Simple rule - it’s always easier to add overhead as a company grows, than to shed it, as it contracts.
Let’s be honest. Who doesn’t like the idea of standing in front of a group of colleagues and announcing the addition of new jobs and a new piece of technology? But is there anyone who really enjoys being in front of the same group and telling them that you are cutting jobs and the technology investment will have to wait another year?
The fact is, rightsizing a business to a smaller level is psychologically tough. It’s always easier to go from coach to first class, then from first class to coach.
Here are some lessons that may be helpful if you are faced with this challenge in your business.
Lesson 1 – It Will Be Emotional
Rightsizing a business to a smaller level will be emotionally challenging. There will be conflict over what to cut and what to keep. If employees are involved it will be what is best for the company and how best to treat employees. This balancing act is further complicated with personal relationships, favorites, and the “sacred cows”.
Second guessing, teeth gnashing, and sleepless nights during this process in normal.
Lesson 2 – Swallow the Worm Whole
What is the best way to eat a worm? - In one bite. Get it over with.
Depending on how the business is performing will determine if you use a scalpel or an axe. Too many executives believe they can make surgical cuts to minimize the downsizing and pain. Then they find themselves having to surgically cut again six months later. The fact is, we are business leaders and not surgeons and most of us just aren’t that good.
Sometimes you just need to take an axe and chop deep. The idea is to cut deep, deeper than the revenue reduction may require. This may seem like overkill, but it is the opportunity to make the business leaner and meaner and it is making up for years of unnecessary overhead growth.
Lesson 3 – Plan, Plan and then Plan Again
Planning is paramount. Plan for contingencies, plan for disasters, plan for everything. Then plan some more. And never have a “worst case” plan. You have no idea what worst case really is.
A critical part of the plan is preparing a realistic budget. After determining the correct and realizable revenue and contributions start calculating your costs. The first and most important cost is your profit. Too often we plan for a breakeven profit or a marginal profit. This is dangerous because inevitably there will be additional costs or reduced revenues somewhere along the way. Having a buffer is critical so you won’t have to do this again in 6 months’ time.
Lesson 4 – Respect the Process and the People
Once there is an action plan in place – follow it. It will be easier emotionally. Then it is critically important to go out of your way to demonstrate that you care about any employees being laid off by creating the best possible exit program you can. This will make this entire process much less painful and easier for all concerned. Also, your remaining employees are watching and assessing how you handle this matter. If you do it with great care and concern, they know you will be kind to them as well.
Lesson 5 – Respect the Law for Layoffs
It's important not to allow the legal department to design a layoff, but just as important to respect employment laws. If you have planned your lay-off according to real business needs, and not on headcount, seniority, or your personal biases, you will have no problem upholding the law. You will find yourself in legal trouble when you base your layoff on factors other than business needs.
Lesson 6 – Honesty and Communications
It is critical that you communicate honestly with your employees. After the initial rightsizing decisions are announced, share the big picture plan with the end game desired. Keep them in the loop going forward. This will create a bond and build respect with the team by telling them the truth, as painful as it might be to hear.
I hope this is helpful
Darrell Pardy, CPA CA