Downsizing Your Business

While you did not buy a business to see it shrink, most “on-going” businesses will experience a decline in revenues that will severely test its leadership. Emerging stronger from the decline will require some tough decisions in general, and specifically around headcount reduction.

Layoffs were never easy for me; they always had a significant impact not just on those laid off, but their families, and the business itself. I always felt personally responsible as the owner. Over the years, it never got easier.

Take action earlier rather than later

Taking action quickly took a while to learn. As a younger executive, I would wait until there were lots of troubling signs—many months or a few quarters. When revenues fell off and we learned that our customers had too much inventory, we would anticipate the next buying cycle, and denial would set it. It was so easy to chalk it up to seasonality or some anomaly in their order patterns. Before we knew it we found ourselves in the middle of a recession, carrying more cost than the lower business levels could support.

Over time, I began to develop a better sense about which customers were good “leading” indicators. Well-run customers were very good at reading their own bookings and customer patterns. When I saw declines here, I knew we had to act. Before purchasing his business, Andrew Mondi worked for a large corporation and says “we planned our plant capacity so that 25% of the total was supplied by temporary contractors and overtime. The thinking was that this capacity could be cut “over-night”.

In my own case, I developed a rule of thumb that a decline in order run-rate from the previous 3-month average of 15% was the “red flag” signaling that we had to take action. For our business, like many, reducing headcount is a primary cost lever. By this time, we had already curtailed overtime, eliminated temporary labor, and scrutinized inventory “buys.”

Bank covenants may also trigger a difficult discussion with your banker about your “plan” for recovery and insuring that their interest and principal payments will be unaffected.

Consider your options and cut deep

I never used pay-cuts, wage freezes, shortened work weeks, or benefit suspensions. In my opinion these measures too often “penalized” the entire workforce and were demoralizing. Everyone stayed on the payroll, true enough, but it did not feel right to ask people to take less pay to do more work. You may rationalize that the decline will be temporary and that you don’t want to lose good employees. But my experience suggests otherwise – you should plan for a longer decline, and work hard to keep your best people.

Yes, the workforce that got laid off was “demoralized”, but I wanted to be sure that those that were retained got raises, were competitively paid, had an opportunity for promotion and knew that their benefits were intact. We always focused on a “deeper” first cut than we felt we needed, because we wanted to avoid multiple “hits” to morale.

Reflect carefully on who will be cut

Although we never had an “across the board” layoffs, we targeted a total headcount reduction, say 25%, and challenged our department managers to come up with names in rank order up to a 40% reduction.

The ranking criteria we used was the skill-set needed for downturn period and recovery period, competency, flight risk, attendance and finally, all other things being equal, seniority. We determined what multiple jobs were done by one person. We also asked what work currently being done could we do without. Since this process was similar to our annual performance reviews, there were generally no surprises but still emotionally challenging for the managers and supervisors.

We made a couple of “passes” at the rankings and in a number of instances would recommend shifting people to other departments to hold on to a particularly valuable resource. In rare cases we offered a “demotion”, never “redlining” pay, but always bringing it down to the new pay grade to hold on to an employee: sometimes they would leave anyway rather than face a pay cut, but oftentimes they stayed on as loyal employees. We paid particular attention to the “cut line” to be sure the two or three employees above and below the line received careful scrutiny.

Often, we would ask employees if anyone wanted to volunteer for a layoff and invariably we got a few who did—they could start collecting unemployment and more importantly, be considered early on the “call back” list when we began to re-hire. Not everyone was selected who volunteered; we did not want to lose our high performers. At a business in northern Michigan, much of our workforce were part-time farmers and welcomed the opportunity for a Spring/Summer layoff.

John Menzel, who purchased Fiberglass Industries, insists that “Layoffs are due to a failure of management, so you should start with the front office.” While each department argued that their function was critical, we did not make cuts to every area, and in fact some added people to some areas to spur growth. The final decisions, however, were made at the CEO level following the precept that “Equal is not Fair and Fair is not Equal”. Many CEOs can mark the inflection points in their growth curves to the new products and services they developed during a downturn.

Be thoughtful about the process

The selection process should take no more than a week, and if asked about “layoffs” my standard answer was “there are no layoffs today!” I never made promises. Most employees were fully aware of the decline in business activity and the need for the company to address it, often seeing it weeks before it was apparent to management.

We spent a lot of time on the logistics for the day of the layoff to insure that we provided as much information to each person about their final paycheck, continuing COBRA benefits and unemployment. We would never speculate on the length of a layoff and explained that it should be considered permanent.

Everything was in writing. Each person was met with separately, with their supervisor, and away from their department, generally after the morning break; never at the end of the day, or on Mondays or Fridays; Tuesday morning was optimal for us. Nick Kulkarni, a searcher who purchased Sintel disagrees and says, “Do reductions on a Friday. The weekend really does allow for things to calm down a bit.” No day is a good day to be laid off!

Focus on the survivors

Once everyone was told and had cleaned out their desks or lockers, we held an all-hands meeting to discuss the situation and focus on the future. We made sure to refer to those laid off with dignity and respect and reminded everyone that they would need support over the coming months, after-all some of them were their good friends.

Generally, we would hear back from the survivors that we had “selected” the proper people and they were ready to move forward, despite the extra workload. Doren Spinner at Norfil points out that “While for you, this looks like a one-time event, your team really doesn’t. They often visualize an axe that keeps on chopping and wondering who is going to be next. You’ve got to over communicate.”

Unless the employees worked directly for me, I did not sit in on the layoff one-on-one discussions. However, from time to time, laid off employees would ask to see me. Although I was anxious about these meetings, I was always firm about the “finality” of the event and most just wanted to vent a little. Difficult and sometimes tearful, listening comes with the territory of being a CEO.

Summary

Moving quickly, cutting deep and focusing on the survivors makes this process effective and humane. Executing on these hard choices allows the business to recover faster, and stronger than ever. However, it is always difficult, with careers, lives and families at stake.

Operate on!

Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! I regularly update individual blog posts, add to the Reference section and Search tips, so visit the www.jimsteinsharpe.com website regularly.