The Smart Layoff

Today’s economy leads to many layoffs across all sectors. According to TechCrunch’s layoffs Tracker, over 132,000 employees lost their jobs from August 2008 in the tech sector alone. Reductions in force (RIFs) are commonplace now but there are few best practices out there when it comes to doing it right strategically. While HR already mastered the process from their side, executives often fail to creatively think of the best way to reduce the number of employees, without destroying the company.

There is a smarter way, but let’s first understand how it is done today. The way most RIFs are done is simple: the CFO and CEO agree on a number (say 10%) and ask their direct reports to reduce the bottom 10% of the company. From their perspective it doesn’t look so bad: after all, if you are asked to cut 10% of your division, wouldn’t you eliminate the low performing employees first? In reality, the outcome is a bit different: the 10% marching order is cascaded down the management hierarchy. Managers are asked to look at their teams and reduce them in 10%. From this point it becomes personal: remote employees will get the ax faster since they don’t know their manager as well, senior managers will tend to survive (since someone need to execute on the layoff plan) so the company will end up with the same amount of chiefs but less Indians and employees that were recently hired will be the first to exit, although they may possess a greater potential than the old timers.

The results of a “10% across the board RIF” are dire: first, you don’t end up reducing 10% in costs since the less expensive employees are the ones to leave. The company loses more than 10% in effectiveness since it has too many managers juggling too many activities with fewer working bees. In addition, you leave every team in the company crippled and de-motivated, regardless of its importance and prospects. So why RIFs are done this way? It is easy to decide and it feels good to ask everyone to work 10% harder and pretend productivity is not lost.

Here is a different way to RIF: make some bold decisions and shut down few activities all together. This is how it goes: If you want to save 10% of your workforce related costs you look at your company portfolio and decide on shutting down activities that will translate into this 10% reduction. When your CFO will come back with the numbers you will discover you need to layoff less than 10% of your force since there are many other costs that will go away when you shut down an activity instead of laying off the lowest paid employees. Now move to stage two: allow each surviving business unit to hire as many people as they want out of the shut down units for a period of 30 days, as long as they are brought as replacements of existing employees. The surviving leaders will run amok to find those stars from the other units, and use them to replace their lowest performing employees so most of the talent is preserved.

The result is very different now: the surviving business units are now STRONGER than they used to be before the RIF and can actually deliver more than you ever expected them. Instead of averaging the pain, everyone that stayed is now happy and motivated: they have enough good talent to get the job done; they see the wisdom and fairness behind the move so they can mentally support it.

It is painful to close down activities but this is the only way for a company to reinvent itself. You can also consider selling activities instead of shutting them down. As an example, service partner may be interested in operating an end of life product for the service fees.  There are more details to cover (like systems to support it or ways to move products to maintenance mode) but this plan passed the logic test of few senior executives in large enterprises that are facing RIFs. Does it pass your logic test?

The Smart Layoff

One thought on “The Smart Layoff

  1. Man, you hit the nail direct on the head about how layoffs usually occur. Your “smart” approach is something I definitely agree with. As unusual as this sounds, I have never needed to have a layoff in any of my companies I had over the course of my 30 years, but as a consultant, I have seen 3 companies go through the process, and ironically it was exactly as you described.

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