Labor Ready says it's learned from mistake

When Labor Ready decided to fire its entire sales staff at the beginning of last year, few seemed to notice or even care.

After all, the Tacoma-based company, the country's largest provider of temporary manual labor, was on a roll. Sales grew exponentially. Labor Ready offices sprung up around the country. The company's sizzling stock price wowed Wall Street, earning it a spot on the New York Stock Exchange. The Seattle Times ranked Labor Ready the fastest-growing company in its annual Northwest 100 list.

Now one year later, almost everyone who supported that decision, from Chairman Glenn Welstad to analysts who track the company, is eating one big piece of humble pie.

Tomorrow, the company will report a fourth-quarter profit of 5 or 6 cents a share, down from 18 cents the same period in 1998 and a far cry from analysts' original estimate of 20 cents. Over an eight-month period, Labor Ready stock has plummeted almost 70 percent, from $28 in June to $8.50 Friday.

However, the company expects annual sales to top $850 million, a 40 percent increase from last year, with a profit gain between 22 percent and 27 percent. That Labor Ready was still able to post solid numbers despite a tumultuous year is encouraging, said John Schneller, an analyst with Stephens.

Half-full or half-empty

"It all depends if you look at the cup as half-full or half-empty," said Schneller. "The company grew sales to $850 million without a sales staff and will reach $1 billion this year."

So with demand for labor so high, why did Labor Ready trim its sales staff?

The company may have been a victim of its own success, growing faster than it could manage, say analysts. Since 1998, Labor Ready has opened 270 offices around the world, reaching a total of 756. Sales for that year topped $600 million, a two-year gain of 271 percent.

But the company, said Jeanne Kraus, an analyst with First Security Van Kasper, lacked the corporate infrastructure to effectively control its ever-expanding operations.

Welstad, the company's chairman, apparently agreed. In July 1998, he named Dennis Diamond, executive vice president for operations since March 1998, to the newly created position of chief operating officer.

"Labor Ready's growth in number of offices and geographic reach has made it necessary to have a chief operating officer," Welstad said at the time.

Diamond, who specialized in sales and marketing before joining the company in 1994, would run Labor Ready's day-to-day operations and improve efficiency. In January 1999, as part of an effort to reduce costs, Labor Ready laid off its 200 sales representatives.

Company executives thought district managers could take on the responsibilities of the sales staff, which basically was to field complaints and keep customers happy, said Kraus.

"It looked like a good idea at the time," she said. "Managers were already doing that but they didn't have time to knock on doors."

By early summer, Welstad knew the company had made a big mistake. After a strong first quarter, sales were plummeting.

Little personal contact

Whereas the sales staff would go door to door meeting with customers, a district manager could only make a quick phone call.

"Businesses are built on these relationships," said Welstad. "The job wasn't getting done. (Customers) were sliding through the cracks."

Diamond, who could not be reached for comment, resigned in July. Welstad declined to comment, but analyst Kraus said it was primarily Diamond's decision to fire the sales staff.

But Schneller, a friend of Diamond, said there was enough blame to go around.

"These decisions are not made in a vacuum," said Schneller, who initially supported the firings. "If anyone wanted to step in at any time and say no, they could have. Everyone was off in la-la land. You need a sales staff in every service industry."

Labor Ready faced a daunting challenge. The company now had to hire a new sales staff during a booming economy and tight labor market, the very economic factors that made Labor Ready successful in the first place.

So far, the company has replaced most of its sales staff and expects to be up to speed by the end of the first quarter. Still, analysts say, it will take time for the company to train its staff and to re-establish a relationship with customers.

Kraus estimates that will take about six months.

But Welstad is confident that Labor Ready has learned its lesson and will more than recover in 2000.

"The demand for business is still there; we just have to go after it," he said. "Anytime you see a company grow this fast, you are going to have a bump in the road."

Thomas Lee: 206-464-2448. E-mail: tomlee@seattletimes.com