Ready, Aim, Fire!

Ways to soften the blow--for both parties

It was the moment Cecilia Pagkalinawan had been dreading. The 31-year-old CEO of boutique Y3K, a New York e-commerce consulting firm, had already laid off six of her 20 employees. Now, just one month later, after a $6 million investment fell through and a major client jumped ship, she had to dismiss eight more.

The toughest task: firing the director of operations--her 35-year-old brother, Ray. The siblings met in Cecilia's Silicon Alley office. She described the dire financial situation. She reminded him that when he left his job as an insurance executive to join her startup, she had warned him it might not last more than a year. Amazingly, her brother, a father of three, simply nodded. "Ray said he was ready to do something else," she says. "Even then, he was my big brother, always trying to protect me."

Ray has yet to find a new job, but being let go hasn't left him bitter. "We're both mature enough to know that there's work and there's family," he says. In fact, Ray insists that he's "proud" of his sister for exhibiting grace under such intense personal and financial pressure. But Cecilia Pagkalinawan remains haunted by the experience. "Until everybody finds work they love," she says, "that feeling of failure isn't going away."

Pagkalinawan should have no trouble finding a shoulder to cry on. With the economic outlook becoming more and more uncertain, managers everywhere are cutting their workforces--eliminating more than 525,000 jobs in December and January, according to the Bureau of Labor Statistics. And although layoffs are never easy, they can be particularly brutal at small companies, where the line between colleague and friend is so fine as to be almost invisible. "The smaller the business, the more likely it is that people feel a sense of ownership in the mission," says Bruce Tulgan, author of Winning the Talent Wars (W.W. Norton & Co., 2001). And that threatens to make layoffs all the more wrenching--not just for the victims of a downsizing but also for entrepreneurs themselves and the companies they lead.


Consider Brian Tormey, president of AgEx.Com Inc., a Sacramento e-procurement service for the food-and-beverage industry. As with many business-to-business exchanges, interest in AgEx has been slow to materialize. So Tormey was forced to reorganize the company, dismissing one-third of his 75 employees in January. He did it as gently as he could, meeting with workers individually and offering two weeks' salary as severance. Company morale remains high, he says, and many former employees still stay in touch. But how does he feel? "I'm a mess," the 45-year-old entrepreneur says. "Whoever said that a layoff is like pruning a tree is clueless. It's root canal without the anesthetic." Even though he knew the restructuring was essential to the survival of AgEx, a stressed-out Tormey suffered weeks of sleepless nights and lost about 20 pounds. "You don't start a company, hire people, and then say: `Now, I'm going to lay you off,"' he says.

In fact, that's exactly what many business owners do, outplacement experts say. You don't have to look far to find downsizing horror stories: employees locked out of their offices, escorted from the premises by armed guards, or learning their fate by calling an 800 number. The real losers in such cases may not be the victims, but the companies themselves. Botch a downsizing, and you almost certainly lose goodwill among surviving employees, says Bernadette Kenny, executive vice-president of Woodcliff Lake (N.J.) outplacement consultants Lee Hecht Harrison. And once it comes time to hire again, it could be hard to recruit.


What's the right way to downsize? It's based on simple common sense notions such as honesty and respect. A good example is Bidland Systems Inc. Last October, when a major client unexpectedly backed out of a contract, the San Diego Internet-software developer slashed 32 positions, honing its ranks to about 30. Managers did what they could to take the sting out of the experience. Dismissed workers were given several days to clear their desks. They were also offered severance packages and a 30-day extension of benefits. Those who had been with Bidland less than a year were given accelerated vesting in stock options in the privately held company. "It cost us a lot, but we wouldn't have considered doing it any other way," says communications director Jan Loomis.

Still, even the most compassionate managers can find themselves with the blues. Grace Stanat, CEO of 415 Productions Inc., a San Francisco Web design company, had to reduce his labor costs by about 40% in February. Stanat decided to canvass employees for ideas. Some volunteered for pay cuts, while others opted for four-day workweeks or leaves of absence. Stanat, 36, had to lay off only 16 of his 80 employees. Although he's proud of his workers, Stanat remains glum. "I know we did everything we could," he says, "but it's still like a death in the family." If the economy continues its downward slide, entrepreneurs may find themselves in a prolonged state of mourning.

By Joan Raymond

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