Having been diverted to Bangor to add more fuel, the flight from Amsterdam on the Friday before Christmas was already more than three hours late when it touched down at Boston’s snowy Logan Airport that evening. Encountering a slick runway, the pilot had to rely on reverse thrusters rather than the wheel brakes to bring the plane to a stop just adjacent to the last exit from the operating runway.

Moments later, having been cleared to proceed to the gate, the pilot discovered that the front wheels, turned fully to the left toward the taxiway, were acting as a snowplow. Even with minimal forward thrust from the engines, the aircraft went in a straight line, pushing snow in front of the wheels, until it had gone beyond the turnoff.

There’s no backup gear in a 757, so there it sat. And there sat my son Chuck, home from Dubai for a week, so near yet so far. It took two hours for Airport operations to get a tractor to them, behind a bevy of snowplows, turning a six-hour Atlantic transit into eleven total hours when they finally reached the gate just before midnight.

The image of the snowplow was doubly apt this week when it was invoked by one of my clients to describe the alternative of deferring some portion of payroll as part of a continuing effort to reduce expenses. In his three-year-old software development company, the majority of costs are payroll-related. To keep pace with 35% revenue growth in 2008, the company expanded its staff in numbers and in talent. Cutting back would be tough.

However, confirmed bookings for the first quarter of 2009 will drop the company back five quarters, to the level of summer 2007, a reduction in sales of 25%. The firm’s accumulated resources will sustain them for another quarter or two in the downturn, but who can say for certain that things will turn up by summer?

In 25 years of working with smaller companies through economic down cycles, we know for certain that:

A critical economic test for any early-stage company is its ability to respond effectively to a significant and sustained reduction in revenues.   Assuming that cash can be collected timely [not a given], the company that can reduce its expenses below its revenues – and thus maintain a positive bottom line – does not have to fear going out of business.   But dropping down a level in both revenues and expenses – in this client’s case almost 25% – requires that difficult decisions be made.   The mark of a winning company is its ability to anticipate adversity, to be proactive in dealing with it, and to emerge stronger.

In a series of meetings last week, right through New Year’s Day, the “Leadership Team” dug into the numbers. Rather than making arbitrary cuts across the board, they scrubbed every line item of expense.

Still it was not enough. The President’s goal is “to ensure that the company survives this economic crisis as a strong, viable entity that we all want to be a part of.” Even while managing “precisely” to the budget, they had to attack the core. The CEO, the President, and the SVP for Sales and Marketing each volunteered for a 20% reduction in pay. And then the discussion began in earnest:

Can we simply “snowplow” payroll as a way of deferring some costs until the economy improves: 10-20% of employees’ pay might be postponed for six months.   Is it reasonable to cut everyone’s pay by a fixed percentage? Should we consider individual circumstances such as family size?   Should we make exceptions for the people with the most marketable skills, leaving intact the salaries of those we’d like least to lose?   How do we inform people while maintaining high morale and momentum? Can we head off rumors? Will people understand that the terminations are not random or arbitrary?   Will this be perceived as fair?

Effective communication was the key, and timing was critical. We had to be ready to go on Monday morning, providing brief one-on-one sessions with people who were being terminated. Then we needed to gather the entire staff at each of the two (widely-separated) sites in order to provide the following information in concise, readily digestible bites:

A short take on the deflationary economic context, nationally and in our industry.   An update on changes in the Company’s outlook since the last quarterly meeting.   Reassurance about the current book of business and our long-term prospects.   What we are cutting – starting with the terminations – why, and by how much.   Why payroll deferrals only create a deeper hole, postponing the tough decisions about who stays and who goes.   That the officers’ salaries are being reduced at least as much as anyone else’s.   We need to keep the Company viable because the very positive long-term outlook for our service hasn’t changed.

After the presentation and the Q-and-A that followed, the members of the LT were deployed as “mentors” to deliver an envelope to each employee, in which was disclosed his/her salary adjustment. The mentors then provided a one-on-one resource to each employee both to answer immediate questions and to gauge response.

With a gratifying incidence of (mostly) constructive feedback from the employees, the LT completed the final first quarter budget on Tuesday, having reduced expenses by 23%, just short of break-even. Management made no representation about catching up on compensation at some point in the future, other than a broad commitment to “get us all back to parity” as soon as possible. At the moment, none of the remaining employees – all of whom were relieved to learn that they were not excess baggage – has indicated that they’re packing their bags.

That may be a good thing for them, because as son Chuck learned on his arrival from Amsterdam, getting [to] the gate is only part of the process. While his flight was sitting on the tarmac at Logan, the plane’s conveyor system froze up. The bags emerged slowly, starting at 1:00 a.m., 25 hours after his initial flight had left Dubai.

Alligator Bites

“Angry that the world is so unfair? Infuriated by fat-cat capitalists and billion-bonus bankers? Baffled by the yawning chasm between the Haves, the Haves-nots – and the Have-yachts? You are not alone.

“Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the ‘real’ economic activities of agriculture and manufacturing. This hostility has three causes. It is partly because debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter. It is partly because financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability. And it is partly because, for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust.

“Despite our deeply rooted prejudices against ‘filthy lucre’, however, money is the root of most progress… the ascent of money has been essential to the ascent of man. Far from being the work of mere leeches intent on sucking the life’s blood out of indebted families or gambling with the savings of widows and orphans, financial innovation has been an indispensable factor in man’s advance from wretched subsistence to the giddy heights of material prosperity that so many people know today. The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong. Banks and the bond market provided the material basis for the splendours of the Italian Renaissance. Corporate finance was the indispensable foundation of both the Dutch and British empires, just as the triumph of the United States in the twentieth century was inseparable from advances in insurance, mortgage finance and consumer credit. Perhaps, too, it will be a financial crisis that signals the twilight of American global primacy.”

– The Ascent of Money, by Niall Ferguson

Draining the Swamp

Recessionary statistics:

• Expected growth in 2009: -1.8%

• Projected unemployment, 12/31/09: 9%

• Initial unemployment claims, 4-wk. moving average: 558,000, highest since 1982

• S&P 500 decline in 2008: 38%

• Job losses in 2008: 1.9 million

• Median Home Price: $230,900 in 7/06; $180,800 in 11/08

• Yield on 3-month T-bill on Dec 4: -0.016%

• Oil Prices: $145.29/bbl. on 7/3/08; $44.60/bbl. on 12/31/08

• Banks in which the U.S. government now owns stock: 206

Sources: The New York Times; The Kiplinger Letter