Tuesday 25 August 2015

Downsizing: Planning

“Downsizing” (the polite way of saying “firing lots of staff”) is a traumatic time for everyone involved from those who are being “let go” right through to the CEO.  Planning a downsizing is essential if the business is to survive with stakeholder, customer, supplier, community and regulator relationships intact.

There’s no easy way to plan a downsizing as so much will depend on the individual organisation, its market position, its financial strength, whether it is highly regulated, whether it requires specialist skills or is a “niche player” and a variety of other factors.

For the purposes of this article, I assume that the business relies on selling goods and/or services to paying customers.  For me, the main areas of focus would be:

Business cycle
“Fixed” vs “Floating” cost base
Financial strength
Sales
Customer Service
Purchasing
Other support functions
Management layers
Legal/regulatory considerations
The community at large (including press)

Business Cycle:
Is your business subject to “peaks” and troughs”?  Is everyone else in the same position as you are?  If so, you're all in the same boat and your business isn’t unique in the problems it faces.  How long can you sustain yourself in a downturn (see also “Fixed” vs “Floating” Cost Base and Financial Strength below).

“Fixed” vs “Floating” Cost Base:
“Fixed” costs that do not vary, e.g. rent for premises.  “Floating” costs are those that vary depending on the situation, e.g. commissions paid to sales staff.

When business volumes are rising, you want as much of your cost base as possible to be fixed (you retain more profit).  When business is slowing down, you want as much of your cost base as possible to be floating.  Most organisations have a mix of the two.

The most significant element of most businesses’ cost base is usually “Staff Costs” (salaries, pension contributions, other benefits, etc).  This is, for the most part, “fixed” and is one of the reasons that many businesses are “outsourcing” processes/services and moving to “zero hours contracts”. 

Beware of eliminating staff simply on the basis of their salary.  They could be your highest performers or the ones with all the vital customer knowledge and you’ll be throwing the proverbial baby out with the bathwater.

Financial Strength:
A business with cash in the bank is better equipped to ride out a slowdown.  During the last UK recession, banks noticed that businesses were paying off loans and relying on cash reserves to reduce their finance costs.

If you can ride out the storm without sacrificing staff, you’ll be in a better position when times are good as you’ll be ready to meet increased demand.  So what if shareholders have to suffer lower dividends?  That’s a risk they take.  If you spend a lot of money on retrenching staff only to have to re-hire them 2 years later, no one will thank you…

Sales:
No sales = no money.  If you rely on selling goods/services, you want to keep the team(s) and people responsible for bringing in the income as intact as possible. Yes, you can afford to let go those who aren’t contributing, provided that you know whether this is within or beyond their control (e.g. difficult market, unrealistic targets, unsuitable product/service).

Customer Service:
Most of the same arguments above apply here as well.  The people who keep your customers happy are just as (if not more) important than your sales force.  These are the ones who have to work out why things may have gone wrong and then put the situation right or you lose the customer.  Same logic applies with non-performers though.

Purchasing:
Depending on the nature of your business, you need people who can get the best possible raw materials/goods at the lowest possible price whilst maintaining continuity of quality supply(ies).  You may have to sacrifice quality temporarily, but if your purchasing department has good relations with quality suppliers, they may be able to help you weather the storm though lower pricing if they want to keep you as a buyer in the long term. 

Support Functions:
HR, IT, Audit, Compliance, Finance are Cost Centres.  They cost money, but don't bring in revenues.  They are a “necessary evil”, but my advice would be to make more cuts in these areas than in Sales and Customer Service.  The nice people who pay for your product or service will notice if their usual relationship manager or sales person isn't around, whereas they don’t care about HR.  What is the proportion of Support Staff (how many staff out of your total headcount don’t deal directly with those who buy your goods/services)?  If more than 25-30%, you could trim some fat here.

Management Layers:
No organisation should have more managers than workers (except in very special circumstances).  Equally, do you have too many layers of management, slowing down decision-making and taking action whilst the different levels give their approval? If this is what your organisation looks like, ask why and take action.

Legal/Regulatory Considerations:
In Support Functions, I commented that they were a “necessary evil”.  You will need accountants, lawyers, HR managers, particularly if you are in a highly regulated business (e.g. banking).  What do you actually need?  What can be outsourced?

Equally, there may be strict labour laws that govern the dismissal of staff for reasons other than gross indecency, bad behaviour or fraud or theft.  You may also have to consider potential Labour Union involvement.

The Community At Large:
What impact will downsizing have on the local community?  Will it affect the local economy?  Will it mean a backlash in terms of reduced purchases from your business either locally or countrywide, precipitating an even worse crisis?  What will shareholder or media reaction be?

Support:
Can you provide any support to those being “let go” to find another job?  This may go some way to defusing any potential resentment or backlash mentioned above.

Don't let these questions stop you taking action, but do use them (and any other considerations relevant your business) to plan things properly.


 I have spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With more than 20 years in international financial services around the world  running different operations and lending businesses, I started my own Consultancy to offer solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of services.  For strategic questions that you should be asking yourself, follow me at @wkm610.

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