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CEO Survival Guide: 10 Strategies to Cut in a Down Economy

Posted by Bob Warfield on October 27, 2008

So you’re scared s**tless about this economy and feeling like a caged animal?  It’s a white knuckle ride every time you check your cash balance and you just want to make the bleeding stop, or at least slow down?  Are you waking up in the middle of the night in a cold sweat, with no idea what to do, just that you need to do something?

Check out Dave McClure’s brilliant rant “Fear is the mind killer,” because it is aimed right at you.  Get used to the fear.  In fact, gain strength from it.  Even better, move from fear to healthy respect and understanding.  Derive a strategy for what to do in this down economy and quit just being afraid.

Many firms are cutting expenses and headcount in these difficult times.  If you’re going to cut, at least do so out of having thought through a sound business strategy for the cuts, rather than just out of fear and because everyone else is doing it.  Fear really is the mind killer and is to be avoided.  You’re going to need a clear head to deal with the market right now, and worse, you need a clear head to deal with your Board and your employees.  It’s a tough time, but that’s why they pay you the big bucks.

Here are 10 strategies for cutting that may actually make sense and are not just fear and adrenalin:

1. Symbolic Cut

Everyone is talking about how bad the economy is, my board is upset, so I need to make a cut.  Besides, you can always cut 10-15%, right?  OK, this one is pretty close to cutting out of fear rather than for a strategic reason.  But by calling it out for what it is, you at least put a somewhat more rational light on it and keep the fear beast a little more controlled.  Still, this isn’t really why we’re here.  Keep reading.

2. Wait Out the Recession

It’s such a tough time I should wait until there is less headwind to invest in the business.  Let’s hunker down until the end of 2009.   How much do I have to cut to make my cash last until then?  What will it do to my business if I cut that deeply?  If you’re cutting to wait out the recession, make sure your cuts deliver a real increase in your staying power, and ideally that they get you to a time frame when you expect the economy to have materially changed.  For this economy, I would hope the cuts get you to the end of 2009.  Cutting to extend your runway from the end of 2008 to mid-2009 won’t wait out the recession, although it might get you to a slightly less panicky time.

3. Cut to Get Profitable or Cash Flow Positive

If it’s within reach, and you want to wait for better times, cutting to profitability is the ultimate trump.  Unfortunately, it is a rare firm that will be in striking distance to do so.  Startups seem to rush to profitability all at once after they’ve reached critical mass.  Before then it seems like profitability may never come.

4. Cut to Redeploy

Jason Calcanis at Mahalo seems to have decided they had not made the right investments.  In his email “How to Handle Layoffs,” he says that some of what they under invested in (e.g. technology) had a higher return than some of what they over invested in (e.g. editorial content).  Hence they cut so they can redeploy some of the expenses to more productive investments.

 This one makes a fine strategy for cutting, but you have to ask yourself, “Why did it take a massive recession to wake us up to the need to retune our expenses?”  Startups should constantly be considering this one.  It is normal for a startup to try something and fail.  Failing fast, making sure you learned from it, and moving ahead with that learning quickly are the best ways to use failure to you advantage at a startup.

5.  Cut to be Inline With the Growth the Economy will Support

I made a big bet and ramped up to try to stimulate growth, but that is futile in this economy.   So, I’m going to ramp back down to where I was comfortable before I made the big bet and just turn back the clock for a while until the tide turns and I can bet again.  This looks like what Jive did as they laid off 1/3 of their staff.   Some say these are the same folks they had brought on after a recent big round of financing, which would mean they were just rolling back to prior levels they were comfortable with.

I always have a hard time hearing about startups that lay off 1/3 of their staff.  It’s hard for me to envision running a company that could be cut back so much without dire consequences.  Nevertheless, startups are often engaged in a land grab.  I just hope that before they ramp up in good times, they absolutely certain the strategy they’re ramping up really scales.  After all, this stuff is tragically knowable before you get so far down the wrong path that a failed strategy forces the layoffs.

6.  Cut to maximize the likelihood of getting a bridge from my VC’s

Fred Wang at Trinity says he’s dividing companies up into those that the firm knows will need more capital but fundamentally believes in, those that can continue on without needing new cash and those that the firm should cut.  But, he points out that the amount of capital a company needs to keep going affects the decision on whether to cut.  “It’s a little bit like poker in the sense that if the company is not burning a lot of capital and the cost of buying a card is low, it’s a little bit easier,” Wang says. “If $1 million buys them another 12 months that’s easy to call, but if the cost of a card is $5 million to $10 million then it’s a lot harder.”

Note that this is just the impact on portfolio companies of how VC’s deal with tough times.  They need to husband scarce capital and make sure it goes to the most likely returns in the portfolio. 

7.  Cut to eliminate fear in the ranks

If everyone on the team expects reductions, to get people productive again you make cuts and declare you’re finished.  Been there, done that, and it works. 

8.  Cut to get better optics for a potential sale

Clear the decks if you think you’re headed for a sale.  Sometimes startups get into a position where it’s clear they may never IPO, yet they have strong strategic value to several players in their industry.  Often this is as a result of discovering that they only appeal to a fairly narrow market segment, but that segment loves them dearly.  If that’s the case, cut to profitability or as close as possible and go find the right suitor to bring about a conclusion to the journey.

I warn though, this is a tough time for it.  I own a house I’d love to sell in order to get out from under the mortgage payments, but it doesn’t take too much imagination to see that waiting could easily net me another $100K in value.

9.  Cut as a forcing function

Getting rid of the sales team so that marketing is forced to find lower cost channels is one example.  Another would be cutting a particular product module that is consuming a lot of resources and passion but that you feel is a long shot.  Cutting a particular area sends a strong message to the rest of the company.

10.  Cut to trade up at a lower cost

Layoffs and company shut downs put better talent on the market that is easier and cheaper to get than before.  Startups are collectors of talent, to a degree.  But, to add to your bench you need space on your bench.  This is another variation on cutting to redeploy, but in this case, it’s focused on individually upgrading some of the lower ranks.

Conclusion

These are all strategies I’ve heard from one source or another.  They won’t all make sense for any given business.  For some businesses, none of them may make sense.  Pity the startup that is extremely lean and well run, yet it’s board insists on cuts.  That scenario is going to do damage to the startup that probably shouldn’t be done mostly for emotional reasons.  This is why it’s so important to agree on a strategy for what’s to be accomplished.

Aside from having a strategy for cutting, it’s equally as important to have a strategy for disclosure, at least if there is someone out there who cares.  After all, having a strategy that makes sense can instill a greater sense of confidence in your firm. 

In addition to disclosing his thinking around reductions, Loic Le Meur of Seesmic is pointing to increased transparency as an important component in this time to help counteract the negative messages associated with cost reductions.  I think he’s right.

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