Business Tech

Editor's note: This is part of a series of stories about the recession's effect on the tech industry.

Over the last few months, there have been countless stories of cutbacks at companies large and small. Real people are losing jobs. For some, that means losing their homes or being forced to change careers. In this series, CNET News is telling the stories of many of the people on the receiving end of the hits recently sustained by the tech industry.

Click for complete special report

But there is another side to layoffs that doesn't get told very often. That's the story of the people who do the laying off, those who make the decisions about who stays and who goes. Do they deserve our sympathy or our derision?

In most cases, the answer is neither. While there will always be an evil schemer or two out there, most executives who conduct layoffs realize they're cutting into their company's most valuable asset: the employees. Sure, it's a corporate cliche, but most of them do believe it.

We talked to the chief executive of a Web 2.0 company that recently axed a bit less than 10 percent of its workforce and asked him to walk us through the process. Not surprisingly, he did so on condition of anonymity. He's running his third company now. This business is his second Web 2.0 outfit, and is generating revenues from a mix of sources, including subscription fees and advertising. It's an established business, not a brand new Web start-up.

The job cut process, as he described it, was driven by raw numbers and business instinct. No Seven Stages of Grief here, just plain old business sense. Like it or not, this is how it usually works in corporate America:

Q: Why did you do layoffs?
CEO: It's clear that 2009 is going to be a different year than we had anticipated. There's no question that we're in a recession, and we expect that next year could be severe. It's really important for companies to do everything they can to keep costs low, and be able to sustain themselves.

This layoff was based not on an actual decline in revenues, then, but a projection?
CEO: We did see some softness in Q3 and Q4, and projections are that the softness is going to continue. One of the things that makes this very difficult is the uncertainty. It's very hard to plan for next year.

How many people did you lay off, and was it a one-time thing, or should we expect more in 2009?
CEO: We let go less than 10 percent, and that is the most difficult aspect. You don't want the layoff to be too big, and you don't want it to be too small. If it's too big, then you've impacted too many people and damaged your ability to execute. If it's too small, you run the risk of having to do it again, and doing that suggests that it's not going to be a one-time thing, but that it's an ongoing thing. And that creates huge amounts of anxiety. So that is the real risk.

It's hard to say what will happen next year. You take risks either way. We say we're doing this so we never have to do it again.

Could you have foreseen this?
CEO: People were expecting a meltdown on Wall Street. It reminds me of back in the bubble days, when people were expecting the bubble to burst. But until it burst, it wasn't rational to behave as if it were going to. Alan Greenspan talked about irrational exuberance in 1996, and it wasn't until 2000 that the exuberance really burst, so it's a very hard thing. In retrospect, sure, there are things we should have done. And it is possible that in six months from now, we'll be saying that in retrospect we didn't know it was going to get this bad. You may see another wave in six months. And it's possible that we all make it through, that the economy picks up.

When did you have that "I'm going to throw up" moment and realize that you were going to have to let people go?
CEO: I don't know if it was like that. It's hard to say exactly when we made the decision. It came to a process of forecasting our business and determining what an acceptable expense ratio was for the business going forward. When we reforecast our business for the second half of the year and evaluated the risk, we realized that our cost basis was just too high.

So when you realize that you have to trim your staff, who gets involved?
CEO: It starts with the heads of our business units, the people who have (profit and loss accounting) responsibility, and the people who are responsible for your revenue lines as well as the bottom line of the business. You first have to have a really strong gut check as to where you feel the business is going to go. You certainly would rather figure out ways of generating more revenue, and the first conversation wasn't about how to we cut costs. We asked, "How can we respond to the changing market conditions? Let's not just think of this as the market getting smaller, but the market is changing, and we ought to adjust our strategy to match. There may be positive ways to do that." And eventually you have to talk to the board.

You don't start with the board?
CEO: There's been a lot of discussion about this. For example, Sequoia brought in their CEOs and told them: This is the way it's got to be. But any CEO who needs to wait for their board to tell them what to do in terms of their expense structure is not doing the right job. It's the management team that ultimately has to make the call. Boards can give advice and ultimately judge the effectiveness of the CEO, but this is something the management team has to own.

I would never want to be a Sequoia portfolio company. Those guys are so heavy-handed in the way they treat their companies. They see the CEOs as interchangeable. I think a lot of people did layoffs because of the slideshow.

How long does it take to put a layoff together?
CEO: For us it was a matter of weeks. We did want to have a structured conversation with the board about what we were proposing. It's very important to have a back and forth, get their advice and their opinions. Also, we wanted to invest enough time in this to make sure we were making the right moves, that it was the right degree, and that we were structuring the company appropriately, and weren't just thinking of this in a one-dimensional way, which is "how do we cut people?"

It was, instead, "how do we structure the company to adapt to the changing conditions?" And that may include other organizational and strategic changes beyond just cutting people. And that's very important. We also wanted to look closely at other ways to cut expenses and generate revenue.

Was there anyone who, at the end of the planning process, changed status, from staying to going, or the reverse?
CEO: Yes. You're trying to figure out the best mix to make the company successful going forward, and that's an iterative process. And in some cases, we wanted to make sure that there weren't opportunities for people in other parts of the company. We took into consideration not the performance of people, but their skill sets and how they could contribute going forward.

How did you tell people?
CEO: We spent a lot of time thinking through the process. The management team went offsite several times to discuss it. We talked through the logistics on how the day would work, and we iterated on it. We really thought through how this would happen. The details of it really do matter.

We decided the best way to do it was to talk to the people individually first. We tried to figure out how we could get the message to people one-on-one, in person, explaining it to them so they knew first, rather than doing a whole announcement and then tapping people on the shoulder. We told people one by one, by their direct managers, and then we had exit interviews, and then we told the rest of the company what was going on. To the extent we had managers who would be eliminated, we told them beforehand.

Did anyone, on the way out, do any bridge burning?
CEO: No one. It was moving, actually. And I haven't seen many stories about people being nasty or bitter. I think people have been pretty mature about this.

What did you do afterward? Did you go out drinking with everyone who was left behind and toast the departed?
CEO: We did. We set a time for everyone to get together and say proper goodbyes. I think it's a real mistake to treat people you've let go as if they're not people or not part of the family anymore or it's too awkward to look them in the face. That's not respecting them the way they deserve.

What's it like to go home after a day like that, to go home to your family and your kids and realize that other people are going home now without jobs, and will be worrying about Christmas and paying for schools?
CEO: It's tough. But once you've made the decision, if you've put enough thought and work and diligence into the decision, then you can be at peace with it. If you did it on a whim or because a board member told you to or because it seemed fashionable, then I assume you would feel more uncomfortable. If you've really done your job, then you can be at peace.

The best thing you can say is that you have thought through what you were doing long enough to know that it was the right thing. My obligation is to the company, and I've got to think about how I can create something sustainable for everybody, and worry about the jobs we still have here as well the jobs we have to cut.

And the next day? What's it like for you?
CEO: For me, it was checking in with people. The key thing is to focus on the company that you have after the layoff. It creates the ability for you to set a new tone. If there was any complacency in the company, this is an opportunity to make sure that doesn't exist anymore. It's really about moving forward, and having people realize that this company is moving forward.

Have you been in touch with people who are no longer with you to help them out in any way? How's it going?
CEO: Yes. It's a tough market. But we do try to help everyone who's laid off. If we can help them get a job or make introductions, we have been doing that. We're tracking everybody and how they're ending up. There's only so much we can do, but we do think it's important.

Has anybody landed a new gig yet?
CEO: Yes.

What advice would you give to people who are doing this for the first time?
CEO: To be as honest as you can about the process.

But this is not a process that lends itself to being open. If I'm at a company and I know times are tough, and you're the CEO and you know a month from now you're going to do layoffs, do you let me know that a month from now I might not have a job?
CEO: That's the hardest part. Which is why, once you've come to the determination that you're going to cut costs or do layoffs, it's best to move as quickly as you can. Then you're not in the awkward space where you have to be circumspect with your team.

Do you let them know you're making those plans?
CEO: No. I think you can acknowledge the circumstances of the company. You can talk about the forecasts looking dim. But you have to balance being candid with sowing widespread anxiety around the company.

If somebody comes to you, and asks you directly: "Am I going to get laid off?", what do you tell them?
CEO: If the answer is, "We don't know," that's the answer I would give them. But I don't think it's good to suggest something will happen that won't. Usually the answer is, "We are looking seriously at how to lower costs." The truth is that very rarely does this happen.

I'm surprised. It's like people are afraid to ask because they are afraid of the answer.
CEO: That dynamic came into play the day of. People were, at some level, expecting it. And therefore when the day finally came, people looked at is an opportunity to move on.

Next in the series: A bustling green-tech industry readjusts its expectations

Editors note: This is the first in a series of stories about the recession's effect on the tech industry.

Patricia Sueltz has had her share of blunt bosses.

LogLogic CEO Patricia Sueltz

(Credit: LogLogic)

At IBM, Sueltz was CEO Lou Gerstner's technical assistant during Big Blue's dramatic turnaround in the 1990s. After that, she ran the services division at Sun Microsystems for CEO Scott McNealy during the dot-com bust from which many believe Sun has never truly recovered.

But not even the acerbic McNealy could have cooked up what 56-year-old Sueltz saw in front of her two months ago: A PowerPoint slide of a blue-shaded, gothic headstone with "R.I.P. Good Times" written in red. It was the first of 56 now-infamous slides used by venture capitalists at Sequoia Capital in a tough talk delivered to the executives of the companies in which they'd invested.

And if that wasn't enough, the third slide, a mangled pig on a butcher's block, drove home the point: The economy is heading south, rapidly. And if you want to save your company, you'd better find a way to trim the fat. Personally, Sueltz appreciated the blunt message.

"I'll take that over a bunch of saccharine, sugarcoated messages," said Sueltz, now chief executive of software start-up LogLogic.

Not everyone appreciated the dark humor, back when it was unclear just how bad the economy would get. But by now they should acknowledge the Sequoia venture capitalists had a point. By most measures, the high-tech industry appears headed for one of its many busts as the global economy sinks into recession. Industry research firms have been downgrading and downgrading their . The PC market is in the dumps. E-commerce spending, for the first time, was down for the first three weeks of November from the same period a year ago. Even online ad spending, though still growing at a healthy clip, isn't expected to expand as rapidly as earlier forecasts. If you're not working for Apple, it seems, these could be the most trying times in decades.

For the tech industry, of course, booms and busts are nothing new. Venture-backed booms generate hundreds of start-ups and drive out aging companies that are no longer innovating. The busts separate the weaklings from the survivors, the smart ideas from, well, the not-so-smart. The PC boom in the 1980s drove out old tech giants like Digital Equipment Corp. and Wang. The PC bust consolidated that industry, just as the dot-com bust separated the survivors from the Pets.coms of the world.

Click for complete special report

Now? The Web 2.0 expansion of the last three years is just a boomlet compared to other industry expansions, and plenty of start-up employees are already losing their jobs. But the biggest concern for the tech industry isn't overinvestment in start-ups: It's the overall economy. Taking the air out of the Web 2.0 community likely won't impact as many people as a single round of layoffs at a giant like Sun, which recently announced plans to cut up to 6,000 jobs. Even healthy tech bellwethers like Hewlett-Packard are telling employees to take time off before the end of the year--a slightly more palatable option to layoffs.

Even worse, economists aren't sure how long this recession will last: A few months? A few years? Starting today, CNET News begins a series of profiles of people in various technology sectors--from the start-up execs getting a stern talking-to from their investors to the holiday shoppers in one of the housing foreclosure epicenters, Modesto, Calif. Their expectations and their means are often wildly different, but in a way, they're in this together: For tech executives, their employees, and even their customers, these are uncharted waters because the industry, as we know it today, has never faced this sort of economic uncertainty.

Saltwater in the face
For Sueltz, running a small company in bad times is a new experience. She's been at huge companies in bad times, and responding to problems isn't easy at companies like IBM and Sun--sort of like turning an aircraft carrier. At a start-up, the challenges are different: it's like being in a small ocean-going boat. Every wave, every gust of wind, feels like it could capsize you.

"But, you know, the best way to deal with it is to get right out in front," Sueltz said. "Sometimes it's good to get that saltwater in the face."

The gregarious mother of two started her career in the 1970s as a rare, female telephone pole climber for the old Pacific Telephone & Telegraph (some joke that must be where she got her famously strong handshake). Sueltz kiddingly portrays herself as one of the old-timers in tech these days, but there's little question that her decades of experience have taught her what to do in tough times.

There were plenty of bad days at IBM in the early 1990s. Hard as it may be to imagine for young people now, IBM had the makings of a company in a death spiral. Like DEC, losses were mounting, and the company was ill-prepared to compete with younger, more nimble competitors. It took Gerstner, an RJR Nabisco executive with no tech industry experience, to turn things around. The biggest lesson for Sueltz during those years working closely with Gerstner was making decisions fast, and sticking with them.

At one point, Gerstner laid off more than 200,000 people in 18 months, Sueltz recalls. No doubt, the impact was brutal, and old IBM towns like Poughkeepsie in upstate New York have never really recovered. But the alternative, IBM going under, was even worse. "It was a pretty horrendous time," Sueltz said. "But I learned from Lou. Swiftness, again, is so important. You have to be firm in what you do."

Sueltz went to work for Sun in 1999 and at one point was the executive responsible for 17,000 employees in Sun's services arm. Few big tech companies were as badly impacted by the dot-com bust as Sun, which grew fat off start-up customers and big financial companies rebuilding their networks for the online world. Unfortunately, when the spending spree ended, McNealy was slow to cut costs. He believed Sun revenues would quickly rebound. They didn't.

Sueltz, who is still friends with many Sun executives, would never actually blame her old boss for being an optimist. McNealy, the son of an auto executive from Detroit, understood the human impact of layoffs, and he believed his company's greatest asset was its employees, from the engineers in Sun Labs to the sales force. McNealy's bet turned out to be wrong, but Sueltz understood that trying to be decent when you have to make hard decisions is the least an executive can do.

Venture capitalists had a blunt message

(Credit: Sequoia Capital)

After stints at Salesforce.com and start-up SurfControl, Sueltz became the chief executive of the security software company LogLogic; she started there a year ago this week. The San Jose, Calif., company, which makes software to track and store data on the network (a must-have to meet some regulatory requirements) has raised $44 million from venture investors and has 150 employees. There have already been a handful of layoffs over the summer (Sueltz won't say how many), but she's confident the company can be profitable within the next quarter or two, despite the souring economy.

Either way, she was already thinking about the economy when she went to the Sequoia meeting. "The global nature of the (economic problems) is what's worrisome to me," Sueltz said.

While the tombstone and butchered pig slides were splashy, the rest of the presentation was decidedly sober. It was both a lesson in how the economy got into such a pickle and a pessimistic look at what happens next: Possible stagflation, lack of significant consumer spending, an economic correction that could last for years.

The next day, as she briefed her own staff on the Sequoia meeting, the slides from the presentation were already leaking to the tech press. But Sueltz is confident LogLogic can withstand the storm. Costs are down, and their software seems like something corporate customers believe is a priority investment, not something that would be nice to have. "As a small company, I believe we were able to get ahead of the curve," and prepare for a rapidly souring economy.

Decisive action, Sueltz said, will be the key to steering her company through it. "It's that death by a thousand cuts..." she said, "that's completely demoralizing."

Next in the series: A Web 2.0 CEO on laying off staff: "I'm at peace with myself."