Reference no: EM13971696

The Case: The HADWIT International Services Company

In 2000, you decided to open a small oil field services company based in Houston, Texas. Two friends from graduate school agreed to join you as investors, and you agreed to manage the business. Your company, Have Data Will Travel International Services Company (HADWIT), provides geological/ geophysical consulting and computerized interpretation of the seismic data collected by surveyors working from boats offshore in the Gulf of Mexico, the North Sea, and the Pacific Rim. HADWIT data are critical to the exploration and production (E&P) companies because they form the basis for decisions on where to invest in oil and gas exploration and development. Many of your clients are major oil companies-such as Shell, Exxon/Mobil, and BP/Amoco as well as a number of independents operating all over the world.

HADWIT's Initial Success

You began operations with 20 employees and trained them well. You are now up to 200 professionals with very specialized backgrounds in geology or geophysics and E&P data analysis. You wanted to develop a company known for high-quality services, and you wanted a stable, loyal workforce to represent you to the client. Your partners agreed with this philosophy, and you provided above-average salaries, paid vacations, health insurance, and annual bonuses.

As the company expanded, you placed employees overseas in offices in Singapore and Aberdeen, Scotland, to meet clients' on-site needs. Things were going well: Employees were happy, and the investors were satisfied with their return on investment. You credit some of the success to your fairly flat, team-based organization (Exhibit 1).

You have been operating on a substantial profit margin. Until recently, you had been billing out your professionals at 2 times their gross salary, but the market will now support only 1.5 times gross salary, which leaves you with no capacity for underutilization of people or resources You have, however, been very generous in the past with bonuses for completing projects ahead of schedule and just for doing good work. In addition, your benefits package is beyond industry standards, with your picking up 80 percent of the premiums.

Market Changes Creating Need for Cost Cutting

Over the last year, however, the oil industry went into a downturn, with oil prices fluxuating and a worldwide recession tightening the market for everyone. Even though prices have rebounded somewhat, your customers' E&P budgets have been constrained; the decline in HADWIT projects led you to cut costs by dismissing four employees who were not performing up to par; cutting back on company perks, such as cars and expense accounts; and reducing travel budgets. Now, with industry consolidations, a volatile world political situation, and a sluggish economy, the demand for your services has fallen more; thus, HADWIT has experienced a serious loss of revenue coupled with increased costs.

So far, the numbers this year are not looking good. In fact, you estimate that profit will be down by around 25 percent this quarter and possibly even 50 percent by the next quarter your partners are losing patience with the last few months of negative cash flow. Although they understand that HADWIT is a market-driven business and you cannot increase demand for your services, they think that your costs are still too high, and they want you to consider laying off a significant portion of your workforce.

CEO Contemplating Cost-Cutting Measures

To date, you have run a first-class operation and have spared no costs when it comes to providing what your employees need, especially when they are overseas and out of the office, working in your clients' facilities. In fact, compared with your competitors' costs, your research shows that your overhead for each employee averages about 15 percent more per year. In addition, you have just purchased the latest computer hardware and software, which allows you to (1) work more efficiently, (2) provide data services others cannot, and (3) connect virtually across the globe. While you know you can cut some of your overhead, you fear that doing so will result in unhappy employees and dissatisfied customers and will not be enough to turn the company around.

This brings you to the possibility of closing offices and laying off employees. Most of the employees have been with the company for several years and all are doing excellent work. In addition, many of your clients depend on having the pick of your staff on-site anytime they want them; up to now, this "on demand" team formation has never been a problem, since you have had the staff to cover client preferences. Your company is built on the principle that HADWIT should provide clients what they want, when they want it, and where they want it. Thus, you expect that letting staff go will cause some clients to be very uneasy about doing business with your company, particularly since most of your employees have direct relationships with your major clients.

Your clients like having people on the ground in Singapore or Aberdeen. Although they can adjust, it will take away from their flexibility and sense of having a "local" service provider. Even though you may be able to convince the customers that this is a short-term move that will not affect the quality or speed of your services, some of them will not take the news well. You fear that you even run the risk of losing them, which you certainly cannot afford, given the current negative cash flow. You hope that you can convince your clients that, since you have all the equipment you need to service any company anywhere in the world from your offices in Houston, they need not worry. Also, since most of the consultants work on-site, you can still send your people to work with clients in the North Sea, or in any other location, as long as the client picks up per diem (daily) expenses.

Partners Demanding Drastic Measures

You have seen the oil industry recover from cycles like this one before, so you hope that, if you can hold out a while longer, things will turn around; however, you meet with your partners, and they want action now. After some heated discussion, you agree to start reducing your costs by 25 percent immediately, which you know will mean you are going to have to let some portion of your workforce go after all.

Your first step following the meeting with the partners is to look for additional ways to cut costs without downsizing staff. You decide to decrease the company's contribution to health and dental insurance, cancel all bonuses, and eliminate paid vacations. You consider even asking all employees to accept a 10 percent salary cut for next year. Also, you decide that you will have to close your offices in Aberdeen and Singapore, even though you know your clients will not be happy about it. That means you will have to let 10 administrative support staff and some geotechs go, in Aberdeen and in Singapore, and will need to relocate all of the higher-level technical people to Houston, where you will centralize all operations. After your initial analysis, however, you see no way to reach the targeted numbers without a substantial reduction in staff. You are extremely concerned about the effect these cuts will have on your company and your people.

You decide to hold a meeting with the management team, which includes all of your direct reports (team leaders in each location, who will be protective of their staff in each country and want to keep their locations open). In the meeting, you want to work through all possible ways to reduce costs and look at which staff you can cut. You also realize that, given the seriousness of the messages you will be sending internally and externally, you need to devote some of your own time to consider you're most important audiences and the messages to send to them.

The Assignment

First, develop a communication strategy for all your internal audiences. Second, write a memo to the management team, delivering the news about the need to cut costs and downsize the workforce and inviting them to the meeting. This memo is an opportunity for you to lay out any issues to be considered and any concerns that you have about the situation, as well as tell them what you expect them to do in general and in preparation for the meeting. Think carefully about this audience. While you will want to provide the truth about what is to happen, you also need to try to allay their concerns as much as possible. These are the leaders in your organization and some of your best people, and you certainly do not want to lose any of them at this crucial time in the company's history. Thus, you need to consider the tone you use and the information these managers will want to have and need to hear. Third, develop an agenda for the meeting establishing objectives, end products, and content.

Source: Case and assignment developed by Deborah J. Barrett and Beth O'Sullivan. Copyright 1999. Revised 2013. Used with permission.