O’Shea’s initial cost-cutting kept the wolf from the door up to the end of 2009. However, it is already clear budgets will remain tight in 2010

PETER O’SHEA set up his IT support company nine years ago. He is an electrical engineer by profession but from an early stage in his career began carving a niche in management within a multinational environment.

Over a 15-year period O’Shea gained considerable experience in Ireland and overseas with three of the biggest names in the IT business. During this time he was responsible for setting up two greenfield sales operations in emerging markets and also found time to complete an MBA. His track record suggested he could have a successful career climbing the corporate ladder but O’Shea had his sights set on being his own boss.

Having seen firsthand the pitfalls of growing too fast,O’Shea took a cautious approach to developing his business, which provided competitively-priced IT support to the SME sector. But the sheer volume of opportunities during the boom years forced him to ramp up to keep up. As a consequence, employment in the company virtually doubled to 24 within the space of 18 months and turnover topped €3 million for the first time. The company built up significant cash reserves, which O’Shea earmarked to fund expansion.

The company had a good customer base but it was comparatively small and O’Shea felt the business was too dependent on too few clients. He had identified two small companies in the sector that would be a good fit with his own and was on the brink of making approaches to buy them when the economic storm clouds began gathering.

At start-up, O’Shea had recruited two young graduates to help launch the business. Both had stayed with the company and are now responsible for new product development and customer services respectively. During the boom it had been difficult to find staff and O’Shea had to offer big money to attract new recruits. This forced him to give substantial pay rises to his two longest serving employees.

O’Shea was happy enough paying high for his customer services manager. He was a bright spark with good ideas and the company’s key point of contact with clients. He also ran the company’s team of engineers and other technical support staff.

With the product development manager it was different. He had assumed the role by virtue of long service and while he was an affable individual and competent within his comfort zone, he rarely came up with cutting -edge solutions. New ideas usually came from O’Shea or his customer services manager. When the recession began to bite, O’Shea knew he couldn’t depend on new product development for his salvation and reproached himself for letting the development team under-perform for so long.

The first indication that the business was coming under financial pressure came when service contracts were due to be renewed. Throughout 2007 and into early 2008 customers had simply signed on the dotted line. But as 2008 progressed they began opting out of retainer contracts completely, preferring to buy support as it was needed. Those who stayed on retainer looked for substantial price reductions.

O’Shea and the financial controller burnt the midnight oil, reviewing the company’s operations in minute detail. The company had built its reputation on providing a fast, personal, 24/7 service and O’Shea was reluctant to make cuts that would damage the heart of the business. However, he was equally unwilling to see it go under because of a lack of grit to make tough decisions.

O’Shea made the first set of cuts below the line so customers were not affected. Operations were consolidated on one floor (they had been spread over two) to save on lighting and heat. Unpaid leave and reduced working hours were offered to staff not in direct contact with customers. Plans to move into the Northern Irish market were put on hold, as was replacement of the van fleet. Better deals were sought with service and utility providers and the company offered a discount to customers who paid their account within 30 days to keep cash flowing.

O’Shea allowed three months to elapse to see the benefits of the first round of cuts before embarking on round two. Despite the savings costs were still out of sync with revenues. A third of the workforce was made redundant, wages were reduced by 5 per cent across the board and productivity bonuses suspended indefinitely.

O’Shea worked hard to keep employees on side during the rationalisation. He was frank about the company’s position but also tried to project a sense of optimism for the future. Despite this, morale was affected and it took about three months for “the survivors” to bounce back.

One of the first staff members to “recover” was the customer service manager who approached O’Shea with a proposal to dramatically reduce the amount of time engineers spent at clients’ premises. The company can already access its clients’ systems remotely to solve small problems but a new piece of technology has become available that would allow technical staff deal with larger issues from afar.

The technology does not come cheap and it will also require a big investment in engineer training. O’Shea can see the argument for installing it but he is concerned about dipping into dwindling reserves to fund it. He is also worried money spent on expensive training may be wasted if more staff have to be made redundant. He has completely let go of the acquisitions idea. He thinks he might do better using the money to buy two competitors at a knock-down price.

His customer services manager offered a radical solution to fund the new technology. He suggested scrapping the development team completely and buying in development expertise as needed. O’Shea can see the logic of the suggestion but is hesitating because it is so radical.

O’Shea’s initial cost-cutting plan kept the wolf from the door up to the end of 2009. However, it is already clear budgets will remain tight in 2010. Three of the company’s customers did not reopen after Christmas and O’Shea estimates turnover has fallen by 25 per cent in the last nine months.

He is now faced with making more cuts or conjuring a significant amount of new business from somewhere. His chief concern about additional cuts is that they will debilitate the company. O’Shea believes the company should be adding value rather than taking it away in order to retain clients.

He is toying with the idea of launching an extensive marketing campaign, although the cost is an issue. He is also thinking of surveying customers to get a fix on exactly what they are willing to pay for. With the focus still on saving money, O’Shea thinks customers may now prefer a service menu rather than an all-in deal.

Peter O’Shea is optimistic by nature and has been long enough in the work environment to know business goes in cycles. He believes if he can just hold things together until later in the year the situation will begin improving. However, the much slimmed-down business is marginally profitable at best and O’Shea is painfully aware his clients are becoming slower at paying and this is forcing him to dip into his reserves. O’Shea needs to make some quick decisions about either spending his way out of recession or continuing to cut costs.

Should Peter spend or continue to make cuts?