Boom and Bust, Localized

We tend to think of boom and bust cycles on a macro level.  Either The Economy (as if it is some monolith you can actually corral) or some industry is going through a boom or a bust period.  This is of course a logical fallacy as some companies boom during an economic downturn and others cease to exist during boom times.  However, we as humans have a pack mentality and if the evidence we have access to seems to point toward things being bad, we will make them worse by acting on our fears.  This is all reasonable behavior and it explains the market instabilities that we have observed over the last decade.  That being said, how does that apply to staffing levels?

Normally, you would expect that if things are going well and it looks like more business is about to come in or has come already done so, then companies will hire more people.  You apply this trend at the macro level and the last 7 or so years make perfect sense.  As economic activity slowed down during the 2008-2009 time frame, many companies shed employees to make up for their falling levels of incoming business or their depleting customer bases. The key takeaway there being that just because things are looking grim, that does not mean that all of your customer will get up and leave at once or at all.  However, if your business is predicated on a massive growth rate, you might simply stay flat during a downturn, which is equivalent to losing customers if forecasters planned for massive growth.

That being said, can the same be said about companies as individuals?  The truth is that sadly this is not true of most companies. I might be able to look at my income and expenditures and say: I have no job, I should probably stop paying for Cable TV or subscription lawn care or golf club memberships. Most companies on the other hand retain employees far longer than they should for a number of reasons.

First, there is the simple and very reasonable matter of brain drain.  Regardless of how organized and process oriented your company is, there will always be some tribal knowledge that exists.  Once the individual members of the tribe go off to do other things, the sum of that tribal knowledge diminishes.  It can be as simple as the maintenance person knowing how to repair a quirky water heater without having to replace it since they know it goes out every year and it just needs a $2 gasket to keep working for another year.  Another person might not know of this quirk and the company is out the full price of a new heater.  More often, customer relationships are anchored by personal relationships that sales people or account managers have with these clients.  If Joe is an account manager and he knows that a customer is much more amenable to resign their maintenance contract after a nice dinner and a trip to the opera, then Joe will take the client out every year and that contract will get resigned every year.  Joe is laid off, and his replacement does not know this, and the client’s maintenance contract becomes a big problem as the client isn’t getting their yearly dinner and opera ticket.  This is a silly example, but it does serve to illustrate how tribal knowledge is sometimes the reason why individuals are retained.

Second, you have the matter of appearances.  We as a society have the same mindset to business that cancer has; that is to say: Grow without limit.  If your company is to be perceived as healthy, then it must grow.  This makes sense from an investor’s standpoint as a stagnant company will not provide a return on investment.  However, from a practical sense, a lot of companies have limits on their possible growth.  It might be a practical limit imposed by the type of products or services it is willing to provide or a limit imposed by how much direct control the people at the top are willing to give up.

One example of this is Apple. Steve Jobs, by all accounts was heavily involved with all details of a product, from the look and feel to the design, to the functionality and even in some cases the packaging of the products.  During his time with Apple, the company released some really high quality products that really reflected that singular vision being brought to life.  Unfortunately, a side effect was that the company could only release so many products each year.  If every product goes through a small set of people for validation before it makes it out the door, then you hamstring yourself in terms of the variety of products that you can bring to market.  During a boom cycle, when a company’s brand is extremely valuable, it is my opinion that branching out and producing a variety of products that leverage that brand will allow the company to reach a wider part of the market.

I think Amazon has leveraged this approach the last few years and it has paid dividends as the company has grown very aggressively as a result.  Not every product is a winner, but if you can limit your risks and expand into fields that make sense, you might take an online bookstore and transform it to the point where it is now everything from a bookstore, to a TV network, a grocery store, a professional services referrer, a hardware manufacturer as well as a web infrastructure provider.  If any of those businesses fail, the company as a whole can still keep going strong simply due to its diversity.  This type of company can continue to grow and appear strong.  If Amazon had stayed in the online book business and not branched out, a downturn in the book sale business would have likely resulted in mass layoffs, which would have presented an image of weakness.

Finally, there is the matter of the human element.  Simply put, most people you meet have trouble putting what is best for business over their personal feelings for their coworkers.  Sure, it might not bother you to lay off that 25 year old with the perfect physique and without a care in the world.  But you might find it a little tougher to lay off that single mother of 6 with a mortgage, cancer and two kids in college.  We have recently been told that some companies can put what is best for business over that personal bias, but the Amazons and Netflix of the world aside, this is a real problem that many companies face.  Simply put, we are on the whole very nice to each other as a society and there is a certain cultural taboo in heaping difficulties on those who are already under a lot of pressure.

All things being fair, there should be no difference between the aforementioned 25 year old and the single mother.  They both did good work, but their services are simply not required anymore.  But in practice, the single mother might get to keep her job a little longer because her manager is aware of her personal issues and that a loss of employment right now might lead to her and her children ending up homeless quite quickly.

Due to these three factors (and some others like loyalty that I won’t get into right now) companies tend to keep people longer than they should when there is a downturn in business. What should change is the mindset that if a business is laying people off, then it must be in trouble.  If your business booms every year in the Spring or your business is cyclical with the economy, then you should plan to have a boom and also plan for a wind down.  Thinking of any step backward as a bust is just wrong.  As a simple example, think of a business that helps people who are being foreclosed on through refinancing their mortgages.  During the recession that started in 2008, that kind of business would need to hire as many people as it could find since a very large amount of foreclosures were coming on the market.  As the recession would down and turned into a recovery, the business should have wound down its staffing levels to match the improving economic conditions.

The key here is that the wind down should start early, so that the business is not cash flow negative as incoming business is reducing.  The simple truth is that people are almost always the most expensive part of a business’ costs.  Having a person on payroll for even three months longer than you absolutely need them costs the business.  As a manager or business owner, you might be thinking that you are performing a kindness for the person, but you are in fact leveraging the future of all of the other employees that are still needed.  Debt accrued in this manner is very hard to unwind as it can grow very quickly during time which can best be described as deflationary for the company.

You are of course free to take away whatever you would like, but I would like to leave you with this: The needs of the many outweigh the needs of the few, or the one.

Live long and profit.