The cutback consequence

Among the insights gleaned from a survey of chief financial officers comes a warning for telecommunications and network gear manufacturers: if you have to reduce your workforce to meet fiscal deadlines, do so cautiously, lest you find yourself less able to compete.

Ernst & Young last month asked CFOs the world over for their opinions of high-tech business practices. The study’s 60 respondents said network and telecom firms should be careful when cutting costs. Headcount reductions, a popular method of balancing the books, might help a company’s current quarter, but they also might harm long-term viability.

“A lot of people say they’re cutting fat,” said Doug McCuaig, vice-president of telecom, media and networks in Canada for Toronto-based Ernst & Young. “In fact, they’re cutting muscle and bone. You should be finding out what’s not core to the business, things that won’t steal…profits for the future.”

So how do executives walk the tightrope between immediate cost-saving requirements and future needs? According to most observers, the answer is a strange brew: one part “forward thinking” and one part ruthlessness. Corporations must play the acrobat and balance vision with practicality, sources say.

Practicality comes first, notes Pat Gaudet, president of the Canadian Information Processing Society’s (CIPS) Toronto section. “If [a company is] in a difficult position, sometimes they have to address the short-term first,” and put vision on hold for a time when there’s money in the bank.

But Kirsten Watson has heard stories of companies doing more harm than good with cost reductions. Watson, president and CEO of HireTopTalent Inc. (HTT) in Ottawa, helps ex-network gearheads stay in the loop and find new positions.

Sometimes “they come in and bash their companies,” Watson said. Clients utter such remarks as, “‘I just left this dumb Web company that doesn’t know what they’re doing. They let go the team that built the technology in the first place. They basically fired their IP (intellectual property).'”

IP -the ideas and innovations that employees bring to a company – is one of the more valuable possessions a business might have, Watson said. But if those ideas remain with one employee recently let go, the firm risks losing a prime asset.

“Where is the IP?” she said. “Is it in the heads of individuals? I’ve seen programs launched internally where the company ensures that there’s almost a buddy system, where there’s always at least two people who shared most of the information; because you never know what could happen to one of those individuals.”

Watson herself once worked at Nortel Networks Ltd., but in Jan. 2001 her division, dubbed Extreme Voice, was chopped as the Brampton, Ont.-based telecom equipment maker started cutting costs.

“We were in the business of Internet call-waiting,” she said. “It was a consumer product delivered over an ASP (application service provider) model through channel partners. My position there was senior manager of channel marketing.”

Asked if Nortel’s decision to shed Extreme Voice made sense, Watson said, “There are two perspectives on that. One perspective is that our division was a bit unique for Nortel. We were also heading down the path of spinning out and breaking away from Nortel…In that respect, because we were so close to being a viable company, it was a bit surprising.

“But it wasn’t surprising from Nortel’s perspective of, ‘Okay, revenues are slowing down. We have all these cost centres, these divisions. Which ones are bringing in the most revenue and which ones are core to our business?’ They start to put some fairly obvious questions on the table. We were the only consumer division they had. We were innovative, on the outer edge of Nortel’s core competency. So in that way, it wasn’t a huge leap.”

Nortel declined to comment on the issue.

Sometimes companies have to make tough decisions that, to the outsider, seem senseless. Dave Caputo can attest to that fact. Now president and CEO of Sandvine Inc., a Waterloo, Ont.-based video networking gear maker, Caputo once worked for PixStream Inc., also a Canadian video networking gear manufacturer. In Dec. 2000 Cisco Systems Inc. acquired PixStream, only to shut the division down four months later. Caputo said the decision came as a shock to PixStream’s employees. But no matter how strange the choice seemed at the time, it did make sense.

“We had a high-performing team that was excelling on every possible metric,” Caputo said. Still, “Cisco got caught up in these winds of change and basically made a strategic change. It wasn’t that they were cutting fat, flesh or nicking the bone as they were so much amputating, saying wasn’t something they were going to focus on.”

As with Nortel, Cisco would also not comment.

Caputo said companies could avoid the fat-or-flesh debate with a simple rule: don’t get chubby in the first place.

“I think the real strategy is to focus on hiring the absolute best people and eliminating any weak performers as soon as they emerge….Just always focus on having muscle as opposed to any fat.”

But Watson suggested Caputo’s rule is too simple.

“I’ve heard stories of [venture capitalists] telling companies that they’re not spending money fast enough. They want everyone to know about the company, because it attracts talent. The more talent you have, the faster you can get your product out the door.”

Watson added that selling your company and its attributes to attract talent, by such means as sponsoring sporting events, became “very, very key.

“Are those efforts considered fat in today’s market? Yes. You don’t see high-tech companies sponsoring crazy sports events. That’s way out in left field right now. People are spending their money more carefully to attract either key talent or key customers, getting back into personal relationships.”