No business owner wants to go through the experience of downsizing their venture, of figuring out how to downsize a team. It causes as much hardship to the business owner who lays off staff as it does to the employee who gets laid off. Having said that, uncertainty is a part of business, and sometimes situations like the 2008 crash or the pandemic of 2020 define our choices. These choices are necessarily harsh.
However, even though downsizing feels like an admission of failure, it can, with a smart layoff strategy, be turned into a tool for success.
Surveys have shown that organizations that don't approach layoff strategy carefully, with deep layoffs, actually underperform by 8% over the ensuing three years. Hence smart organizations deploy downsizing as the very last resort in managing their business crisis. During the 2008 crisis, 81% of the top 100 companies in Fortune's 2009 list had no layoffs.
So then, why is it the most popular tool in managing a crisis?
The simple answer is it's a knee-jerk reaction of organizations who view their workforce as cost and not value.
The common fallacy being layoffs will lead to lowered costs hence higher earnings hence higher stock prices. But this assumption is flawed since reduced expenses will lead to a reduced value which will, in turn, lead to reduced earnings and hence stock prices.
Effectively, with a poor layoff strategy, you would have traded a short-term cash flow fix for long-term losses.
But, this does not take away from the fact that smart downsizing is required in emergency situations like the current pandemic or as part of an overall workforce strategy. In fact, General Electric and Procter & Gamble are examples of how to downsize a team successfully since it was part of a well-thought-through strategy, unlike Citibank, which gave into the pressure of being perceived as bloated during the 2008 crisis and even after a massive downsizing still had to file for bankruptcy.
Clearly, there is something called smart downsizing, where instead of it hurting the organization, it can actually work to keep a business afloat or pivot it to profit. But first, let's be clear about when it will hurt the organization - when it's a kneejerk reaction rather than a strategic last resort, when the workflow remains unchanged even after the workforce has changed, and when it's a top-down decision with the workforce not involved in arriving at a decision.
There are four hard questions you need to ask before you decide on a layoff strategy:
What is the business problem you're trying to solve?
Have all alternative avenues been explored?
Do the long-term benefits outweigh the short-term gains?
What will the impact on earnings be in the long term?
Smart downsizing comes with a set of smart tools.
As a business owner, you could choose to look at Attrition – the simplest and most productive tool in the smart downsizing process wherein you don't refill the empty seats. Whichever tool you choose, you need to be strategic in its application. And whatever you do, back it up with a robust legal review.
The savings of downsizing should not be eaten away by litigation, after all.