When the Great Recession hit, Delaware-based Midwest Acoust-A-Fiber was faced with an unpleasant choice: Make drastic cuts or shut down completely.
Incoming orders for the insulation manufacturing company ground to a near halt in 2008 and 2009, says Skip Allen, the company's president and chief operating officer. "You have to reduce your costs, you have to reduce your people. In our case, volume dropped by more than 50 percent," Allen says.
Allen's challenge has become a common one. When faced with a slowdown in business, Central Ohio companies have to find ways to stay in the black, maintain quality and be ready for the economic recovery-whenever it comes.
Staff reductions often are one of the most visible cuts, particularly for publicly traded companies. Struggling with a dramatic drop in energy demand, Columbus-based American Electric Power planned to trim its workforce by 5 percent to 10 percent in 2010 to offset decreased revenues.
AEP announced in April that it would offer a voluntary severance package to some workers. Approximately 2,450 employees accepted the deal and left the company June 1, including about 500 Central Ohio employees, says Pat Hemlepp, director of media relations. Some other employees were laid off, but that number was small, thanks to the voluntary severance packages, Hemlepp says.
In order to balance Acoust-A-Fiber's books, Allen had to examine every expense and make strategic choices to help his company weather the storm. "I've been through plenty of recessions and economic downturns, and the worst thing you can do is start cutting randomly," Allen says.
Before getting out the chopping block, it's important to align any cost-cutting measures with company goals, says Kyle Pifher, a principal for human resources consulting firm Findley Davies. A cost-benefit analysis is an important first step.
"We need to understand what they're doing, how often they're doing it, and how long it takes them to do it," Pifher says. "From there, we need to get a firm idea of ... what they're spending on specific tasks."
Every company will have different needs. There's no one-size-fits-all plan for cutting costs, Pifher says. "You may be able to reduce tasks, and therefore headcount. But at the same time, you want to make sure that you're strategically aligned and that you're driving toward the organization's overall goals and mission, which is profitability."
AEP tried to avoid cutting staff for as long as possible, Hemlepp says: "We had hiring freezes in place, we've made significant budget cuts, travel restrictions, all the usual things. Our management worked very hard to avoid doing anything that would reduce staffing levels, but as the recession dragged on ... they had no other options."
Acoust-A-Fiber scaled back by 80 percent-from 200 employees to 40. Allen then turned to Peter Nowell, a local consultant with Expense Reduction Analysts, to examine the company's incidental spending.
Nowell says many businesses can eke out more savings than they realize. "The resources you've got left available ... are focused on the core costs of the business. But some of the indirect costs can still account for 10 to 15 percent of the operating budget, and those don't quite get the same level of focus," Nowell says. "That's where we come in, making those kinds of costs our core business."
Allen asked Nowell to evaluate the company's waste expenses. Acoust-A-Fiber manufactures acoustical and thermal insulation parts for automobiles; the products are custom-molded to reduce engine noise and shield the passenger compartment from hot exhaust systems. The manufacturing process generates 10 to 15 truckloads of waste a day-not to mention a hefty garbage bill.
Nowell negotiated a savings of 30 percent while staying with the same waste hauler. He also examined the company's office and packing supplies and found better deals on items purchased regularly. "He sorted through our specific needs-the type of corrugated materials and the type of pallets and suppliers in the Ohio area where we could get the best deal. That might have taken weeks to do," Allen says.
The best way to realize savings is to open everything up for debate while keeping overall company goals in mind, Nowell says. "Question everything you do. If you are sending parcels, do they have to be couriered? Do they have to get there the next day? Can they be sent via Priority Mail instead? Can it just be sent parcel post?"
Shipping costs often can be reduced through negotiation, Nowell says. Ohio Semitronics in Hilliard utilizes a lot of small package freight shipping, so Nowell sought bids from three different vendors. The end result: a 30 percent savings on shipping costs.
When examining why a business spends what it does, there should be a logical reason behind every decision. Don't do something just because that's what the company has always done. "The question is what you're doing compared to the needs of the actual business ... so they're not paying for services that are not important," Nowell says.
Every executive knows that modern technology can save companies time and money. Many businesses are underutilizing software that could save them on both those fronts, Pifher says. For example, many paper-pushing tasks that used to be the responsibility of human resources personnel can now be taken care of by employees.
"If they were responsible for benefits open enrollment and they were going through that in a manual process, how long does it take them to distribute that?" Pifher says. "What if we leveraged an online system that had all that capability, and you got out more streamlined data and more effective data? In some organizations, those can be very significant dollar savings."
In some cases, old hardware holds businesses back, says Joe Barganier, a management printing services consultant with MT Business Technologies, an office technology company with eight Ohio offices. "Printers are a very unmanaged part of American business," Barganier says. "[Companies] don't know how much they're spending, and they don't have budgets assigned."
A typical small business with 100 to 1,000 employees may have 100 printing, faxing and scanning devices, Barganier says. "Over time for the last 10 to 15 years, the organization has been acquiring output devices," he says. "You'll see they've put a monochrome laser printer next to a color laser printer, next to a dedicated fax machine, and then you'll see a scanner and they put them in one little area. That's highly inefficient."
New all-in-one devices may be a big upfront expense, but in the long term they can save a company money in servicing costs and toner. Ed Baran, controller for Columbus home accessories manufacturer Pana-cea Products, is projecting a 15 percent savings in toner alone after hiring MT to manage the company's printing services. "They also include the maintenance of the printers in that, too," Baran says. "I'm sure the machines will be better maintained."
Barganier also helped position machines throughout the office for maximum efficiency and minimum cost. "We move the lower-cost machines near the people who use them the most," Baran says.
Technology is one way companies have been able to do more with fewer employees. "Roles have been outsourced to technology, and positions have been eliminated because technology has been able to do the same thing. That has been a major shift," Pifher says.
Another way to take pressure off remaining staff and potentially save even more money is to outsource work that isn't the company's core business. That doesn't necessarily mean sending jobs to a call center in India; it could be as simple as using an outside contractor to handle functions like HR or IT.
Barganier says there's been a change in corporate culture toward acceptance of outsourcing. "The question is, at this time, can I afford to have a full-time office manager ... to manage the day-to-day, the coffee machines, the sorting of the mail, the printers, the copiers. Thirty years ago, we had no problem with that. In the last 10 years, we've become exasperated by it. In the last two, you can't have that extra headcount of the receptionist and office manager."
Outside contractors often can provide specialized services for less than what it costs a business to provide them. Companies can use those savings to maintain jobs that are central to the organization's goals.
"You can only optimize so far," Barganier says. "We believe managed print services is one way to ... save everything you can before you have to cut core jobs and core services."
MT Business Solutions also offers IT services. "We're able to either reduce headcount or prevent increased headcount to monitor their network and manage their network. Maybe they've had recent layoffs and now they need some additional help," Barganier says.
Steve Morris, founder and president of Asset Strategies Group, says outsourcing companies such as his are growing in popularity because they have more money to invest in specialized technology. Asset Strategies Group handles lease negotiations and payments, as well as store design and construction for mall-based fashion retailers.
"I see companies wanting to outsource because they just don't have the scale that an outsource company can bring to them," Morris says. "We can do it for about the same costs, but they don't have to worry about investing in the technology, and on top of that, we've been able to reduce the capital cost of their stores. We're very efficient in both scale and scope."
Pifher says that reasoning is sound. "The outsourcing partners have the scalability that the employer may not have, therefore they're able to do it a lot less expensively than the employer can do it," he says.
Outsourcing certain tasks doesn't have to mean sending an entire department to the unemployment line. "Nobody's laying off 20 people. These are two to four people, and if they're good at this, they can be focused on something that's more critical to the company," Morris says.
Most cost-cutting consultants and the businesses they serve agree that recession-time reductions will continue to help companies even after the economy bounces back.
Allen says deals on supplies and more favorable contract terms will be an ongoing benefit for Acoust-A-Fiber. "I would say that we're going to continue to enjoy those cost savings for a while," he says. "Those savings are still there even when your volume grows and you have more trash being hauled and more packaging being used."
That's already the case for Acoust-A-Fiber, where business began picking up in early 2010. "Since February, our volume has recovered and it's outpaced ," Allen says. "We're ahead of where we thought we would be. It's been a little uncertain right now, it's a little slower pace."
Allen says cost-cutting measures taken during lean times are helping to generate increased profitability now. "Volume sometimes hides those problems, but after going through the recession, I think we're going to be more sensitive to that," he says.
Some businesses had become bloated with extraneous employees and positions during the boom times, and found that scaling back helped streamline their workflow, Pifher says. "Many of the organizations are finding out that they can do more with less. They've become more strategic, they've become more innovative, and they've weathered the storm very well," he says. "Whether or not that will become the norm remains to be seen."
But cutting costs is a balancing act. Cutting too much or in the wrong places can do long-term damage to a business. "If you jeopardize the quality of service, that, in the end, isn't going to increase your profits," Nowell says.
Be aware that reductions can have other unintended consequences. Nowell says it's important to consider the morale of employees, because they have long memories. Taking away daily doughnuts and locking up office supplies may save a few bucks, but is it worth risking the contentment of the staff?
If a business needs to take drastic measures to stay afloat, it's important to create a culture of sacrifice, and that starts at the top, Nowell says. "The philosophy of tightening the belt has to be companywide, and it's not just a case of head cutting at the lower end," he says. "It's trying to get the culture across that everybody has to partake in the savings, and that's good as long as people see that everybody's doing it."
When the economy is booming again-or at least on an upward trajectory-companies will need the loyalty of their employees to keep up with growing demand. Acoust-A-Fiber already has rehired many of the employees that had been laid off. The company is back up to 200 workers, Allen says, and applying lessons learned during the recession. Time will tell if other businesses are just as fortunate.
Lisa Aurand is a freelance writer.
Reprinted from theJanuary 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.