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How did we ever get here? Planning and executing a layoff

February 11, 2009

A NASDAQ listed software vendor reduced their staff by 20% in 1 day. Some of the reasons made sense because the company was terribly overstaffed with Managers reporting to Managers, Directors to Directors to Senior Directors to Executive Directors. Within a week Management had lost credibility when word got out that a number of the now laid-off employees had been hired, granted a performance bonus along with the rest of the company, and were then terminated, all within 30 days of their hire date. There has to be a better way.

Much of the current MBA level and academic management literature talks about what makes up a leader, how do you hire and inspire staff, etc. Thought provoking concepts like leading by values, leading by example. Really good material, assuming the economy was still in 2004. Well, pardon my being a bit hands-on here but these days the thoughts which should be in the literature should revolve around who do I layoff and how do I minimize the impact it will have on my remaining employees and competitors. We won’t even go into what the heck our MBA programs (and I have an MBA) teach which produces the bunch of business leaders we now have.

While you’re planning the details of the layoff, you should ask yourselves “how did I get here?”. No, not the economic downturn, but the fact that you’re overstaffed. Do you pay market and get employees who are competent but not superstars (and therefore may require more of them to get the job done)? Should I have outsourced certain functions to begin with? Should I be proud or concerned that my employees usually stay for 10+ years, often doing the same job or a job 1 promotion grade higher (ex:. , am I getting new blood with new ideas)? Is my facility located in a comfortable community but not geographically desirable for the top performers in your industry and so they don’t even think of applying? A time like this gives you the license to ask yourself and your Leadership Team some hard introspective questions about what kind of employees you want going forward, i.e. is this a time to not just layoff excess personnel but a time to reshuffle the deck and your tenure assumptions as well?

So who do we structure a layoff? There are a few schools of thought. The Horizontal school goes for an X% company wide reduction, spanning all departments. Often, this leaves every business function understaffed and trying to reorganize itself to get the job done. Resentment is generated by employees feeling overworked and sad they are doing the work formerly done by co-workers and friends. Much time will be spent during breaks and lunches speculating on why individual employees were singled out for the layoff. Was someone not the boss’ friend? Were they malcontents? Were they inflexible? Were they the last hired, regardless of competency? If there does not seem to be a consistent thoughtful plan it could appear to be, at worst, vengeful or arbitrary.

The Vertical approach is summarized by the reason “we are no longer in (fill in business or location)”. If you’re going to cut back in a market, think if you should even be there or if your cutback will tarnish your name and give a leverageable advantage to your competitor in terms of customer support, presence, etc. Why spend money only to look poor? If you’re leaving a business segment, perhaps it can be sold off, but bottom line, everyone in that unit is laid-off, top to bottom. Resist the tendency to keep the to-be closed unit’s Senior Management in the company, unless the reason the business was cut had nothing at all to do with their performance in even the slightest way. Never mind this “you learned your lessons on my nickel” thought process – trust me, they’ll make similar mistakes again. For the surviving employees, this approach makes the most sense since presumably the now shed business unit was either unprofitable or not strategic going forward and the applicable Senior Management was not improperly rewarded with continued employment at the expense of their employees.

This is also a great time to mix the two approaches (calling it Diagonal is a bit odd) by leaving a business or location entirely and combining this with a very small general force reduction. The number of laid-off employees should be overwhelmingly guided by the Vertical approach, on the order of 70/30 Vertical to Horizontal. If you reverse the emphasis, it can be seen, internally and in the market, as panicky or ‘crashing and burning’.

When do we know we have to lay-off? Some will wait until a bad Quarter gives them either a reason or political cover to do so, but my recommendation is to be proactive and

• Model what your Financials will look like at the most likely % revenue reduction, and then reduce it by another 5%. Restate your projections to the worst case (and hopefully you’ll come in ahead of this restated plan, looking the hero)
• Since this is rarely linear across the entire company, look at what businesses/locations will fall the fastest and most – these are your prime targets for deep review
• Decide if those businesses/locations are mission critical now and 24 months from now
• Use your ROI per Employee bogey to determine the proper Financial Employee Level.
• Determine if you wish to recast your employee profile towards fewer, higher value employees both now and for the future, or if you wish to keep your regular employee profile and just have them do more until you can hire at a later date. The latter approach may involve increased errors and decreased customer satisfaction, so be prepared.
• Reorg on paper to support the Financial Employee Model in daily operations and be ready to restore a normal daily operating environment as quickly as possible
• Work with your Labor, Business and, if applicable, Bankruptcy attorneys to ensure all notifications are filed, protected groups accounted for properly, etc.
• Include your PR people as well if you think this could be a news event.
• It is not uncommon for Presidents and Interims to call their peers at strategic partners and key customers to give advance notice and perspective.

One last comment: make sure, on the day the layoff will be executed, you publicly announce the event and after all involved have been notified, publicly declare the layoff is over. Absent your closure announcement, everyone will go comatose, awaiting their turn. Eventually your remaining employees will figure out that the layoffs are over, but your being taken as credible at face value will be shot.


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