New Businesses Run Leaner As Job Growth Fails To Bounce Back

By Amy Martinez
The Seattle Times.

On the eighth floor of a 1930s downtown building that once housed many employees of Pacific Northwest Bell, dozens of fledgling technology companies at a startup incubator represent a new approach to hiring.

Most have only one or two full-time employees and use part timers as needed. Cloud computing from outside vendors helps them grow online without adding technical staff or IT professionals. Even their work space is flexible, with month-to-month arrangements to meet changing cubicle needs.

Take entrepreneur Anup Chathoth, a tenant at the Seattle incubator: With more part-time than full-time employees, he keeps a lid on hiring.

“Things change so quickly. You have to be able to adapt,” said Chathoth, co-founder and CEO of software-maker Ubi Interactive.

“If we were to change our business, we’d have to reinvent ourselves, and that would mean reinventing our workforce.”

The Washington economy, like the nation’s, long has thrived on new businesses opening and creating jobs. While older and larger companies — think Microsoft and Boeing — employ the vast majority of workers, most job growth actually comes from establishments that are less than a year old.

Without them, Washington would have had a net increase in jobs in only six of the past 20 years, according to the U.S. Bureau of Labor Statistics (BLS).

But new businesses today aren’t hiring as much as they once did, contributing to a sluggish jobs recovery.

Total jobs at establishments under a year old in Washington have plunged by more than 20 percent in the past decade, while business “births” have fallen by 8 percent, federal data show.

These young establishments include not only technology startups but new restaurants, doctor’s offices, real-estate brokerages, gyms and nail salons — as well as expansions of older companies, such as an additional Starbucks store or Bank of America branch.

Economists say an increase in hiring at such new enterprises is a key missing ingredient for a robust recovery both locally and nationwide.

A decade ago, each establishment under a year old in Washington employed five or more people. Now, they’re hiring only about three workers, according to BLS data.

“It doesn’t take as many people to start any kind of company, not just a tech company,” said Dane Stangler, vice president of research and policy at the Kauffman Foundation, a research organization focused on entrepreneurship.

“Twenty years ago, if you were to open a doctor’s office, you’d need a person to keep track of your data. Today, you don’t need that person,” he said. “It’s all automated.”

Shrinking startups

The decline in the size of startups is especially steep among technology and manufacturing employers. But startups in sectors as varied as retail and construction also are making do with fewer employees.

The nation’s service industry created an average of 3.9 jobs for each new establishment in 2012, down from 5.5 in 2002, according to BLS data.

The goods-producing industry had 3.8 employees per business “birth” in 2012, compared with 5.3 a decade earlier.

JPMorgan Chase, citing “customer self-service trends,” said last month its branches of the future will employ an average of six people, down from nine now, thanks to technology.

A new branch on Capitol Hill, for example, has an ATM that dispenses singles and $5 bills, something only tellers used to do.

“I do believe there will be fewer tellers, but it will be a result of customer demand,” said Jamie Cecich, who began his career as a teller and now oversees nearly 160 Chase branches in Western Washington. “Customers have this thirst for easier, more convenient ways to do things.”

The self-serve economy also means fewer employees in stores and restaurants. Consumers increasingly will give up personal attention from employees for convenience, affordable prices and good-quality products, said Jeff Green, a Phoenix retail consultant.

“Fast-casual restaurants like Chipotle are popping up all over the place. You order at the counter, and then your food is brought to you. There’s no need for servers,” Green said. “It requires a much lower employment base.”

Sector hit hard

The recession hit young, small businesses especially hard, which, in turn, deepened and prolonged the state’s economic problems.

Job creation at young establishments statewide peaked at 92,000 in 1998, then dropped as low as 42,000 in 2010. The number recovered to about 55,000 last March, but still was 13 percent below its 2007 level.

Because new businesses in general are more likely to use home equity for financing, the housing boom and subsequent credit crash left them all the more vulnerable, economists say.

In January, the state finally returned to pre-recession employment levels, with nearly 193,000 total jobs added in the past four years. But that doesn’t take into account the more than 400,000 extra people who have joined Washington’s working-age population since 2008.

The unemployment rate, at 6.4 percent, remains well above its pre-recession low of 4.4 percent.

Erik Brynjolfsson, a professor at the MIT Sloan School of Management, says rapid technological change has reduced the need for basic data-entry clerks and other support personnel. He says the loss of those middle-wage jobs has exacerbated the growing gap between rich and poor.

“Technology is changing the kind of work that needs to be done and the work that can be done by humans,” said Brynjolfsson, co-author of “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies.”

“You’re seeing much leaner companies that can quickly get to scale without mass.”

Customer demand

Brynjolfsson pointed to the stunning example of Facebook purchasing mobile-messaging company WhatsApp for $19 billion. Five-year-old WhatsApp had grown to 55 employees when Facebook announced the deal in February.

WhatsApp did not employ any marketing or public-relations staff and instead relied on customers to spread the word about its app.
“You can slim down quite a bit when you have a digital infrastructure,” he said.

Indeed, Bonnie Cech, the CEO and founder of Cadence MD, a year-old software company focused on the health-care sector, supplements her three-member staff with contract workers and technology tools.

To handle payroll, Cech uses an accounting software program called QuickBooks. For her IT needs, she uses a cloud-hosted computing system from Heroku. And to increase her online presence, she recently signed a product-marketing expert to an equity contract.

Like Chathoth, she rents cubicle space at the startup incubator SURF, short for “Start Up Really Fast,” in the Exchange Building in downtown Seattle.

“In the old days, you did all your product-development work, then took it out to customers and said, ‘What do you think?’ Today, you build a minimum viable product and get input from customers along the way,” she said. “You don’t need a whole team of software engineers. You need a couple people to get started, and as the company grows, you can add in different skill sets.”

Business “births”

Washington gave birth to an average of 18,430 businesses a year during the economic expansion from late 2001 to late 2007.

Startup activity slowed in 2008, then plunged by 16 percent in 2009, BLS data show.

As of 2012, the most recent year for which annual statistics are available, business “births” had stabilized and begun to grow again, albeit at a modest pace. The metric, at 16,980, hasn’t approached 18,000 in any single year since the recession.

By the same token, business “deaths” in Washington surged in 2008 and are tapering off to normal levels.

“Starting a business is risky even in the best of times,” said local economist Dick Conway. “In the worst of times — and this has been one of the worst recoveries we’ve had in a long time — it’s an even bigger risk. The odds of being successful now are much less than in past recoveries.”

The flip side is that workers with in-demand skills are wary of casting their lot with an employer whose future is so unclear.

Ubi Interactive, which aims to turn any surface into a touch screen, recently promoted an intern to a new full-time position and hired a part timer to produce online videos about its software. In all, Ubi has four full-time employees, including Chathoth, and five part timers.

“It’s hard for them to make a commitment. And it’s hard for us to make a commitment,” Chathoth said. “We could not have guessed six months ago what we need today.”

Tackling the imbalance

With so many causes of anemic job creation, experts propose many ways to jump-start new-business hiring, including tackling the imbalance between workers’ skills and open jobs and helping entrepreneurs find alternative funding sources.

What’s more, all the hype over lean startups doesn’t mean the most successful ones won’t go on to hire hundreds, if not thousands, of people. In fact, a cautious hiring approach might increase their chances of success by making them less likely to run out of money or hire the wrong people.

In 1998, when local entrepreneur Terry Drayton launched — an e-commerce company that later became part of Webvan, one of the most spectacular failures of the dot-com era — he employed a staff of 70.

Today, Drayton has another startup, Storrage, but cloud computing and other changes have reduced his workforce needs. Storrage is a storage service that allows customers to use their mobile devices to schedule pickup and delivery of their belongings.

“You can do so much more with less now,” Drayton said. “When we launched HomeGrocer, we probably had 20 people in operations and 50 in technology. Now, we have two in operations and five contractors in technology. It’s about a tenth the complexity and cost to do stuff as it was back then.”

Drayton said he appreciates the new efficiency, but also worries about its impact on society.

“As a parent, it’s worrisome. It seems like we have an economy that doesn’t drive jobs anymore,” he said. “We’ve shed a whole bunch of people who may never work again.”

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