In the following memo sent to Merc employees, Publisher Mac Tully (pictured) warns of more budget cuts forced by lower revenues and notes that the paper has hired an efficiency expert. Tully’s memo went out as the paper began negotiations with the Guild on a new contract to replace the one that expired last month. More on that after Tully’s memo.

Dear fellow employee:

The economic news in our paper tells the story: We are obviously operating in a very challenging economic environment — much tougher than anyone anticipated. Today, I want to give you an update on where we are and what I foresee at yearend. First, I want to thank you for your efforts in helping the newspaper navigate its way through difficult times. All businesses are struggling and the newspaper industry is particularly challenged. Our business model was already going through a “sea change” before the extraordinary economic developments of recent weeks. They certainly are adding to our difficulties.

While our core competency of local content generation remains extremely valuable and unique to us, and the desire for local content by readers is still strong and will remain strong, the method of how people are choosing to receive that information is in transition. While most readers still prefer the printed paper, there is some migration to online taking place. Fortunately, our overall audience numbers of print and online readers remain pretty stable. Unfortunately, we haven’t been able to monetize the online audience in the manner we’re able to do with print readership. We believe the industry will figure that out. We’re not the first medium to go through a sea change — magazines and radio have all successfully navigated their way through major changes and we will, too.

What’s making our road tougher is that at the same time we’re dealing with these significant changes in our business model, the economy is worsening. That is making our challenges exponentially harder. I believe we are up for the challenge and we will be successful. I am absolutely committed — as I know you are — to the success of this newspaper and the Bay Area Group.

Our original budget projected advertising revenues to be down about 8% for the fiscal year. Given what we now know about the economy, that’s unrealistic. There’s very little information that would suggest business is going to improve — at least in the short run. In fact, there is a lot that suggests it will get worse. Therefore, the prudent thing to do is to pull down our revenue estimates even further from our reforecast.

Since operating profit is a function of two things — revenue and expense — we will have to pull down our expense budget to mitigate at least some of the revenue decline. That means we’ll have expense action on a number of fronts. We’re going to ask you to do more with less. I’m hoping that you’ll understand why it’s important to make these expense reductions and do everything in your power to make the most out of what you will have to work with.

We have contracted with an efficiency expert and we’re hopeful he can help us identify expenses that can be put to better use. We’re examining every dime we spend to see if we can reduce, delay or even cut it out.

Based on today’s economic outlook, it seems inevitable that we will have to have some layoffs at the beginning of the calendar year. That’s the last thing anyone wants to do, but given the economic environment that we’re operating in, I don’t see how we can avoid it. The scope of such action will depend, at least in part, on how the holiday shopping season turns out.

I promise you we will do everything in our power to try to better the situation. But this is how it stands today. As I stated earlier, I’m confident our newspaper will survive and even thrive in the coming years. But we have to survive the economic downturn we’re now in.

I’m sorry to have to deliver this news but I think it’s important that you’re up-to-date on the status of our business. Again, we appreciate all you do and look forward to better times in the future.

Mac Tully