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.
Labels: Crisis Management, Customer Care, Financial, Leadership, Strategy
posted by William Martin @ 08:02
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