How to Strategically Downsize Your Business
Downsizing is probably the most stressful task any business leader will ever face. The reason for this is that there’s so much at stake. Most companies only even consider downsizing when the long-term viability of the business is on the line.
On top of that, businesses are made up of individual people with bills to pay and dreams to save for. Downsizing inevitably throws a wrench in those plans, which obviously has a massive effect on your employees and colleagues.
That’s a lot of responsibility to carry on your shoulders.
With that in mind, your goal for downsizing should be to ensure the long-term viability of your business, while causing the least harm. This is called strategic downsizing. In this guide, we’ll discuss how to go about this. That way, you can be sure your downsizing efforts don’t cause more harm than good.
When to Downsize a Business
Most high-profile downsizing happens in periods of uncertainty. These include times like the 2008 crash or the first few months of 2020.
The reason for this is that during an economic downturn, the general public has less spare cash. This leads to businesses experiencing less demand for their goods and services, so they need to cut costs.
One of the easiest ways to do this is by reducing the number of employees a business has. The benefit of cutting costs this way is that a business can remain operational on a reduced scale while it weathers the economic storm.
This would not be possible if a business cut costs by selling assets, like patents or machinery.
At least, that’s the theory. In reality, downsizing can also hurt profitability. This is especially true when downsizing is used to try and fix short-term cash flow problems. Often this leads to companies undertaking successive rounds of downsizing, rather than addressing other issues at the core of their poor profitability.
As such, downsizing is best employed when a downturn in demand is unlikely to be short-lived. Where a period of uncertainty is only temporary, it’s better to consider some alternatives to downsizing.
Alternatives to Downsizing a Business
Even if you choose not to downsize, there are plenty of ways to reduce your wage bill during a period of low demand. Besides being more prudent in the long term, many of these strategies have other benefits.
For example, voluntary executive pay-cuts are an easy way to reduce your wage bill temporarily. They’ll also result in plenty of good publicity, which your business would not receive while downsizing.
Similarly, it’s often possible to negotiate temporary pay cuts with your staff more broadly. When employees recognize that their colleagues may face job losses; otherwise, many will be willing to work for a reduced rate for a period of time.
This will also improve your employee retention by creating a greater sense of community and solidarity among your workers.
However, if downsizing is still the right strategy for you, let’s look at how to do this strategically.
Keep it Legal
One of the most important considerations in any downsizing exercise is your legal position. Depending on where you’re based, you may be subject to a range of legal requirements before you can downsize a business. These can include;
- Standardized selection criteria
- Minimum requirements severance packages
- Proof that lay-offs are unavoidable
- Appeals procedures
- Procedural requirements
If you don’t meet these properly, you may find yourself on the losing end of a lawsuit or suffering reputational damage. Unfortunately, your legal position depends on where you are, and likely the size and nature of your company.
As such, before downsizing a business, you should always seek out expert legal help.
How to Create Layoff Criteria
Your next difficult task is to figure out which employees to lay off. There are third-party auditing and consulting firms who will do this for you. However, these are often expensive and may fail to recognize some of the value that individual employees bring to the table.
Instead, here are some of the most common layoff criteria for downsizing a business.
Last in First Out
This is probably the most common strategy. However, it’s also pretty much the worst. The basic logic is that you calculate the percentage of your workforce, which you need to cut to stay afloat.
You then lay off this percentage of employees who joined the company most recently.
While this is sometimes described as the fairest way to make layoffs, what people really mean by this is that it’s the easiest strategy to defend against discrimination claims. However, in terms of ensuring long-term profitability, it isn’t any better than choosing employees to fire at random.
Look for Volunteers
It may sound funny, but some of your employees would probably be happy to lose their jobs. That is, there are likely to be some people in your organization who would like to change careers, start their own business, or go back to school.
A redundancy package might be the key to their plans.
As such, it is worth seeking out employees to take voluntary redundancy. This is especially true where you are required to offer compensation to redundant employees anyway. You might even find that your voluntary redundancies are oversubscribed.
Offer Early Retirement Plans
This is a similar idea, but you target it at your longer serving team members. The rationale behind this is that employees who have been with your business for longer generally have higher salaries for the same roles.
Similarly, older or more senior employees are often already part of more generous pension or healthcare schemes than their younger counterparts. This often reduces the additional costs of early retirement schemes compared to voluntary redundancy.
Again, in many cases, you’ll find that employees will knock down the door to receive an early retirement package.
Focus on Departments
Another effective approach for strategically downsizing a business is to focus on specific departments while ringfencing others. One way to do this is by using a little bit of common sense. For example, a sales team of 100 people might be able to operate effectively after a 30% job cut.
An accounting department of 3 people probably wouldn’t.
Similarly, you may wish to classify certain departments or job functions that are mission-critical. A hospital is a good analogy for this. Here, the organization wouldn’t be able to achieve its bottom line if it reduced medical staff like doctors and nurses, so these would be mission-critical.
Job losses would then be limited to non-mission critical staff who work in administrative or business services departments.
If you run a small software company, it might make sense to cut a few members of the development staff, but it would be pretty silly to lay off the only person who knows how to write a project proposal.
Dynamic Selection Criteria
A more in-depth strategy for selecting staff for layoffs is to create a list of different criteria and score each staff member based on these. You might even weigh each based on their relative importance to the business. These criteria might include;
- Unique Skills & Knowledge
- Management Skills
- Recent Performance
The benefit of using an employee evaluation strategy like this is that your remaining employees will be those best suited to keeping your business afloat. You should communicate these criteria ahead of time to ensure transparency and trust throughout the process.
Downsizing a Business without Causing Harm
Now that you understand the basics of drawing up a downsizing strategy, it’s also worth considering some of the pitfalls you should avoid. These might be as simple as treating your staff members poorly. They might also be as serious as negating your downsizing efforts.
We’ve already discussed how downsizing can impact lives and livelihoods. To limit this, you should prioritize treating your employees with professionalism and respect throughout the process.
One crucial element of this is communication. As early as possible, it would be best if you made your employees aware that layoffs are a possibility. You should then maintain clear communication at every stage of the process.
This allows you to give affected staff the greatest possible notice period, which will give them the time they need to find a new role.
If you communicate poorly during the downsizing process, you’re likely to hurt employee morale. In turn, this will see your productivity and employee retention suffer. The basic rule here is that if your employees don’t think you care about them, they won’t care about you.
To combat this, employees should understand the reasons why downsizing is unavoidable. This means that they must be confident that you’ve taken every possible step to avoid any job losses.
To return to an earlier point, consider the message you’d send to your employees if you offered large executive bonuses in the same year as cutting staff levels.
Downsizing a business isn’t a silver bullet to regain profitability. In fact, businesses that undergo downsizing are more likely to declare bankruptcy soon afterward. There are two reasons that this can happen.
The first is that downsizing wasn’t the right choice in the first place. Often, businesses choose to downsize as an easy way out when profitability is poor. However, in many cases, the core problem is with demand, not with supply. That is, the problem wasn’t that you had too many people. Rather, you didn’t have enough customers.
Even when downsizing is an appropriate solution, many businesses still suffer in profitability because they used the wrong strategy. In other words, they did have too many people, but they laid off the wrong ones.
How to Strategically Downsize a Business
Today we’ve explored why you would want to downsize a business. We also looked at how you can do this effectively. Here, effectiveness means solving your core business problems without exacerbating them.
The first step to this is deciding whether downsizing is an appropriate solution, or if there might be better alternatives to short-term cash flow problems. After this, you face the difficult job of deciding which employees are to lose their jobs. While many strategies exist for this, as a general rule, you should avoid blanket strategies such as ‘last in first out’.
Finally, treat your employees with respect and courtesy throughout to avoid hurting morale among your remaining staff.
Olga is a creative yet data-driven marketer with 10+ years in digital marketing, entrepreneurial mindset and a deep SEM expertise. Avid writer with 50+ publications including Entrepreneur, HubSpot, Foundr, Search Engine Journal, Upwork, GoDaddy blogs. Certified HubSpot inbound marketer. SaaS enthusiast. Coined the term ‘staircase guest blogging strategy’. Believes that epic content is King, Queen and all the Aces in marketing. A parent of a 5-year old and a marketing team of dedicated A-players.