Avoiding e-Conomic Insanity When Business Rebounds

When I get to the bottom I go back to the top of the slide,
Where I stop and I turn and then I go for a ride,
'Til I get to the bottom and I see you again.
' The Beatles, “Helter Skelter”

Unfortunately, there is no question where the U.S. and world economies are located as we began 2009 ' they are definitely at the bottom of the economic cycle. And certainly, everyone hopes that the return to normal business conditions, when that occurs, will not then be a quick reminder to us all of the lyrics quoted above.

However, for e-commerce firms and businesses generally, the ability to maintain a turnaround will be affected by decisions made now, in the depth of the recession. Today, as they struggle to preserve cash flow and stay current on obligations to lenders, landlords and vendors, the helmspeople of too many firms have come to regret decisions they made with hope in their heart for a booming economy '
yet forgot and may still forget to plan prudently for the rebound. Ever more so than before, today's “big deal' may become the liability that leads to tomorrow's bankruptcy filing.

As Albert Einstein once said: “Insanity (is) doing the same thing over and over again and expecting different results.” Firms that don't want to repeat the struggles of 2008 and 2009 should, therefore, use the expensive lessons of the last economic boom ' and slump ' to learn to avoid the commitments and mistakes that have plagued them during the current downturn. With that in mind, let's examine a few typical decisions made when business was good, but that have now proven disastrous, to avoid making the same mistakes “over and over again,” and expecting different results, as the economy returns; indeed, perhaps we needn't be Einsteins to avoid repeating the calamitous cycle, helter skelter.

Many Factors Affect Things E

Let's begin, paradoxically for an e-commerce publication, with real-estate leases, often one of the largest fixed costs of an e-commerce firm, and a potentially huge drain on cash flow. Leases are usually signed with great optimism, hope and plans for growth. For a firm that expects to prosper, obtaining space to allow for expansion, whether by a large lease or an option, can be wise business planning, especially if it can lock in a good rental rate for the long term at a time when landlords are looking for tenants. Not having to incur the costs of relocation, even if relocating is easy to do, may also seem appealing. Relocating as more space is needed could also cause the loss of valued employees who do not want to commute, and will certainly disrupt day-to-day operations.

Yet, e-commerce firms may not need to consider all the long-term requirements of leasing that are part of the calculus for a bricks-and-mortar business, because they are often more mobile ' they can operate anywhere that has a secure source of electricity and properly controlled location for servers (if those are not themselves outsourced as well). If a firm can relocate simply by its employees and owners moving back-end equipment to take advantage of leasing incentives, then why should it spend too much time worrying about all the fine print in the typical commercial lease? An e-commerce firm can simply lease the most inexpensive space that is convenient for employees and for inventory storage. The movers of bricks-and-mortar firms, in contrast, must spend much more time thinking about expansion opportunities, and locking in future space and operating needs at (they hope) lower-than-current costs.

Still, even though an e-commerce business can relocate its operations, the legal rent obligation will not go away ' the rent remains due month after month, regardless of how the business performs. Of course, the cost of excess space leased or held subject to an expensive option will never be recovered. Obtaining a subtenant or replacement to “mitigate damages” can be difficult, especially if there is a glut of space available due to other firms' struggles or a downturn in the economy, or simple overbuilding, which may well have affected a large portion of a business' property-selection pool during boom times, unless the location is a desirable one with advantages other than simply providing a business some shelter and a physical address.

Even worse, landlords often require business owners to personally guarantee a lease ' whether or not the business succeeds, and the tenant (and often his or her spouse) remains on the hook for the space. We have seen firms in recent months struggling to meet rent with decreased cash flow, shortly after commitments were made for excess space, a long-term lease, or both ' none of which should have happened if the principals had stepped back from “automatic” continuation of the status quo of renewing a lease that had become burdensome, or to consider whether the extra square footage was really necessary, or even likely to be used. In addition, if revenue does not expand from use of the additional space, big rent payments will pressure cash flow and just make the problem worse.

Look for Wiggle Room

An e-commerce tenant, however, can try to negotiate an exit strategy in advance, preferably a buyout or early-termination option in the lease, if that is what the landlord must concede to win a tenant in today's difficult markets. Negotiating in advance for an option to terminate early, either to move to a different-sized location (especially one owned by the same landlord), or on a mutually agreeable event that indicates a business failure, such as a dramatic drop in revenue, may cost more initially, but may in the long run turn out to cost less than having to pay the full lease. The e-commerce firm can credibly tell that landlord that if it must foreclose for non-payment, the landlord will recover only assets that will likely be worthless to it or any potential buyer, or can even threaten to simply walk away from the lease; indeed, the landlord may be able to win a judgment easily, but what can it foreclose on to sell to recover unpaid rent? Realistically, in those circumstances, a judgment for possession simply gives a landlord another vacant space.

The landlord may, then, have to choose between negotiating for a reduced payment that it will actually get, or the right to spend money on legal fees chasing a failed business, with little possibility of collecting money from e-commerce assets (typically, intellectual-property rights) that the landlord likely cannot use. From the landlord's perspective, this type of a lease demands a personal guarantee, but under today's conditions, having a tenant who (the landlord hopes) will pay rent, to cover overhead and provide some cash flow, may be preferable to vacant space ' if forgoing the guarantee is what such a deal requires.

Too large of a lease commitment is one example of what former Federal Reserve Chairman Alan Greenspan referred to as “irrational exuberance,” speaking early in the dot-com boom (see, www.irrationalexuberance.com/definition.htm; en.wikipedia.org/wiki/Irrational_exuberance). In other words, entrepreneurs and pioneers alike who are convinced that conditions will improve, or continue to do well, choose to spend or invest heavily ' far beyond what they could justify under today's actual market conditions. In the e-commerce sector, other examples would include heavy acquisition of inventory, adding infrastructure capacity and hiring full-time staff.

No Long-Term Commitment

A firm planning against an economic decline, however, might find acceptable ways to solve the same business needs, without the equivalent of a long-term commitment. For example, rather than purchasing inventory, many e-commerce sellers outsource that function to back-office firms, such as GSI Commerce (www.gsicommerce.com). The Web site will then display the selling firm's logo, but rely on one of the many third-party warehouse sellers readily found online. (It is not a coincidence that so many vendors' Web sites look identical and carry the same merchandise.) This tactic shifts the cost of carrying inventory to a third party, at the expense of a slight loss of control ' and the limping economy, in a twist that applies particularly well to e-commerce enterprises, may be a small boon to these third-party merchandise-displaying outfits.

In contrast, as The Wall Street Journal reported in early February (see, online.wsj.com/article/SB123414021195261687.html? mod=todays_us_marketplace# articleTabs=article for a preview; subscription is required for access to the full article), large inventory accumulations in 2008, built to beat rapidly rising prices, crashed against a sudden drop in demand. Again, a prudent purchasing decision became a cost problem due to the unexpected depth of the downturn. Equipment needs can also be met with leased equipment, rather than purchased goods (although sometimes that is not a good long-term strategy, because it leaves the firm's capacity ' and a way to pay for it ' to the whim of the financial markets). As noted above, space leases can include (for a price) early-termination clauses.

Trying to Make Ends Meet

Many other more mundane aspects of an e-commerce business exist that can pile on costs in small, imperceptible increments, especially when strong cash flow leads to less scrutiny of every bill. No single cost may catch the eye of the Chief Financial Officer, but cumulatively they could cause the proverbial “death by a thousand cuts” (see, en.wikipedia.org/wiki/Death_by_a_thousand_cuts). Professional-society memberships and other “per user” fees can quickly add up. Firms that cannot eliminate them entirely, or that cannot shift them to the employees to pay themselves, may find it preferable to investigate site licenses, or to negotiate flat, company-wide rates using the leverage provided by the economic meltdown ' companies generally will choose to “make a deal” to keep a paying customer, even at a lower price, than risk losing the account not just temporarily, but entirely and forever.

Software Costs

Software licensing is a particular hot button for cost increases in the tech and e-commerce sectors. As programs are updated constantly to reflect new technology, new versions ' and new licensing fees ' proliferate. But as I have noted in prior articles, (see, “e-Curing the Holiday Humbug,” in the December 2008 edition of e-Commerce Law & Strategy, available online at www.ljnonline.com/issues/ljn_ecommerce/25_8/news/151437-1.html), it is often unclear whether the need for an upgrade is driven by the programmers or the vendor's marketing department. That is why the people making these decisions are well advised to consider whether their business needs the “latest and greatest” functionality, or whether the existing software package will serve their needs. For example, this article was written in Microsoft Word 2003, on a computer using Windows XP (with third-party security devices in place) ' a system soon to be two generations out-of-date. In addition, free online software can fill many needs, but watch for licensing traps ' a buyer, investor or lender may be uncomfortable if too much of a firm's critical software is outside its control.

Of course, “control” of software may be its own oxymoron for the technological age ' ongoing use of software or other technology often requires continuous payment of expensive licensing or maintenance fees under an “enterprise software” model, and future use depends on the vendor continuing to offer the same product at a comparable price, and so each firm must strike its own balance on whether licensing fees should be a target for spending controls.

Similarly, the number of “seats,” or licenses, may offer ways to control future costs. An IT manager may not think as critically as the person making the budget whether everyone needs a particular piece of software on his or her laptop or desktop, just as with print subscriptions. Unfortunately, bundled packages often limit the ability to pick and choose from among common applications ' the writer who needs Word can't avoid paying for Excel or PowerPoint, and the cost structure may leave no alternative.

Giving All Expenses the Once Over

Other areas in which firms may commit to spending prematurely are employee benefits and payroll expenses in general. For example, cutting hours, rather than people, can help to preserve a smoothly functioning team for when business returns. In addition, just as it may be more prudent in the short run to lease equipment rather than to buy it, using independent contractors, who pay their own share of employer payroll taxes, is a time-honored tradition in the tech industry that helps firms avoid overhead costs and preserve cash flow.

While avoiding the financial and other obligations of having employees for the long term has trapped major tech firms that used the oxymoronic “permanent temps,” use of this technique as a short-term bandage minimizes a firm's cost and cash exposures until it has stabilized sufficiently to meet expanded obligations permanently. As a society we are long past the point of employees expecting to have their employer provide for their retirement, and in times like these, that's good, because the cost of setting up and administering even a basic contributory 401(k) plan may be quite large, especially in comparison to the often minimal incentive effect that a long-term savings plan may have on employee motivation in an inherently transient job set. Why should a firm pay to administer retirement assets that may sit untouched for decades, long after the employee has left for greener pastures ' perhaps with a competitor?

Consider Workforce Size,
But Keep Workers Happy

More basically, decisions in an e-commerce firm are often driven by the company's intended scale of operations. Is the company planning for a workforce of 10, or of 100, or more? While there may be significant economies of scale available in “thinking big,” the reality of cash flow today (especially as the economy sheds jobs) will certainly trump potential future cash savings from prudent planning and purchasing in quantity. A fundamental focus on growth will drive many of the specific cost decisions mentioned above. Buying or planning for too little can cause inconvenience, or temporarily increased costs. In contrast, a long-term commitment to increased expenses can force a company and its principals into bankruptcy if it cannot meet its bills. A Web site focused on supply-chain management recently published several articles on the risks of short-sighted purchasing decisions that can damage a firm's long-term prospects ' as well as tips on ways to take advantage of opportunities presented by the downturn (see, www.supplyexcellence.com/blog/2008/10/30/renegotiate-contracts-recession, www.supplyexcellence.com/blog/2008/10/29/tesco-puts-suppliers-at-risk and www.supplyexcellence.com/blog/2009/02/12/small-business-cost-cutting). Remember, of course, that no matter how good the bargain, a firm still has to pay for it ' the theme of this article.

Don't Hurt Yourself

Speaking of fundamentals for an e-commerce firm leads to perhaps the biggest planning trap: making short-term choices that compromise a firm's brand equity or core values. A firm known for the quality of its goods or services that decides to cut back on its service staff or to use less-expensive materials may find that it has lost the edge that led customers to be willing to pay a premium in the first place.

A recent Harvard Business School study, “Uncompromising Leadership in Tough Times” (http://hbswk.hbs.edu/item/6108.html), confirmed the importance of “conforming to (the) values and high purpose” of a firm when making difficult business decisions. “First, they do not merely focus on cost cutting and layoffs when a crisis arrives,” the article says. “While they may lay off employees (though with a different process than average companies), they continue to develop the organization and its people. So they do not cut all training and education. Nor do they cut employment without a lot of open communication about why they are doing it, often traveling to all parts of the company to communicate about these matters personally. Some keep people when others are firing and take lower profits, thereby gaining the advantage when the economy turns around.”

Online branding studies provide many examples of firms whose cost-cutting undercut their core image and value to customers. An Australian article (see, http://money.ninemsn.com.au/article.aspx?id=640786), for example, cited an airline known for safety that allowed maintenance to decline. The same author questioned how Starbucks' recent mass closings may harm its core value of selling community to a transient generation (including many e-commerce entrepreneurs for whom the local latte shop was the closest thing to a permanent office). The Washington Post similarly reported on how some firms have decided that the damage to customer satisfaction from foreign help desks and call centers, even English-speaking ones in India, no longer justifies their cost savings (see, www.washingtonpost.com/wp-dyn/content/article/2008/12/10/AR2008121003574_pf.html). Even publications known for the quality of their journalism can suffer when cutbacks also lower quality standards (see, www.entrepreneur.com/tradejournals/article/178351586.html ' the subscription ad will disappear in a few seconds, or readers can click a link to skip it and go directly to the article). An irony in the case of the decline in prestige and reader interest for some newspapers, indeed, has been publishers' desire to “do more with less,” with the Internet a key factor in the process, but whose vision still sees operations fashioned on traditional print-media production and personnel-management principles.

However, these branding aspirations can be particularly challenging for an e-commerce firm, where price-comparison shopping is effortless, and only the brand image allows it to maintain pricing. Indeed, it may be too late to fight this battle for online sellers of luxury goods ' The Wall Street Journal reported in February that “the party is over for fancy labels” amid reports of 70% discounts by name-brand designers, in an environment of significantly declining sales (see, http://online.wsj.com/article/SB123320030509927593.html). If the market “knows” that an e-commerce seller's goods can be bought elsewhere for less, especially through price-comparison sites, then why would anyone pay more for the privilege of paying full retail? In fact, under long-standing U.S. law, a manufacturer can try to maintain prices by refusing to sell to firms that do not honor its pricing policies, or rules on permitted methods of selling, but not by illegally setting minimum prices ' so-called “resale price maintenance.” But the right to cut off a non-compliant retailer that has cut prices doesn't help when the discounter is a valued authorized reseller, or even the manufacturer itself.

Nonetheless, some firms try to sacrifice profits to maintain the quality of their workforce, and products. The immediate (and often temporary) benefit of reducing salary and benefit expenses must be balanced against the harm to the brand and to customer goodwill if key employees are lost ' and with them critical relationships with vendors or contractors, or technical skills that are not easily replaced when business returns. In fact, one prominent CEO even published ads urging his peers to avoid mass layoffs, albeit more on humanitarian grounds, than for economic advantage (see, www.philly.com/philly/news/homepage/39355212.html and www.philly.com/inquirer/business/20090215_Korman_has_star_status_with_work ing_folks.html).

Intelligence from the Trenches

An anecdotal personal experience illustrates this point well. A neighbor with a lifetime of sales experience and a track record of exceeding sales quotas in a highly technical field was given an enhanced severance package and laid off in a round of cost-cutting when the economy first began to decline. After his non-competition period expired, he took a position with his former employer's chief competitor ' and quickly regained virtually all his entire book of business because of his superior product knowledge and industry reputation. The sales reps remaining at his old firm, even though less expensive, were unable to meet the clients' needs as well as he had been able to do with his years of contacts and experience. By avoiding the considerable cost of his salary and benefits, his old employer also “saved” the trouble and expense of filling millions of dollars of future orders from formerly loyal, long-time customers.

In all these situations, decisions a business chooses to or must make today, at the bottom of the cycle, may determine how well it can survive when business rebounds ' or whether it will drop back to the bottom, again, as happened to the narrator in “Helter Skelter.”

And businesses making decisions in the depth of the recession ' decisions that they think will help them survive and avoid another collapse ' may instead cripple their ability to prosper when the economy rebounds.

But, instead, to paraphrase for a specific audience ' e-commerce principals ' the Beatles' warning in “Helter Skelter,” when the economy comes down, don't let it break you, especially when it begins going back to the top to greet you again: e-Commerce and traditional firms alike should try to avoid picking the big attractive box labeled Quick and Easy Savings, whose executives and employees may find holds only keys ' to bankruptcy court.

When I get to the bottom I go back to the top of the slide,
Where I stop and I turn and then I go for a ride,
'Til I get to the bottom and I see you again.
' The Beatles, “Helter Skelter”

Unfortunately, there is no question where the U.S. and world economies are located as we began 2009 ' they are definitely at the bottom of the economic cycle. And certainly, everyone hopes that the return to normal business conditions, when that occurs, will not then be a quick reminder to us all of the lyrics quoted above.

However, for e-commerce firms and businesses generally, the ability to maintain a turnaround will be affected by decisions made now, in the depth of the recession. Today, as they struggle to preserve cash flow and stay current on obligations to lenders, landlords and vendors, the helmspeople of too many firms have come to regret decisions they made with hope in their heart for a booming economy '
yet forgot and may still forget to plan prudently for the rebound. Ever more so than before, today's “big deal' may become the liability that leads to tomorrow's bankruptcy filing.

As Albert Einstein once said: “Insanity (is) doing the same thing over and over again and expecting different results.” Firms that don't want to repeat the struggles of 2008 and 2009 should, therefore, use the expensive lessons of the last economic boom ' and slump ' to learn to avoid the commitments and mistakes that have plagued them during the current downturn. With that in mind, let's examine a few typical decisions made when business was good, but that have now proven disastrous, to avoid making the same mistakes “over and over again,” and expecting different results, as the economy returns; indeed, perhaps we needn't be Einsteins to avoid repeating the calamitous cycle, helter skelter.

Many Factors Affect Things E

Let's begin, paradoxically for an e-commerce publication, with real-estate leases, often one of the largest fixed costs of an e-commerce firm, and a potentially huge drain on cash flow. Leases are usually signed with great optimism, hope and plans for growth. For a firm that expects to prosper, obtaining space to allow for expansion, whether by a large lease or an option, can be wise business planning, especially if it can lock in a good rental rate for the long term at a time when landlords are looking for tenants. Not having to incur the costs of relocation, even if relocating is easy to do, may also seem appealing. Relocating as more space is needed could also cause the loss of valued employees who do not want to commute, and will certainly disrupt day-to-day operations.

Yet, e-commerce firms may not need to consider all the long-term requirements of leasing that are part of the calculus for a bricks-and-mortar business, because they are often more mobile ' they can operate anywhere that has a secure source of electricity and properly controlled location for servers (if those are not themselves outsourced as well). If a firm can relocate simply by its employees and owners moving back-end equipment to take advantage of leasing incentives, then why should it spend too much time worrying about all the fine print in the typical commercial lease? An e-commerce firm can simply lease the most inexpensive space that is convenient for employees and for inventory storage. The movers of bricks-and-mortar firms, in contrast, must spend much more time thinking about expansion opportunities, and locking in future space and operating needs at (they hope) lower-than-current costs.

Still, even though an e-commerce business can relocate its operations, the legal rent obligation will not go away ' the rent remains due month after month, regardless of how the business performs. Of course, the cost of excess space leased or held subject to an expensive option will never be recovered. Obtaining a subtenant or replacement to “mitigate damages” can be difficult, especially if there is a glut of space available due to other firms' struggles or a downturn in the economy, or simple overbuilding, which may well have affected a large portion of a business' property-selection pool during boom times, unless the location is a desirable one with advantages other than simply providing a business some shelter and a physical address.

Even worse, landlords often require business owners to personally guarantee a lease ' whether or not the business succeeds, and the tenant (and often his or her spouse) remains on the hook for the space. We have seen firms in recent months struggling to meet rent with decreased cash flow, shortly after commitments were made for excess space, a long-term lease, or both ' none of which should have happened if the principals had stepped back from “automatic” continuation of the status quo of renewing a lease that had become burdensome, or to consider whether the extra square footage was really necessary, or even likely to be used. In addition, if revenue does not expand from use of the additional space, big rent payments will pressure cash flow and just make the problem worse.

Look for Wiggle Room

An e-commerce tenant, however, can try to negotiate an exit strategy in advance, preferably a buyout or early-termination option in the lease, if that is what the landlord must concede to win a tenant in today's difficult markets. Negotiating in advance for an option to terminate early, either to move to a different-sized location (especially one owned by the same landlord), or on a mutually agreeable event that indicates a business failure, such as a dramatic drop in revenue, may cost more initially, but may in the long run turn out to cost less than having to pay the full lease. The e-commerce firm can credibly tell that landlord that if it must foreclose for non-payment, the landlord will recover only assets that will likely be worthless to it or any potential buyer, or can even threaten to simply walk away from the lease; indeed, the landlord may be able to win a judgment easily, but what can it foreclose on to sell to recover unpaid rent? Realistically, in those circumstances, a judgment for possession simply gives a landlord another vacant space.

The landlord may, then, have to choose between negotiating for a reduced payment that it will actually get, or the right to spend money on legal fees chasing a failed business, with little possibility of collecting money from e-commerce assets (typically, intellectual-property rights) that the landlord likely cannot use. From the landlord's perspective, this type of a lease demands a personal guarantee, but under today's conditions, having a tenant who (the landlord hopes) will pay rent, to cover overhead and provide some cash flow, may be preferable to vacant space ' if forgoing the guarantee is what such a deal requires.

Too large of a lease commitment is one example of what former Federal Reserve Chairman Alan Greenspan referred to as “irrational exuberance,” speaking early in the dot-com boom (see, www.irrationalexuberance.com/definition.htm; en.wikipedia.org/wiki/Irrational_exuberance). In other words, entrepreneurs and pioneers alike who are convinced that conditions will improve, or continue to do well, choose to spend or invest heavily ' far beyond what they could justify under today's actual market conditions. In the e-commerce sector, other examples would include heavy acquisition of inventory, adding infrastructure capacity and hiring full-time staff.

No Long-Term Commitment

A firm planning against an economic decline, however, might find acceptable ways to solve the same business needs, without the equivalent of a long-term commitment. For example, rather than purchasing inventory, many e-commerce sellers outsource that function to back-office firms, such as GSI Commerce (www.gsicommerce.com). The Web site will then display the selling firm's logo, but rely on one of the many third-party warehouse sellers readily found online. (It is not a coincidence that so many vendors' Web sites look identical and carry the same merchandise.) This tactic shifts the cost of carrying inventory to a third party, at the expense of a slight loss of control ' and the limping economy, in a twist that applies particularly well to e-commerce enterprises, may be a small boon to these third-party merchandise-displaying outfits.

In contrast, as The Wall Street Journal reported in early February (see, online.wsj.com/article/SB123414021195261687.html? mod=todays_us_marketplace# articleTabs=article for a preview; subscription is required for access to the full article), large inventory accumulations in 2008, built to beat rapidly rising prices, crashed against a sudden drop in demand. Again, a prudent purchasing decision became a cost problem due to the unexpected depth of the downturn. Equipment needs can also be met with leased equipment, rather than purchased goods (although sometimes that is not a good long-term strategy, because it leaves the firm's capacity ' and a way to pay for it ' to the whim of the financial markets). As noted above, space leases can include (for a price) early-termination clauses.

Trying to Make Ends Meet

Many other more mundane aspects of an e-commerce business exist that can pile on costs in small, imperceptible increments, especially when strong cash flow leads to less scrutiny of every bill. No single cost may catch the eye of the Chief Financial Officer, but cumulatively they could cause the proverbial “death by a thousand cuts” (see, en.wikipedia.org/wiki/Death_by_a_thousand_cuts). Professional-society memberships and other “per user” fees can quickly add up. Firms that cannot eliminate them entirely, or that cannot shift them to the employees to pay themselves, may find it preferable to investigate site licenses, or to negotiate flat, company-wide rates using the leverage provided by the economic meltdown ' companies generally will choose to “make a deal” to keep a paying customer, even at a lower price, than risk losing the account not just temporarily, but entirely and forever.

Software Costs

Software licensing is a particular hot button for cost increases in the tech and e-commerce sectors. As programs are updated constantly to reflect new technology, new versions ' and new licensing fees ' proliferate. But as I have noted in prior articles, (see, “e-Curing the Holiday Humbug,” in the December 2008 edition of e-Commerce Law & Strategy, available online at www.ljnonline.com/issues/ljn_ecommerce/25_8/news/151437-1.html), it is often unclear whether the need for an upgrade is driven by the programmers or the vendor's marketing department. That is why the people making these decisions are well advised to consider whether their business needs the “latest and greatest” functionality, or whether the existing software package will serve their needs. For example, this article was written in Microsoft Word 2003, on a computer using Windows XP (with third-party security devices in place) ' a system soon to be two generations out-of-date. In addition, free online software can fill many needs, but watch for licensing traps ' a buyer, investor or lender may be uncomfortable if too much of a firm's critical software is outside its control.

Of course, “control” of software may be its own oxymoron for the technological age ' ongoing use of software or other technology often requires continuous payment of expensive licensing or maintenance fees under an “enterprise software” model, and future use depends on the vendor continuing to offer the same product at a comparable price, and so each firm must strike its own balance on whether licensing fees should be a target for spending controls.

Similarly, the number of “seats,” or licenses, may offer ways to control future costs. An IT manager may not think as critically as the person making the budget whether everyone needs a particular piece of software on his or her laptop or desktop, just as with print subscriptions. Unfortunately, bundled packages often limit the ability to pick and choose from among common applications ' the writer who needs Word can't avoid paying for Excel or PowerPoint, and the cost structure may leave no alternative.

Giving All Expenses the Once Over

Other areas in which firms may commit to spending prematurely are employee benefits and payroll expenses in general. For example, cutting hours, rather than people, can help to preserve a smoothly functioning team for when business returns. In addition, just as it may be more prudent in the short run to lease equipment rather than to buy it, using independent contractors, who pay their own share of employer payroll taxes, is a time-honored tradition in the tech industry that helps firms avoid overhead costs and preserve cash flow.

While avoiding the financial and other obligations of having employees for the long term has trapped major tech firms that used the oxymoronic “permanent temps,” use of this technique as a short-term bandage minimizes a firm's cost and cash exposures until it has stabilized sufficiently to meet expanded obligations permanently. As a society we are long past the point of employees expecting to have their employer provide for their retirement, and in times like these, that's good, because the cost of setting up and administering even a basic contributory 401(k) plan may be quite large, especially in comparison to the often minimal incentive effect that a long-term savings plan may have on employee motivation in an inherently transient job set. Why should a firm pay to administer retirement assets that may sit untouched for decades, long after the employee has left for greener pastures ' perhaps with a competitor?

Consider Workforce Size,
But Keep Workers Happy

More basically, decisions in an e-commerce firm are often driven by the company's intended scale of operations. Is the company planning for a workforce of 10, or of 100, or more? While there may be significant economies of scale available in “thinking big,” the reality of cash flow today (especially as the economy sheds jobs) will certainly trump potential future cash savings from prudent planning and purchasing in quantity. A fundamental focus on growth will drive many of the specific cost decisions mentioned above. Buying or planning for too little can cause inconvenience, or temporarily increased costs. In contrast, a long-term commitment to increased expenses can force a company and its principals into bankruptcy if it cannot meet its bills. A Web site focused on supply-chain management recently published several articles on the risks of short-sighted purchasing decisions that can damage a firm's long-term prospects ' as well as tips on ways to take advantage of opportunities presented by the downturn (see, www.supplyexcellence.com/blog/2008/10/30/renegotiate-contracts-recession, www.supplyexcellence.com/blog/2008/10/29/tesco-puts-suppliers-at-risk and www.supplyexcellence.com/blog/2009/02/12/small-business-cost-cutting). Remember, of course, that no matter how good the bargain, a firm still has to pay for it ' the theme of this article.

Don't Hurt Yourself

Speaking of fundamentals for an e-commerce firm leads to perhaps the biggest planning trap: making short-term choices that compromise a firm's brand equity or core values. A firm known for the quality of its goods or services that decides to cut back on its service staff or to use less-expensive materials may find that it has lost the edge that led customers to be willing to pay a premium in the first place.

A recent Harvard Business School study, “Uncompromising Leadership in Tough Times” (http://hbswk.hbs.edu/item/6108.html), confirmed the importance of “conforming to (the) values and high purpose” of a firm when making difficult business decisions. “First, they do not merely focus on cost cutting and layoffs when a crisis arrives,” the article says. “While they may lay off employees (though with a different process than average companies), they continue to develop the organization and its people. So they do not cut all training and education. Nor do they cut employment without a lot of open communication about why they are doing it, often traveling to all parts of the company to communicate about these matters personally. Some keep people when others are firing and take lower profits, thereby gaining the advantage when the economy turns around.”

Online branding studies provide many examples of firms whose cost-cutting undercut their core image and value to customers. An Australian article (see, http://money.ninemsn.com.au/article.aspx?id=640786), for example, cited an airline known for safety that allowed maintenance to decline. The same author questioned how Starbucks' recent mass closings may harm its core value of selling community to a transient generation (including many e-commerce entrepreneurs for whom the local latte shop was the closest thing to a permanent office). The Washington Post similarly reported on how some firms have decided that the damage to customer satisfaction from foreign help desks and call centers, even English-speaking ones in India, no longer justifies their cost savings (see, www.washingtonpost.com/wp-dyn/content/article/2008/12/10/AR2008121003574_pf.html). Even publications known for the quality of their journalism can suffer when cutbacks also lower quality standards (see, www.entrepreneur.com/tradejournals/article/178351586.html ' the subscription ad will disappear in a few seconds, or readers can click a link to skip it and go directly to the article). An irony in the case of the decline in prestige and reader interest for some newspapers, indeed, has been publishers' desire to “do more with less,” with the Internet a key factor in the process, but whose vision still sees operations fashioned on traditional print-media production and personnel-management principles.

However, these branding aspirations can be particularly challenging for an e-commerce firm, where price-comparison shopping is effortless, and only the brand image allows it to maintain pricing. Indeed, it may be too late to fight this battle for online sellers of luxury goods ' The Wall Street Journal reported in February that “the party is over for fancy labels” amid reports of 70% discounts by name-brand designers, in an environment of significantly declining sales (see, http://online.wsj.com/article/SB123320030509927593.html). If the market “knows” that an e-commerce seller's goods can be bought elsewhere for less, especially through price-comparison sites, then why would anyone pay more for the privilege of paying full retail? In fact, under long-standing U.S. law, a manufacturer can try to maintain prices by refusing to sell to firms that do not honor its pricing policies, or rules on permitted methods of selling, but not by illegally setting minimum prices ' so-called “resale price maintenance.” But the right to cut off a non-compliant retailer that has cut prices doesn't help when the discounter is a valued authorized reseller, or even the manufacturer itself.

Nonetheless, some firms try to sacrifice profits to maintain the quality of their workforce, and products. The immediate (and often temporary) benefit of reducing salary and benefit expenses must be balanced against the harm to the brand and to customer goodwill if key employees are lost ' and with them critical relationships with vendors or contractors, or technical skills that are not easily replaced when business returns. In fact, one prominent CEO even published ads urging his peers to avoid mass layoffs, albeit more on humanitarian grounds, than for economic advantage (see, www.philly.com/philly/news/homepage/39355212.html and www.philly.com/inquirer/business/20090215_Korman_has_star_status_with_work ing_folks.html).

Intelligence from the Trenches

An anecdotal personal experience illustrates this point well. A neighbor with a lifetime of sales experience and a track record of exceeding sales quotas in a highly technical field was given an enhanced severance package and laid off in a round of cost-cutting when the economy first began to decline. After his non-competition period expired, he took a position with his former employer's chief competitor ' and quickly regained virtually all his entire book of business because of his superior product knowledge and industry reputation. The sales reps remaining at his old firm, even though less expensive, were unable to meet the clients' needs as well as he had been able to do with his years of contacts and experience. By avoiding the considerable cost of his salary and benefits, his old employer also “saved” the trouble and expense of filling millions of dollars of future orders from formerly loyal, long-time customers.

In all these situations, decisions a business chooses to or must make today, at the bottom of the cycle, may determine how well it can survive when business rebounds ' or whether it will drop back to the bottom, again, as happened to the narrator in “Helter Skelter.”

And businesses making decisions in the depth of the recession ' decisions that they think will help them survive and avoid another collapse ' may instead cripple their ability to prosper when the economy rebounds.

But, instead, to paraphrase for a specific audience ' e-commerce principals ' the Beatles' warning in “Helter Skelter,” when the economy comes down, don't let it break you, especially when it begins going back to the top to greet you again: e-Commerce and traditional firms alike should try to avoid picking the big attractive box labeled Quick and Easy Savings, whose executives and employees may find holds only keys ' to bankruptcy court.