Tuesday, November 25, 2008

The Two Thirds Solution...

The Two Thirds Solution - An Industrial Strategy for Survival in Hard Times

Companies in the manufacturing sector need to re-organize if they are to survive hard times, according to Canadian management consultant Charles Fitzsimmons. "The way most are structured now makes them fragile. They're OK in boom times - who isn't? - but when their industry enters a down turn, they have no way of protecting themselves, and things can go bad in a hurry. Orders fall off, inventories rise, fixed costs stay the same, and the largest cost of all - labour - becomes a millstone around the corporate neck. Everyone knows what happens next - production is cut back, people are laid off en masse, the fixed costs are spread over an even small base, which makes the balance sheet look even worse. The firm begins to eat into its reserves; working capital dries up, credit becomes more expensive or disappears entirely.. If the local company is part of a larger corporate empire, then it may be closed, and everyone loses their jobs. We see this more and more. Manufacturing firm these days are like infantry walking into a fire fight standing straight up, and not wearing any body armor. How about some defensive strategies? Wouldn't it at least be a good idea to duck?

"The question of how to survive hard times is highly relevant now, says Fitzsimmons, "because we're in a recession now. But strategies to survive the down part of economic cycles will probably always be needed, because ups and downs are just part of life for manufacturers - and plenty of others, too."

So where are they, these strategies for surviving hard times? "One approach I find very interesting, says Fitzsimmons, "was adopted by some large Japanese manufacturing firms about 20 years ago. The principle is very simple: employees are only paid about two thirds of their wages in their regular paycheck. The remaining third is paid twice per year, in a lump sum, but only if the company is making money. Think about it. When times are tough, these firms can reduce their salary expense - always the largest cost - by one third without making a single lay-off. And when orders pick up again, all the trained staff are still in place so that production can be ramped up again immediately, while competitors who let their trained people go during the down times, have to recruit, hire and train new people to get back up to speed. And that takes time, and time is a competitive edge. The Two Thirds companies - that's what I call them - have the competitive edge is a number of ways.

A strategy that helps you survive in hard times, and gives you a competitive edge in good times. That's what this looks like to me. First, the Two Thirds Solution guys are able to give lot more loyalty to their employees than other companies - the quick-shedders, as I call them. Because they offer greater loyalty, they get more loyalty back. They reduce staff turnover, which is in itself a cost reduction. By having a strategy in place to deal with downturns, they can offer their customers quick response, because they're always ready to go with trained staff who are very keen to see the company make money, because when the company makes money, the employees make money, too. Everyone knows that when employees have a direct stake in the profitability of their company, you get the best out of your company resources - less waste, reduced absenteeism, a company-wide ethic that, hey, we're all in this together, so let's make it work. Also, the disruption and heartache of layoffs is avoided - but at a cost - people have to be willing to accept the potential of less pay when times are bad

Sounds, good, right? says Fitzsimmons. "So why is it just about unheard-of in North America? Here are some reasons that occur to me. Unions may not like it, because they see it as their job to protect the highest seniority, highest paid workers. If that means that junior folks go out the door in hard times, well that's just the way it's always been. Employees who are at the top of the seniority and pay heap may feel secure enough, or close enough to retirement, that they don't want to see their monthly pay go down just so that there won't be lay-offs that probably won't affect them anyway. Mind you, if the whole plant closes, they are out in the cold with everyone else. Management may not like it because they have to play by the same rules - meaning their pay goes down by a third when the company isn't making money, just as it does for the workers. Also, it implies a commitment to candor - letting employees see how the company is actually doing. That's a big change for most companies. Shareholders may not like it, because it actually puts the stability and profitability of the company in the long term sense something ahead of short-term financial interests, and for some of them the short term is what their compensation is calculated on, so that's the only term that matters."

Fitzsimmons says, "I think governments, when they are considering pleas for assistance from companies in the manufacturing and other sectors that are hurting right now, are entitled to ask whether these companies are doing anything like this to protect their own viability, as a condition for getting help. When someone asks you for a blood transfusion, it's seem a legitimate question to ask whether they are doing anything to stop the hemorrhaging."

So what's the bottom line on this? According to Fitzsimmons, "in the Two Thirds Solution, everyone involved may have to give up something. In return they get a better shot at their company weathering the economic storms, and also performing better in good times, too. But people generally don't like change, and often the people wielding the levers of power in companies, unions and the financial world measure everything with their own personal yardstick. It's like they'd rather burn the engine out and then junk the car than change the oil if they have to pay for the oil change themselves."

But is he optimistic about this idea catching on? "Well, hard times are a great teacher. Many companies are looking into the abyss right now. Winston Churchill said, 'the likelihood of imminent death concentrates the mind wonderfully'.

Final words: "When the interests of so many people and communities are at stake if firms go under, is it too much to ask people to act responsibly and consider the wider interest? After all, he says, "there are other people to consider in any situation, and there is such a thing as tomorrow."


Anyone interested in contacting Mr. Fitzsimmons for further information or discussion can reach him at:

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