Date: Wed, 29 Oct 2008
From: "Paul Backer" <pauljbacker@gmail.com>
Subject: Survive the Crisis in Russia and CIS! Part 2, Operations and Staffing.
International corporate and securities attorney in private and public practice focused on Russia/CIS from 1994.
[DJ: Part 1 in JRL #192, October 22]
DISCLAIMER: This article is uncompensated. It is NOT legal advice. Everything herein is personal opinion. It does not represent anyone else’s opinion. It does not address any current or past client or employer matter.
To a lawyer, every business looks largely the same whether an online casino, an oil company in Kazakhstan, a construction company in Moscow or a dairy farm in Ukraine. A set of general or specific (natural resources, telecom, banking, gaming, etc.) laws, compliance regulations, and local (business, administrative, regulatory, enforcement) practices are applied to a set of operations generating and (crucially) repatriating revenue. As a lawyer, you figure out what business your client is in and apply the above. In a crisis, your primary task is to help a client rapidly apply new rules to his operations and to help him secure his assets and ensure repatriation of profits. Often, a client can’t figure out what business he is in, and then everyone is doomed. See Chrysler. Sometimes, a client can’t accept the new regulatory and enforcement realities. Then he is also doomed. Lots of folks are doomed, some simply because they chose a business model incompatible with a crisis. It’s probably a better time to open a used car dealership than one more new car dealership. On the operations side, as a crisis management consultant, helping a client survive a crisis depends largely on cutting his burn rate (for in depth discussion of term, please see the 1999-2001 Internet crisis) and focusing all operational effort on generating revenue. A consultant with crisis survival experience should not try to teach clients how to better manufacture, market or ship their widgets, not his job. He should apply painfully gained experience in prior crises to help your business survive this one. His job is to make you face the world as is, not as you would hope it to be. He provides the skills and some of the luck needed to overcome the crisis. If your crisis management consultant never saw a crisis or engages in flights of fantasy during this one, most likely he is just adding to your payroll and headcount costs.
Books about Chernobyl note that one of the symptoms of critical radiation poisoning is that a victim feels fine. He knows he was exposed, but he doesn’t feel it. He is not in pain, he is cheerful. He is also less likely to timely seek potentially life saving treatment, and therefore statistically likely to either die or be seriously permanently disabled. Much the same thing happens in a crisis to entrepreneurs, businesses and consultants. Some get shell shocked and walk around town dazed, chanting the mantra, “It’s a good time to find a bargain.” Others argue that in reality, a crisis is a blessing, staff are becoming far less expensive, previously unaffordable office space is more affordable and revenue in local currency is up, up, up! Anyone pointing out that a failing local currency is hardly a blessing unless you are solely an exporter with costs in local currency is a spoilsport. As in: we pay Misha in rubles, so at 50,000 RFR he used to cost the company over $2,150+ at ruble’s peak, now at 27.7 per USD, he only costs us $1,800, so he is MUCH cheaper and it may be time to look at adding staff. Imagine how cheap he will be at 30 or 35 or 40 rubles to a dollar! Too bad, he won’t be able to buy imported food, clothing, vehicles, electronics, etc. If he is not a key employee, he is too expensive at any salary cost. If he is a key employee, let’s hope that the plan is not to stand by and watch his salary get decimated. He will leave, crisis or no crisis.
A crisis is not any sort of a “good time” and your staff isn’t cheaper or needs an expansion. The situation is serious and recovery is likely to be a while off, long and painful. The stock markets regionally have collapsed. Seventy percent declines are not a “correction”. Opening and closing seemingly at random is not a good sign. The local currencies lost 20 or more percent of their value in a very few months. Credit is largely unavailable, even at 25% per annum with collateral. Governments and regulatory agencies looking to utilize limited funding to salvage companies that either must (too big or nationalized to fail) or deserve to be saved, are actively looking to close the ones that aren’t or don’t. The polite term is sanation.
The reality is that the tolerance of financial, tax, customs and other regulators is dramatically lower than when everyone was fat and happy. Tolerance levels and associated costs have materially changed. Companies are literally under the microscope. Tax authorities are held responsible for lower collections, as will customs authorities as will regulatory authorities. The current situation is very unlikely to be the end of the crisis. It is much more likely to be the beginning, as regional companies and consumers face the realities of no credit, reduced purchasing value of local currency. Wait until the reality of materially reduced municipal and federal budgets begin to impact officials unready to part with their umm… oh gosh… let’s say “lifestyle”. Make sure that your assets are not just lying around.
Be objective, rely on your gut, not on PR. Not that it’s not worth watching. A recent spectacle was a regional business TV channel which appeared to call for criminal punishment for irresponsible financial reporting by journalists. A train wreck example of “what me worry?” coverage was provided by a Moscow English language daily, cheerfully reporting that the current crisis may well prove a boon for the entertainment (TV and movie) industry. Not likely. At the same time, Russian language press reported that one studio cut 70% of its staff and most were abandoning projects. A comparison was made between studios and construction companies freezing their projects. The truth is that in a crisis, folks are much more likely to pay 4 dollars for a bootleg DVD of a movie than spend a multiple of that by going to the theater.
A crisis isn’t good for anyone, it’s a crisis, it’s about triage. Many will survive, some won’t. It is my contention that a crisis isn’t even particularly good for “distressed company” specialists as those are generally good at monetizing an unhealthy company in a healthy sector. Sure, the RE prices may fall dramatically, but so will the public and private budgets to support that infrastructure, some of which was painfully ill built to start with. Now is not the time for new office space with accompanying moving, contingency and other unexpected costs. If you were failing in the old office space, cut your losses, leave. Come back when times are better. They will be.
Staff. A rule of thumb is a RIF of 25% to 35%. If your business didn’t store up any fat during the good times, well… you either don’t need any advice or (more likely) aren’t objectively evaluating your staffing needs. There are three key employees to weather the crisis: you, your finance director and your lawyer. Push comes to shove, you can be your own finance director. The first step is to sit down and objectively evaluate the actual cost of every employee and the revenue brought in by that employee. All of the costs, insurance, office space and of course, perks.
Perks. Do you have corporate apartment(s)? Multiple company cars? Would you be surprised that the actual cost of each one, even if your company pays the driver largely in frozen chickens, exceeds several thousand a month? Multiple receptionists? An assistant and/or driver for the four months of the year when you are in the country? Personal security… no, let’s not get started on that one. You are not doing anyone a favor by running down your crisis reserves by being overstaffed or overperked. It impresses no one, least of all those employees who actually contribute to the bottom line. It’s unfair, but a person may both enjoy being hosted at the most expensive restaurant, and simultaneously think less of you for it.
It imperils your business, alienates your revenue critical employees, and ultimately will require an even greater RIF when unemployment is at its peak, estimated around February to April of next year and company reserves are exhausted. If someone has to go, it is fairer for them to go now, when some companies are still hiring and your company retains some funding to pay termination and other subsidies. Are you paying for cell phones for your employees? Fly business class? Company retreats? Company credit cards? Sponsor employee MBA education? Corporate lending program? Do you find that your executives think that Pushkin, Galleria or Soho Rooms are the only places to have a meeting in Moscow? Are you hiring expats largely for the sake of the “made in” label secretly tattooed on the backs of their (our) necks?
Advertising and public relations. Are you doing anything not directly linked to the success (revenue generation of) your business? Sponsor a ballet, fund a gallery, take a leadership role in a charity? Are you the belle of the AmCham ball? Dedicate tens of thousands of dollars to staff education? All good things that a civilized person should do. But, a crisis is a time when you should use your own money for that sort of thing, not take food out of your employees’ mouths to be either the BMOC or if you prefer, the MOU or BSD. If eliminating the nonsense would allow you to cut the cost of your goods and services to your customers by 5%, cut the costs. Your clients are also experiencing the crisis, and will remember that you helped them and will stay loyal during the bad, and the inevitably, good times. Be a hero.
Heroism. In a very clever article that I remember a decade later, a Russian newspaper (the Exile) described the cut and run conduct of the robber barons during the 1998 crisis as purse snatcher barons. Very funny and to a great extent true. SBS Agro, Incombank, Dialog bank, etc., etc. At the same time, there were truly heroic gestures. To me, the actions of Mr. Friedman and Mr. Aven (Alfa Bank) during the 1998 crisis provide an example.
When every bank seemed to fail and use every excuse, legal and patently illegal to not honor their obligations and shut down their ATM, Alfa Bank kept (at least) three ATM running and giving out dollars. Limited volumes, but dollars from a wall. It was like magic. I dimly recall that one was, on Krasnopresnya, one on Kuznetsky Most and one on Old Arbat. For me and most expats caught by the crisis, it was the only place to get cash dollars in Moscow. In the following decade, I directed dozens of clients with hundreds of millions of financial throughput to Alfa, as the only bank that honored its promises.
No one remembers those who robbed themselves and their employees of their futures by remaining overstaffed and otherwise wasting corporate resources in a crisis. Nothing wrong with the good life, but seriously, use your own funds, don’t mug your business and employees. If you are an owner, there are few things as operationally and financially dangerous as an executive who “sees the writing on the wall” and wants to live the good life in the interim. These are the executives that make failure a self fulfilling prophecy. A good warning sign is if the executive either fails to cut rep expenses during a crisis or they actually go up.
Save the money, and maybe use some of it to hire key revenue generating staff (at realistic salary rates) as they come on the market. Running a business is a trust, folks are trusting you with the futures of their families. Don’t hold on to commitments that you can’t keep. Make the deepest cuts that you can, do it once and quickly. It’s not an opportunity for a catharsis, ensure that the process is handled professionally.
Talk to your staff. A reliable paycheck, even one somewhat diluted by the decline of the local currency and knowing that your leadership is both realistic and committed to your future does a lot more for corporate morale than a meaningless annual retreat and hackneyed speeches. Watching deadwood leave is good for the morale of those who remain as long as it is a one time event. Your staff must know that they must do more during the crisis. If at all possible, reduce the fixed component of staff compensation and increase the role of commissions from successfully generated revenue.
Don’t rob the dead. Waiting for staff to leave voluntarily to reduce head count destroys organizations. Inability to quickly implement the hard, but necessary executive actions fosters negative selection. If staff see that you are not prepared to save the company, they will start leaving. If you have built up no reserves, if you have not fired the deadwood and if you keep insisting that a “deal is a deal” and keep core staff salaries unchanged as the local currency collapses, staff will leave. The staff who leave first are the ones with the greatest market value.
Because they are your best employees, they will take clients and revenue with them, leaving you worse, not better off than before. Talk to the staffers you want to remain, see if they will be willing to accept a temporary reduction in compensation (in hard currency terms) in exchange for a long term commitment and some bonus linked to a hard currency. Do not index salaries, “indexation” must be earned on a case by case basis and should be a reward not an entitlement. Talk to the staffers who need to explore other opportunities. Offer some incentives for orderly departure: an extra month’s salary, a strong letter of recommendation, not unimportantly, their dignity in the process. They may very well be willing to resign now than stay in an organization where they do not have a future.
Work with your lawyer. Determine which staff have protected (long term) and unprotected (short term or no) contract status. Establish and follow objective criteria. RIF underperforming employees as a group, following objective criteria, combined with offering some compensation is much less likely to result in litigation on discrimination and other grounds than firing one person at a time, seemingly based on whim. Keep the process well documented and objective. Don’t be either a villain or an agony aunt.
If large numbers (of staff or compensation) are involved it is cheaper to hire a specialist law firm to come in and constructively manage the separation than DIY the process. Don’t be a “Chatty Cathy”, generating emails to employees undergoing separation. A RIF is profoundly stressful, but it’s your stress, it’s part of being a boss. You may feel that phrases such as “I agree it’s unfair” or “Yes, I expected that you would be with us for years” are merely a comfort. They may well prove grounds for litigation. It is true that email in Russia is not a legal document on behalf of an employer, but it has been admissible on behalf of an employee to prove discrimination, violation of labor law, etc.
The satisfaction of commiserating with or alternatively, denouncing a former employee historically proves to be both an expensive and a counterproductive pleasure. It is exceedingly ill advised to “bad mouth” the former employee to remaining employees as they will inevitably communicate that information to the former employee. This is especially true, if that employee is then himself terminated, as is often the case in companies struggling during a crisis. Disgruntled employees make great witnesses. Further, remaining employees will expect the same from you, should their time come.
You must make the hard decisions, your lawyer should implement them. Good news should come from you. Bad news from a responsible official in your company. This may be your first crisis, it’s not the first one for any local employee over 30.
An unnecessary additional word on maligning (demonizing) former employees. Many executives are unable to downsize staff without turning the process into a morality play. Often making wild, unethical, vicious and unprovable accusations to vilify an employee. If this employee has an international profile, is a foreign national or if the accusations originated in any other jurisdiction other than Russia/CIS, you could very well find yourself sued in personam in your home jurisdiction for discrimination, libel, tortious interference with employment, fraud, etc. Sued in a jurisdiction where court documents are in the public domain. Sued in a jurisdiction where legal costs can run in the hundreds of thousands of dollars. In these situations, you may face legal bills and ultimately, judgments in the hundreds of thousands or potentially millions of dollars with no one, but you responsible for them financially or professionally. At best, a Pyrrhic victory, don’t do it.
Ultimately, the lifeblood of any business is funding. Every business either borrows funds, lends funds or operates on its own funds. Part 3 of Survive the Crisis! on funding.
NOTE: this doesn’t mean that I have wholly abandoned the Crisis Survival Guide, it’s on a “time out”, as time is limited and the issues of overcoming the ongoing situation appear more pressing than generalized discussion of good practices and what can your lawyer do for you. Personally, I think that exploring the distinction between local, major and boutique law firms is very interesting, but the timing may not be perfect.
As always, please send any questions, comments, etc. to pauljbacker@gmail.com.