An Executive's Guide to Planning for Layoffs
An Executive's Guide to Planning for Layoffs
Labor tends to be one of the biggest costs of any organization, so layoffs tend to be seen as a natural part of any business cycle. But companies that win long-term have a people-first strategy.
In May of 2022, YC wrote a now-famous email cautioning their founders to “plan for the worst.” Drawing conclusions from the last two economic downturns and the valuations of companies like Netflix and Shopify, their advice was to ‘cut expenses and extend runway.’ Boardrooms all across the globe had founders and executives asking the same questions: how do we prepare in the case of an economic downturn?
Fast forward, now it’s November 2022. Amazon laid off 1% of their workforce. Facebook laid off 13%. Twitter laid of 50%. Zillow 5%. The list goes on. In aggregate, over 100,000 employees have been notified that their positions have been eliminated this year — reaching a record since COVID.
With labor being one of the biggest costs of any organization, the answer to preparing for an economic downturn was (and often is) to layoff employees. Layoffs should be a last resort option since their impact tends to be wider-spread than number-crunching executives and finance teams often think about in the boardroom. Morale and productivity are temporary lost in all departments as managers prepare for the tough conversations they will need to have with their teams (both leaving and remaining) and for months after the cuts initially happen when the remaining employees worry for their own jobs while trying to absorb additional workloads. Top talent tends to leave organizations (especially after multiple rounds of cuts), opting to be builders vs. being part of the demolition and cleanup crew. The employees that are left try to recover from lost knowledge and workstreams that inevitably break when people leave involuntarily and abruptly. And eventually, if an organization recovers from all of this, it’s extremely costly to rehire (both from a headhunter perspective and getting new employees up to speed).
For all these reasons, layoffs should be a thought through last-resort. Wondering how to think through this for your organization? Here’s a guide:
Start planning early. As a founder/CEO or an executive management team, you should know enough about your business and overall economic trends to start anticipating the need for strategic changes months in advance of needing to action a layoff (caveat for black swan events like COVID). These early downward signals give you the bandwidth to assemble a tight group of “exercise planners” and start scenario planning. Your exercise planners should be an extremely small group of strategic-minded individuals who have the best interest of your customers, your company and your existing team members in mind.
Take responsibility. Ultimately, if you’re in a position of leadership, the company is in the situation it’s in-part because of you. Look inward first. What could you have done better? Did you have a lack of direction/strategy? Did you fail to fix cultural issues? Did you make bad decisions? Did you fail to set reasonable goals with your team and your board? To take responsibility for these actions means you’re clear about your impact on the situation, can articulate your own shortcomings to the team and are willing to put yourself on the line first. Use these learnings to have transparent conversations with your exercise planners about what needs to be done on a go-forward basis to get the business healthy again.
Honor verbal offers, but halt hiring. During the scenario planning process, it’s important to honor any verbal offers that have been given to candidates, but halt all other hiring immediately. There is nothing worse than hiring employees, asking them to leave good jobs and then find yourself letting them go a month later. To your remaining employees, this comes across as extremely poor planning or lack of strategy. To those impacted by the layoffs, it causes resentment, a damaged reputation and lost customers. For those Managers trying to hire and candidates that are in the hiring process, be transparent about the hiring freeze. Don’t commit to timelines. Follow your scenario planning process and honor the time it takes to do it right.
Understand the goal. When preparing for a downturn, the task is often to plan to a number (ex. we need to find $10M to be profitable). Be clear on what this goal is — how much do you really need? Trying to manage to an unattainable or astronomical number can be demoralizing and detrimental. Once you’re clear on your number, ask your exercise planners to to come up with three plans:
find $x dollars (-10% of your number),
find $y dollars (your number),
find $z dollars (+10% of your number).
Take daily, weekly or monthly checkpoints with this team (depending on how fast you need to make a decision). In your checkpoints, challenge them to outline scenarios with both cuts and growth. When evaluating what parts of the plan to move from “exercise” to “action,” take the long-term view (i.e. if I gave the green-light to action this, what does the business look like 3/9/12/24 months from now?).
Engage your growth & innovation teams. Keep in mind that long-term sustainability for companies requires both cutting expenses and growth. Often, the easiest thing to do when you’re in need of cash flow is to cut. The harder task is taking the time to strategically map out how you plan to grow your business. You’re a CEO or executive, time is not something you have a lot of. But if you’re lucky enough to have a growth team or innovation team, bring them along as part of your “exercise planner team.” While these teams often are the first to be cut in downturns, if you have the right people on these teams, they may be your biggest asset. Entrepreneurial, growth-minded individuals thrive off aggressive goals, a purposeful impact and giving 150% towards goals that others might deem unattainable. This is the time to refocus these teams and engage them in the planning task.
Get Creative. Before you make layoffs or dramatic cuts, there is often a time where you can get creative. Rather than taking spreadsheets and cutting the highest, or lowest, or most-recently hired employees, ask if your culture is one where employees may band together with temporary salary reductions (and/or increased stock packages) to keep the team in tact. You may be surprised how many employees would be willing to temporarily reduce their own salary to keep the team in tact. Cutting employees often means increased stress, workload and emotional burden while employees tend to think “who is next?” Getting creative with keeping the team in tact is a way to show faith and loyalty to your team. I’ve seen this work where each level of management takes a cut in proportion to their impact on the company’s situation:
C-Suite = 25% reduction
VPs = 20% reduction
Directors = 15% reduction
Managers = 10% reduction
Individual Contributors = 5% reduction
This eliminates negative feelings of highly paid executives sitting on massive salary packages while some equally dedicated employees suffer lost jobs or reductions. This is leadership by example.
Plan to start with easily reversible cuts and growth plans. When it comes time to take action, start with easily reversible growth plans that you can start to see results on in the next 30/60/90 days. Begin getting these projects live with your growth/innovation individuals and start tracking results. For cuts, start with “easily reversible” avenues first. Are there software costs that can be consolidated? Are there contracts that can be renegotiated? Are there expenses without a clear ROI that you can temporarily pause (ex: reduce experimental marketing, etc.)? Are people working from home more that would allow you to downsize office space? Do you have 3rd party contracts that you can temporarily suspend or bring in-house for cheaper? Is there additional bloat on your balance sheet that you can reduce?
Look for value vs. cost. If you do end up moving forward with your plan, make sure you’re optimizing for value and not cost. Look at the return on investment individuals and expenses have on your organization vs. their cost on a spreadsheet. Letting go of two people with $60K salary may be better for your organization than firing one person at $150K if that $150K person is producing a better return. Investing $100K in a project that may make you $1M may be the right move, even when you need to save. Understand what each person, line-item and investment gets you; prepare to action accordingly.
Measure twice, cut once. Once you’ve aligned with your exercise planners on the go-forward actions, sleep on it and regroup two times before actioning. Wood-workers live by the adage “measure twice, cut once” referring to the fact that you only have one shot to get it right. Make sure your plan cuts one time deep. Employees will forget a once time slice, but never want to be part of death by 1000 papercuts.
Align your leadership team. Get your leadership team and board aligned first. Explain the situation and your plan. Explain your long-term vision and the strategy behind why you’re doing this now (to achieve that long-term vision). Explain what you’re prepared to give up personally, what you need them to sacrifice as part of this and what you need them to do.
Share your plan & act transparently with the whole organization. Once you have a go-forward plan and your leadership team aligned, host a town hall or office hours with your team. Share the plan. Reassure them that the plan involves reductions in expense and growth, and that your ultimate goal is to retain your talent while doing what’s right for the business. Allow them a forum to ask questions, share how they’re feeling and get help if they’ll be impacted by the plan. For those that will be let go, ensure they’re leaving with a clear understanding of how you’ll take care of them through the transition. Will you give them health benefits for 6 months until they find their next gig? Will you give them 3 months severance (knowing that it takes on average 5 months to find a new job today)?
Be prepared to lose good people. Sharing your plan will make some good individuals leave. For others (the right ones), it’ll challenge them to step up to the plate to help you action the plan.
Growing a business is never easy, and neither is running a company in the face of an economic downturn. But having a plan for these swings allows you to make the right decisions instead of the easy ones. Acting with a people-first manner at each step throughout the process may be the difference between long-term success and failure.