• Team Business-360°

How to downsize smartly to cope with challenging times

Updated: Dec 19, 2021

No business owner wants to go through the experience of downsizing their venture. 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. And those choices are necessarily harsh. However, even though downsizing feels like an admission of failure it can be turned into a tool for success, when handled smartly.

Surveys have shown that organisations with deep layoffs actually underperform by 8% over the ensuing 3 years. Hence smart organisations 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 organisations who view their work force as cost and not value. The common fallacy being layoffs will lead to lowered costs hence higher earnings hence higher stock prices. The assumption being – other things remaining the same. But this assumption is in itself flawed since reduced expenses will lead to reduced value which will in turn lead to reduced earning and hence stock prices. Effectively, you would have traded a short term cash flow fix for long term losses.

But, this does not take away from the fact that 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 successful downsizing 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. Jack Welch and Suzy Welch famously said in the May 2009 issue of the Businessweek “H.R matters enormously in good times but defines you in the bad”.

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 first kneejerk reaction rather than a strategic last resort. When the workflow remains unchanged even after the workforce has changed. When it’s a top down decision and the work force is not involved in arriving at the decision. It will benefit the organization when - it’s a strategy to mitigate an emergency which is unlikely to go away in the short term. When it’s part of an overall organizational restructuring or when the organization is pivoting to new business which requires new skills.

There are 4 hard questions you need to ask before you decide to downsize. What is the business problem you’re trying to solve? Have all alternative avenues been explored? Do the long terms 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 downsizing tool wherein you don’t refill the empty seats. Voluntary Termination – This is good for the work force, as they get to choose and get fair compensation for it, however it can lead to loss of high performers too. Early Retirement Incentive – this staggers the depletion in the work force hence mitigates any massive disruption for both employee and employer. Compulsory Termination – this can be deployed when an entire business unit is made redundant. However, in all these scenarios as a smart business leader you need to be strategic. You cannot risk across-the-board approach - The Economist describes this problem as “Snip, Snip, Oops!”

Whichever tool you choose you need to be strategic in its application. Make productivity or performance the core mantra and then scan your organization for the most unproductive or low performing departments or functions. Within them the most unproductive employees and within them the ones with the least relevant skills. And whatever you do back it up with a very robust legal review. The savings of a downsizing should not be eaten away by litigation after all. And while deploying these always keep in mind the 5 fundamentals of being transparent, being fair, being sensitive, being graceful and hand holding employees through this traumatic process.

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