From the September 2001 issue of Entrepreneur

Last year, Matt DeLine, founder and CEO of San Diego Hotel Reservations Inc., was hiring almost everyone who applied. The scramble to fill jobs was insane: "There wasn't time even to do reference checks," he says. "It was a frustrating time."

He wasn't alone: A Challenger, Gray & Christmas survey last year found that three out of five small-business owners were hiring virtually anyone with a pulse-including underqualified workers who affected the bottom line with poor customer service and decreasing product quality. "[Employers] had to get their orders out, so they hired people who weren't as productive and couldn't do the job as well," says John Challenger, CEO of Challenger, Gray & Christmas Inc., an international outsourcing and research firm in Chicago.

But as dotcoms continue to fail and larger companies restructure in a softer market, hot talent is suddenly pounding the pavement. For entrepreneurs in growth phases, it's like manna from heaven. "Many employers now are breathing a sigh of relief," Challenger says. But temptation also forces a hard decision: Do I fire some employees to upgrade my work force while this hot talent is available?

You Are the Weakest Link

For DeLine, the decision was clear. Since last December, he has almost completely replaced his staff of 40. The effort to improve customer service, product development and sales paid off big in the first quarter of 2001: Phone volume was up 15 percent and Web reservations were up 450 percent over the prior year. Sales now average $15 million. "No way is it too late to replace mediocrity [with] talented, smart people," says DeLine, 40. "You can be a lot pickier now."

A year ago, Craig Schiff, 44, was more tolerant of low performers. But the founder and CEO of Stamford, Connecticut-based technology company OutlookSoft is now receiving resumes from people coming out of failed start-ups. Now he can be a "little harsher" in evaluating the skills and productivity of his 90-plus employees, and he's begun weeding out underperformers.

"I can look around and say 'Are these the people who will take us to the next level?' And if not, are some of these resumes coming my way the ones that'll do it?" Schiff says. The company is hiring aggressively in the sales and service areas, and annual sales are about $6 million.

The soft economy has left more quality people than positions in some cases, and applicants who would have been hired in a heartbeat even six months ago are going through multiple interviews and reference checks. "Placements that we used to flip in a couple of days are taking weeks," says John Doffing, founder and CEO of StartUpAgent Inc., a San Francisco Internet talent search firm. "Employers are waiting for the perfect person, rather than the almost-perfect person."

When StartUpAgent recruited for a content manager position this spring, it received nearly 500 resumes within a 72-hour period-all great applicants, says Doffing. "It epitomized to me how things have come full circle. It's a great time for companies to be hiring."

This pendulum shift has employees on edge. Where there was a degree of hubris, there's now "a new rationalism. People are realizing how competitive it is," Doffing says. Employees who once knew that they were hard to replace are asking Schiff whether he's happy with their job performance. "They're very concerned with the market changes out there, and they want to stay here."

Goodbye!

Verne Harnish, CEO of Gazelles Inc., an executive and strategic training consulting firm in Ashburn, Virginia, is advising his clients to upgrade their work forces while they can and to get rid of their "just good enough" mentality toward employees. "We hire too quick and let go too slow. A lot of entrepreneurs make excuses for their people," he says. "But I've never heard someone say they wished they'd moved slower on replacing an average performer."

Take a close look at unproductive employees who may be damaging morale. "Look at areas of your business where there are people who are dragging your department down," Challenger says.

But before you upgrade, be realistic. Look at the hard forecasts and numbers, Harnish suggests, and don't make too many changes at once. Without some planning and strategy, you can damage your credibility with your remaining employees-or have people running scared, which can also hurt morale.

Be aware that upgrading can decrease productivity in the short term when there are gaps between employees. DeLine's redesign took six months, and sales dropped with fewer employees on staff. "We lost a substantial amount of business in the first quarter because we weren't prepared to handle customers," he says. "But our company will make more because we've upgraded."

Finally, consider the biggest risk that comes with hiring a hot talent: mainly, whether that person will be willing to stick it out as your company grows. "When the economy heats back up, is your sense that this person will jump ship to get back on a more exciting bandwagon?" Harnish says. If you can live with the risks, go for it.