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June - 2001 - issue > Sam Pitroda Column

Tackling Reality Head-on: Downsizing

Monday, November 17, 2008

Ten years of unprecedented growth in the US economy have created the impression, especially among young people in the high tech industry, that growth is permanent. After all, many have never seen an economic downturn, at least during their professional careers. Now the high-tech industry is going through difficult times. The stock market is down, venture capital funding is tight, private companies are grasping for cash, shutting their doors, watching their CEOs quit.
Unemployment is up, families are being forced to relocate — overall, it is a rather depressing environment compared to a year ago. The bad news forces us to rethink the growth strategies of the past and to focus on survival strategies for the future. What matters is the speed of hard decision-making with focus and objectivity. People need to stay grounded in reality, and not succumb to hype about the future.

The Four Sides of Downsizing
There are four main areas to focus on in downsizing a company. Each is interconnected. And the goal is to maximize returns:

1. Cash Flow Management
In today’s environment, burn-rate has to be decreased, and run-rate has to be increased. Essentially, companies have to return to basics. The money coming in has to be more than the money going out. This is especially true for companies that have been spending cash received from private or public markets without ramping up their revenues. Suddenly, they have to focus on generating cash! The normal practice is to slash expenses, reduce staff, and spend less on capital equipment, office space, travel, and borrowing, while building cushions and focusing on financial management. The key is to not delay the hard financial decisions. In any organization, even under normal circumstances, 15 to 20 percent of expenses can be trimmed without hurting anything. But in this crisis, the focus ought to be to cut 50 percent and see if you can still survive.

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