Cutting the Fat Saves Jobs

E-businesses slash pay and hours, dump freebies.

CommerceTone Inc.s woes are a familiar tale. Time and cash were running out. A major investor had yanked away $5 million in funding. Customers were nonexistent. Back in November, the application service provider looked to be a prime candidate to join the unhappy parade of e-businesses laying off employees.

"We realized that we only had four weeks left if we continued spending at the full burn rate," said CEO Sean Rosser, in Waltham, Mass. Executives went hunting for a buyer but worried that the acquisition process could take too long—as much as 12 weeks.

Today, five months later, CommerceTone is still afloat, and the company never had to lay off any of its 14 full-time workers. How did the company make it this far? By eliminating nine contract jobs, asking everyone in senior management to temporarily forgo salaries and temporarily cutting the salaries of other employees in half, Rosser said.

Facing slower demand and a harsh funding climate, executives such as Rosser are finding creative ways to cut spending without having to eliminate permanent employees positions. Theyre asking everyone from top management to administrators to take pay cuts and are limiting nonessential expenditures, such as coast-to-coast travel for meetings that can be done over the phone.

Such steps can help companies save capital without having to cut employees that are essential to producing their products and services. Even for e-commerce companies that arent facing financial difficulties yet, experts say that by identifying budget cuts and using existing workers more efficiently they can lower the chances of future layoffs.

Cutting nonessential expenditures, such as weekly staff dinners, is part of the solution. Even more important for budget-minded companies is the ability to allocate workers efficiently, said Chris Brennan, managing director of the Business-to-Workforce Solutions Practice at KPMG Consulting Inc., in Stamford, Conn. Sometimes, no alternatives exist, and layoffs are unavoidable. "We tell clients to realign their back-office resources and staff," Brennan said. "For example, in how many offices do you have travel or HR staff? Can you eliminate redundancies there and still provide the services you need?"

At CommerceTone, asking workers to take drastic pay cuts wasnt an ideal solution, but the company helped soften the blow for some key employees by accelerating stock option vesting. Employees on engineering teams and in business development were offered full vesting for when the company is sold along with additional options that would vest when the company is sold. As of press time, the company was close to signing a deal to be sold to an undisclosed buyer.

Rather than cut salaries when times got tough, Infonet LLC, in Chicago, decided to look toward alternative sources of labor when it realized it couldnt fill new positions. The 7-month-old streaming-media company produces Webcasts from the floor of the Chicago Stock Exchange on the Web site. In November, the company was considering hiring additional full-time employees to keep up with Web production tasks. CEO Carol Davis had second thoughts, though, as she followed the cooling climate for dot-coms. Instead, Infonet turned to using college interns. Three part-time interns are now making $7.50 per hour helping the company keep its Web casts humming. "Every step of the way, weve had to cut costs, shift money around and change our business model" to adjust to the softening economy, Davis said.

The payoff for CommerceTone was that it could keep its development team intact. The company, which had 23 workers at its peak, now has 11 after the contractor cuts and after three employees chose to leave.

In todays tough economy, some companies are beginning to make pre-emptive cuts now to avoid layoffs in the future. At privately held financial content and services dot-com Asia-Links Media, all 26 employees, from the CEO on down, take off every other Friday without pay to help the company conserve cash. "We want to be in business for a long time, and with the economy being the way it is right now, we wanted to tighten our belts," said Asia-Links Media Chief Financial Officer Shirley Lien, in Sunnyvale, Calif.

Workers such as Mei-Ling Leong, a Web content manager at the company, were thankful that cutbacks did not lead to layoffs. To her, it showed that management was committed to employees.

The goal for companies such as Asia-Links Media and CommerceTone is not only to survive through tough financial times but also to be able to continue to produce quality products and services by keeping their most precious assets—their employees.

"Obviously, ones first reaction is, I have to think about what it means to have less money coming in," Leong said of her pay cut. "But my top personal goal is getting more work experience. Thats more important to me than the money."