Smart Cuts

When David Briggs made the difficult decision to lay off seven employees in early April, he was confident that it was the best course of action for his dealerships’ immediate and long-term health.

Although difficult from a personal standpoint, Briggs’s decision was grounded in a realistic analysis of the situation facing his two Twin Cities dealerships, Wayzata Marine and Minnetonka Marine. After looking at his market, his financials, his business strategy and each employee’s contribution, he knew exactly how much money he needed to save to keep the business viable into 2009 and who he could afford to let go.

Still, while downsizing can be a good business strategy — indeed, a must in many cases — to keep a dealership profitable in hard times, many dealers don’t make smart cuts based on business indicators. Instead, they rely on gut instinct, personal loyalties or other subjective barometers to decide who to cut and when, often to the detriment of the bottom line.

Briggs has seen that very thing happen in his own market. During previous economic swoons, he’s watched as a competitor laid off a number of employees, leaving only the managers and none of the workforce that was actually getting the day-to-day work done. Briggs, who learned from that company’s example, instead has used a network of consultants and colleagues, mostly from his association with a Spader 20 Group, to help him work through his decisions. The ability to brainstorm with them gave him the confidence that he was doing the right thing.

Making the right decisions at the right time when downsizing your company is critical to remaining profitable. It may mean the difference between staying in business and closing the doors.
“If dealers look ahead and know what they are doing, they can downsize themselves into very good profitability,” says John Spader, president of Spader Business Management. “But without a clear map to follow to do it the right way, it can put them into a tailspin.”

For those considering downsizing this year, now is the time to create that map. Peak revenue months can be a particularly dangerous time to ignore the long view because cash flow can camouflage problems and provide a false sense of security. By the time reality hits in the fall, it could be too late to make the changes needed to keep the dealership afloat.

So what’s a smart dealer to do?

Assess yourself
All sound business decisions begin with the financials. When contemplating how to downsize, it’s important to first look at the balance sheet to help determine a strategy. Is now the time to take advantage of growth opportunities, or does the business need to be stabilized first?
“If you don’t have a strong balance sheet in today’s environment, it is a time to play very conservatively to make sure you have a stable business,” says Spader. “Otherwise you are gambling on your future.”

Dealers who participate in business education and training programs, such as those offered by Spader Business Management, are usually given tools and processes to help guide their downsizing strategy. For those who don’t participate in those types of programs, Spader recommends they begin the self-assessment process by doing a monthly budget forecast for the year that includes projected volumes and revenue in unit sales, parts and accessories, rentals, marina fees and any other income, along with all expenses.

The next step is to examine the functions — not the people currently doing them — that must be done to manage the projected level of business. Only then can a business properly evaluate individual employees and their capabilities.
Dealers who don’t have organizational charts showing who reports to whom and solid job descriptions detailing the tasks of each position run the risk of cutting the wrong employees. Managers need to take a long, hard look at each individual’s contributions to determine the return on investment the business is getting in them. “Running a business without an organizational flowchart is just not a good idea,” says Valerie Ziebron, principal, VRZ Consulting. “It can be a real challenge, but I ask all of my clients to do it before we start working together … just doing the chart can open their eyes to a lot of inefficiency.”

Flip your thinking
Few businesses can afford to carry low performers during a downturn. But rather than making a list of who to fire, Spader suggests business owners flip their thinking and ask themselves which employees they would hire again given what they know now.

If there are no under- or non-performers, the decision-making process becomes more complicated. A general rule of thumb is to constrict in reverse to how the business grew, or in other words: last hired are first fired. But, again, it is crucial to make that decision in light of projected need for the year.

For example, a dealer might decide to cut yard workers to maintain the number of technicians in the service department. But if that means a technician is spending what otherwise would be billable hours moving and cleaning boats, it would be more cost-effective to keep the lower-paying, non-revenue-generating employee.

Although cutting management in lieu of revenue-generating personnel is typically smart, some dealers are willing to carry the expense to keep their management team intact. If so, those businesses should put a number on how far they are willing to go. What amount of money are they willing to spend to keep the team together? At what point will it no longer be worth it? The monthly budget will help determine the tipping point.

Tracking projected and actual indicators will also reveal flaws or changes to a downsizing strategy. For example, Briggs has already brought back one of the employees laid off in April, a warranty clerk who also delivered boats to customers and taught them how to drive them. The tasks had been allocated to other employees but were not getting done. In addition, the dealership’s business increased somewhat.

“We decided that it was a good investment to bring him back,” he explains. “We needed to be able to continue at the level of service that our customers expect and that they were promised when we sold them their boats.”

Ease the transition
Reallocating job functions and positions can help keep good employees on the job. At Briggs’ dealerships, for example, some of the remaining 25 employees, and Briggs himself, are taking on functions previously done by the individuals who were laid off. Briggs himself has been operating forklifts, moving boats around and recently said he needs to turn his attention to cleaning the showroom.

Ziebron recommends looking for other creative ways of keeping good employees. For instance, are any employees willing to work fewer hours or even take a sabbatical? It might be that certain employees would find it appealing to take two or three months off if they knew that they have a job to come back to.

“I’ve known people who have taken as much as a year off,” says Ziebron, who also suggests finding out if technicians qualify for free continuing education at industry schools: “If you can put that individual on reduced pay for an education leave, they can update their skills and come back to you a more efficient technician.”

When there is no other option but downsizing, many business owners often feel more comfortable with the process if they can provide severance pay. Of course, many simply cannot afford to give employees any more than their earned vacation pay, and sometimes not even that. But for those who can, two weeks pay is a common amount. Others might try to offer severance based on the number of years employed, such as one week’s pay for each year served.

There are also other options in lieu of severance pay. For example, although Briggs wasn’t able to offer his ex-employees severance pay, his organization did help five of the seven people laid off find work in area marine service organizations.

Another option is hiring an outplacement firm to work with the employees. These firms not only provide help with writing resumes and preparing for job interviews, they often offer career testing to match the person with a new career.
“This is important as oftentimes people who aren’t performing well are people who are in the wrong profession,” says David Parker, principal of Parker Business Planning, Inc. “I know of a dealer who had an ex-employee come back and thank him profusely for helping him transfer into a new career that he absolutely loved, whereas he hadn’t really liked what he was doing when working in the dealership.”

The employees who remain also need support in the form of good, honest communication. Owners and managers don’t need to dwell on the soft economy, but neither should they try to sugarcoat the situation. It is also important to schedule lay-offs all on the same day. Not only will it be easier on the remaining employees, it lessens the likelihood that the employees’ anxiety will be transferred to customers. All seven layoffs at Briggs’s dealerships occurred on the same day.
“We were able to rally everyone and explain that this was what we had to do,” Briggs says. “I think everyone was shocked for a few days, then they dug in knowing that we were going to make it. We talked about the environment out there and the possibility of some of our competitors going out of business and how we were being proactive. So as hard as it was, I think it turned into a pretty positive experience for our dealership.”

Look for the opportunities
As difficult as an economic downturn can be, it is also a culling process that can leave a business or an industry healthier in the long run.
That makes the current downturn good news, according to Don Galey, owner of Galey’s Marine in Bakersfield, Calif. Despite being located in California, which has been hit hard by the housing slump, Galey’s outlook is positive.
“We’re healthy enough that I can’t see letting any employees go,” Galey says. “They are too good, too valuable. We are lucky enough to have a large accessory business and probably the largest service department in California, which is a big income producer for us. So if we don’t sell as many big ticket items, we have these other departments to lean on.”

Parker concurs that this is the time to be positive and look for opportunities.
“Even if you are downsizing, you should also be talking about what you can do to improve profit,” he says. “Used boats, for example, usually do better in a downturn, and there’s no reason, if you are buying the boats right, that you can’t be making 20 to 30 points plus on them.”

Just when the current downturn will end is anyone’s guess. Dealers in some of the softest markets believe they have yet to hit bottom, but they agree that it is just a matter of time.
“We’ve been through this before,” says Briggs. “Our mantra now is to work hard, be efficient, sell a lot of boats and bring everyone back.”