It all started with a certain softness during the Christmas, 2007, shopping season.
Reps for American retailers were telling Umbra's account managers that sales were stagnating. And there wasn't much mystery as to why. Although the Toronto-based company makes a broad range of designer housewares, from clocks to patio chairs, drapery rods have long been its biggest sellers. But with the U.S. housing market seizing up, home-decor vendors like Umbra-which relies on American shoppers for the bulk of its $100-million in revenues-were taking it in the gut.
Then came the oil price spike.
As 2008 limped toward spring, Umbra CFO Howard Rosenberg laid out the increasingly dire situation for co-founders Les Mandelbaum and Paul Rowan. Many Umbra products, such as the ubiquitous wave-topped wastebaskets, are plastic. Which was a problem, because plastic costs were going through the roof as oil prices pushed north of $100 (U.S.) a barrel. Production budgets for the trash cans alone had risen 10 per cent over five months. The price threshold on a mass-produced plastic item doesn't have much elasticity, Rosenberg told the management team. "At some point, you say, 'This isn't working any more.'"
A grim picture soon came into focus: With more than 450 employees worldwide, Umbra's top executives realized they'd have to discontinue unprofitable product lines and lay off staff, marking an unhappy first in the company's 28-year run of uninterrupted growth. "We couldn't pass on price increases fast enough," says Mandelbaum. "We had to cut costs."
Les Mandelbaum is a gravel-voiced character who dresses a bit like a roadie, and he comes by his rock 'n' roll persona honestly: In the 1970s, he was a bass player in a Toronto band. After one U.S. tour, he brought home some of those sturdy black equipment cases. They weren't available in Canada, and Mandelbaum found himself staring at a business opportunity in importing and manufacturing the hip-looking objects. He turned to an old friend, graphic artist Paul Rowan, for some marketing materials. Soon after setting up that business, Mandelbaum and Rowan decided to branch out, producing other clever knick-knacks for the home and office. And so, in 1979, Umbra was born, at the trough of another recession.
The company steadily built an international reputation as an astonishingly prolific and original design studio, introducing the world to such decor novelties as the multiple-cell picture frame that displays several photos of varying sizes, and amassing an impressive collection of design awards. In the 1980s, Umbra established warehouses in Buffalo to serve the burgeoning U.S. market and, in 2004, set up manufacturing facilities in China as the firm moved into mass-market items such as wastebaskets. The partners even bought four condo units in Shenzhen for employees on extended Chinese stints.
The Umbra brand was the very embodiment of the high-flying, urban and urbane homeowner. In 2007, the company opened its first store, in downtown Toronto. Through it all, it never shed staff. Indeed, Umbra hardly noticed the 1991 recession or the tech collapse in 2000.
But last spring, senior managers agreed to cut 45 positions from its work force, in all corners of the company. The decision was emotional, says Mandelbaum, who admits that he was "inattentive" in letting the payroll grow too large. "Some of these people were 100 per cent loyal, personal hires of mine. And you knew they were going into a very uncertain future." Yet so was the company. While Umbra wasn't facing bankruptcy, it was losing money for the first time in its life. And Mandelbaum, as company president, had to make the bleeding stop.
Frank Miller arrived at Umbra in March, 2008, with the mandate to bring a bit of Fortune 500 savvy to an entrepreneurial outfit whose payroll looked increasingly unsustainable. An independent consultant who teaches organizational behaviour at Ryerson University, Miller had done HR stints at Coca-Cola, Glaxo Wellcome and Sun Life. In the '90s, he'd helped manage consolidation-related layoffs at Coke and Glaxo. "Umbra wanted to get a sense of human resources practice beyond what they'd done before," he says. Indeed, when he arrived, Umbra didn't have an HR director.
Miller quickly saw that Umbra employees needed to draft career development plans, and some of them lacked a clear understanding of the company's brand. But he knew the main reason he'd been hired was to orchestrate the downsizing, provide advice on communicating the news and manage the restructuring of jobs.
His first lesson for his new bosses: It would be painful, and there would be no hiding from that reality. Lesson two: Make sure the laid-off employees don't think they're being terminated because of poor performance, which would make the blow even harder. Miller told the partners that after the layoffs, they'd need to repeatedly emphasize-during company meetings, in newsletters and in other internal communications-the reasons for the cutbacks, and keep information flowing to curb dark speculation on the grapevine.
One Friday afternoon last April, Umbra's top management team-Mandelbaum, Rowan, Rosenberg and Miller, as well as five executives from the Chinese and U.S. operations-discreetly convened for a weekend at a Florida hotel to plot out a downsizing strategy. The group reviewed the firm's progress in streamlining global warehouse and shipping operations, which would allow Umbra to close two warehouses. But cutting shippers and receivers wouldn't suffice, so the team began looking at the whole sweep of the company. Some cost-reduction measures were obvious: less travel, cheaper hotels, smaller Christmas party. Mandelbaum makes do without an executive assistant. At head office, meantime, two people did nothing but deliver mail, most of it flyers. As Mandelbaum puts it, "We were paying people to deliver junk."
Still, they needed to find more cuts. Miller's first recommendation was that the executives should protect the top performers. Each department head was asked to name one or two indispensable staffers. The group then identified seven individuals in various parts of the company-design, marketing, administration, purchasing-who were internal leaders. Consensus on the choice of people wasn't immediate. "Some people [on the management team]hadn't had a positive experience with some of those nominated," says Mandelbaum. But the exercise gave him a snapshot of his work force. "It brought to my attention the real stars, and also the ones who weren't keeping up."
Mandelbaum made it clear to Miller that he wasn't a fan of the sort of technocratic approach espoused by former General Electric chief Jack Welch, who insisted that managers constantly rate their employees as As, Bs or Cs, and then cut a tenth of the Cs. Nor did he want to toss the newest hires overboard on the last-in, first-out principle. Finally, he insisted that they couldn't play favourites, keeping those who sucked up or excelled at office politics. As news of the looming layoffs began to spread, Mandelbaum says no one overtly tried to curry favour, but he found himself on the receiving end of many nervous smiles.
By the end of April, the list was almost set. Over several days early in May, Mandelbaum, Rowan, Miller and other department heads met individually with the employees who were being let go. They chose private spaces inside the office to break the news. The meetings Mandelbaum attended were painful; some of the employees cried, and so did he. But empathy wasn't on offer at every session, because some managers hadn't spent enough time rehearsing with their departmental heads what they would say to the layoff victims. In some cases, Mandelbaum concedes, "the message was a bit colder than I would have preferred. You can give everyone a script, but it's how you say things, not what you say."
One detail Umbra's executives consciously avoided: summoning security guards to escort discharged employees to the door, as if they were criminals. "We didn't summarily dismiss them," says Rowan.
The day they gave out the proverbial pink slips, each department head gathered their staff to explain what was going on. Rowan, a hip and affable 50-something, oversees Umbra's team of young designers, clustered in a crowded, open space right outside his office. When he informed his group of the cuts, two of the three terminated employees were in the room. It was an unusual gesture, but Umbra's managers decided to use the opportunity to "recognize" those who were leaving, Miller says. "We talked clearly about the business challenges the organization was facing. It was nothing personal. These were really good people."
To handle outplacement, Miller brought in Toronto firm Knightsbridge Human Capital. The laid-off staff in Toronto, Amsterdam (where Umbra has a regional sales office) and Buffalo were put in touch with Knightsbridge consultants or their affiliates, who offered career transition workshops, coaching and access to a database of job search information.
In the weeks following the layoffs, Umbra's top executives tried to be as accessible to staff as possible. Despite the contrition from the corner office, morale took a nosedive. Rowan knew he'd have to take steps to reinvigorate the design team. At the same time, he made it clear to those who remained that they would have to step up. That meant extricating themselves from the post-layoff funk and coming up with new ideas. To help inject some energy into the group, Rowan asked a few of the top designers to take a more active role in business development and the production process-tasks previously handled by some of those who'd been let go. These promotions required the employees not just to create new prototypes, but to see them through manufacturing and marketing.
In the interim, Umbra focused on bracing the business for a tough economy. Sales and marketing managers scrutinized retailers' orders for opportunities to expand their range of merchandise (Umbra's goal is to have its products in every room in the house). The company also imposed a hiring freeze. These days, when someone leaves, their responsibilities are divvied up around the firm. And, thanks to Miller's regular newsletters and other internal updates, Umbra's staff understand they'll be working in a lean operation for the foreseeable future.
Last fall, Miller rented a local movie theatre and invited all Toronto employees to participate in an information session about Umbra's future direction. He suggested that Rowan devise a visual way to represent what was happening to the company and its market. Rowan came up with a graphic that plainly conveyed the seriousness of the situation: a stylized downward arrow that rebounds and heads back up, over the slogan "Meet the Challenge." But he knew a cute visual wouldn't be enough. "Because it's a small company, it's not just spin we were looking for," he says.
Over time, morale has begun to bounce back. Rowan makes a point of being upbeat; he's the kind of manager who constantly stresses the positive. But Mandelbaum, a glass-half-empty type, is much more cautious in his assessment of the future. "We think there are big opportunities because we're one of the few firms that can offer original design, manufacturing and logistics," he says. But he's learned, he says, that "you're constantly pruning and examining your business process."
A lean mantra for lean times.
WHEN THE RED INK SPREADS...
Layoffs should be the last weapon you reach for in a campaign to reduce overhead, because they're disruptive and expensive. Direct costs such as severance payments, fees for outplacement services, and lawyers' retainers if your ex-employees take you to court, aren't the end of it, warns Heather Stockton, a partner at Deloitte & Touche. There's a host of associated outlays as well:
› Productivity decline Poorly planned layoffs, especially on a product development or R&D team, may cause projects to fall behind schedule or go over budget as departments scramble to offset staffing holes.
› Double-dipping It's the familiar boomerang when a downsizing overreaches: A company lays off employees, then is forced to rehire them on a contract or freelance basis-even as they're collecting severance.
› Loss of institutional knowledge You discharge a veteran employee only to realize he happens to be the one person who knows everything about a major new service you're launching. "All that history walks out the door with the person," says Stockton.
› Relocation Fewer bodies may translate into reduced space requirements, so companies that have slashed head office jobs or eliminated a facility may need to buy their way out of leases or relocate to smaller digs.
Iain Morris, national partner for human capital at consulting company Mercer Canada, urges business owners to first look for cost cuts in areas such as purchasing, benefits packages and business travel. Consider wage cuts, rotating layoffs and shortened workweeks, all of which can have a dramatic impact on payroll. "Severance is such a final thing. You want to make sure it's necessary," he says.
Pick your people well
Among HR professionals, the most salient legacy of the early-'90s downturn is a recognition that buyout packages, while less unpleasant than outright layoffs, create unintended consequences. The best performers often take them, expecting they can get work elsewhere, and the company loses talented people with excellent prospects.
Selective cutting produces better results than either buyouts or across-the-board reductions. Let HR staff and line managers first identify the stars who are directly contributing to the business, and protect them. "If you have key talent you want to retain, letting them know [they're valued]is important," says Mercer principal Lynn Stoudt. Then rank the rest of the staff as As, Bs or Cs, using consistent measures of employee effectiveness: Who takes initiative and who waits for marching orders? Which recruits have the potential to rise through the ranks? This analysis should ideally be done in teams, to get a range of perspectives: One manager's star may be another's headache. Once armed with a clear inventory of your employees' relative contributions, you'll feel more secure in deciding who is dispensable.
Business owners should also anticipate whom they'll need when the economy picks up again; for example, a marketing group that may not have a lot of work now will be critical once sales start to rebound. Above all, avoid playing favourites when it comes to choosing who stays and who goes: The rationale behind the choices should be transparent and credible to all of the remaining employees.
DO THE SEVERANCE MATH
The irony of layoffs is that just as a company is shedding staff to save money, it has to dig deep into its cash reserves to finance the severance outlay. And those amounts can be substantial, especially in the case of a mass termination. "Your company has to have financing or a line of credit to pay those costs," warns accountant Peter Farkas, a vice-president at RSM Richter in Toronto. "And you won't feel the positive effect of a reduced payroll for months." A common misconception about layoffs is that severance is set by provincial laws-typically, a week of pay per year of service. Such minimum standards can give small business owners "a skewed picture of their obligations," says employment lawyer Norman Grosman. In reality, legal precedents over the years have raised the amounts that staff may be entitled to collect beyond what is guaranteed by labour codes. In general, severance packages range from two weeks of salary for each year of service to over a month for more senior employees. The principle underlying severance is that the employer should provide terminated workers a financial bridge to their next job. But, Grosman acknowledges, "there's no formula to crank out the right answer." Rather, the package will vary based on four factors:
› Age Generally, the older the employee, the more difficulty they'll have in finding another job. For this reason, the courts customarily ask for longer severance periods when the affected workers are in their 50s or older-as much as several months of additional payments.
› Length of service "The longer someone's been there, the greater your obligation," says Grosman.
› Position Courts presume that the more senior the position, the fewer the equivalent opportunities in the marketplace, thus adding to the severance package. So while it may seem logical that a top marketing person will have much better career prospects than a mid-tier one, that senior performer's severance package must reflect the relative scarcity of equally high-level job openings.
› Availability of similar jobs Another consideration is the state of the labour market. If demand for certain skills is shrinking, the courts will demand an extended notice period. Ultimately, Grosman's message to employers is that parting ways with workers can be costly if not handled with care. If a shortchanged employee sues and refuses to settle, you'll be out $50,000 or more in legal fees alone. "Take the high road," he says. "Don't be penny-wise and pound foolish, or you may end up in litigation."
WEIGH THE TIMING
There's no good time to hand out pink slips, but some times are particularly awful. If only a few individuals are affected, try to avoid their birthdays. Holidays are also tricky. Some firms, for example, may be tempted to delay layoffs until after a Christmas season. Yet that gesture can prove ill-advised-if employees had known they were losing their jobs, they might have curbed holiday spending. Fred Feldman of Feldman Daxon, a Toronto outplacement firm, further advises clients to deliver the news early in the week and to avoid Fridays. That way, laid-off employees can meet with outplacement counsellors immediately after getting their notices. Otherwise, they may stew about the dismissal over the weekend and soak up well-intentioned but misguided advice from friends and relatives.
INFORM THE WORLD
It's difficult to contain news of a layoff, and word will likely spread virally to suppliers, distributors, customers and the media. Taking charge of the story is critical, says Daniel Tisch, CEO of Argyle Communications in Toronto.
Business owners make two common mistakes when confronted with nosy questions about internal problems: Either they say everything's fine or they offer an analysis of the problems without explaining what they're doing to resolve them. Instead, think about what you'll reveal to the world as you prepare to swing the axe. When someone-an industry colleague, a reporter-asks, "How's business? Your answer should be "clear, consistent and compelling," says Tisch. Begin with a brief explanation of the firm's challenges: "We needed to get a handle on our variable costs"; "the economic slowdown has forced us to cut production." Then focus on broader strategic goals: "We're reducing overhead by creating a leaner management structure"; "we're moving to improve our margins"; "we're looking to gain a competitive edge by lowering our price points."
Ensure that your managers understand the layoff explanation and communicate it consistently to both employees (in internal newsletters, for example) and outsiders. Tisch advises against excessive spin or sugar-coating. Acknowledge the problems frankly, but move swiftly to tell the world how you're responding to the financial squeeze.
D-DAY: KNOW YOUR SCRIPT
While human-resource veterans differ on how to conduct this difficult task, on one detail there's ironclad consensus: It's never cool to break the news by e-mail or phone. Make the announcement in person, with an HR manager there. Plan the logistics of the day carefully, finding available meeting rooms and, if necessary, having enough managers on hand to deliver the news individually. It should come either from the company owner or the employee's supervisor, and occur in a private and neutral location-neither the owner's nor the manager's office, nor that of the employee. Limit each session to 15 minutes or so-plenty of time to communicate the necessary information in a concise and to-the-point manner. Most importantly, know exactly what you'll say and how you'll reply to frequently noted comments, such as: "But I've been working a lot harder than Mike and Jane, and they're staying"
Resist the employee's attempts to second-guess the decision, and don't present the layoff as a matter of job performance if it's a response to market issues. "You don't want to get into a debate once the person's been told they're being terminated," says Corey Daxon of Feldman Daxon.
"Have I done something wrong?"
There's a good reason HR staff should be present at such sessions. If a manager tries to soothe hurt feelings by offering up sympathy and praise, they may inadvertently give an aggrieved employee grounds for legal action. "If you start to answer specific questions, you may say things that can be held against you down the road," says Daxon.
"Does this take effect immediately?"
The best break is a clean one. Terminated employees can spread resentment around the workplace if they remain after they've been given notice. Indeed, it's best if the staffers leave the premises as soon as possible. At the same time, calling in security guards to escort them out is needlessly harsh. Daxon suggests ending the meeting by introducing an outplacement consultant, who will set up a follow-up appointment and offer the individual a taxi chit.
RALLY THE SURVIVORS
With the pink slips handed out, senior executives should ideally convene a town-hall-style meeting with the remaining employees on the day of the cuts or as soon thereafter as possible. You should come armed with key messages about the reason for the layoffs and how the move fits in with a broader strategy for returning to profitability. Owners and managers need to make themselves available afterward to answer questions, dispel rumours and even listen to some venting. The meeting may even prove cathartic for executives who feel guilt-ridden about laying off long-time employees, some of whom may have been their friends.
This is a good moment for senior staff to announce their own belt-tightening moves, to show solidarity and share the pain. Trimming discretionary perks such as a company car, luxury hotels on business trips, and bonuses is an obvious start in helping to rebuild trust.
But Deloitte partner Heather Stockton says town halls are not enough. Executives "need to walk the halls and have one-on-one time for their people. It's important to show your humanity, especially for the business owner." In fact, she stresses that the owner or CEO shouldn't abdicate responsibility for a layoff to the HR department. When a company has to shed staff, senior managers must face their employees if they're to retain their remaining staff's respect. "The business leaders have to be seen as having courage," she says.
After a layoff, gird yourself for a period of low productivity, Stockton notes, as the remaining employees work through what amounts to a grieving stage. And you'll be facing the question on every survivor's mind: Is that it, or are more cuts to come? HR experts urge companies to do all the dirty work in one fell swoop if possible, rather than putting staff through successive waves of layoffs. Either way, employees will be looking for assurances and signals. "If top performers see their organization is potentially at risk, they may start looking for alternative employment," warns Mercer's Lynn Stoudt. But she cautions against lying if you think more cuts may come. "I'm a firm believer in not making promises you can't keep."