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Be a manager long enough, and you’ll either initiate a staffing cut or be asked to execute one. There is plenty of literature about who, how, and when to cut. Not enough is said about the tools needed to make these decisions. If you haven’t laid off people before, or this is a rarely used muscle, what follows is written for you.
The Mindset
A layoff is an explosion. The impact crater reaches beyond those losing their jobs. There are seasonal businesses for whom payroll reductions are part of the planning process. However, for high-growth companies, layoffs are exception processing. You are rarely thinking of them as the ordinary course of business. Something has gone wrong, either within the company or in the marketplace, and you need to cut staff.
Some call a layoff a Reduction In Force (RIF). IBM, for example, calls it a Resource Action. They are all bland, clinical terms to describe a mass, company-initiated firing. A 10% natural attrition rate doesn’t make a 15% cut ordinary. A layoff is a company exercising its power to do right by its strategic and tactical goals. The people affected by this exercise of power have no input into the decision.
You must be calm, sober, and cold-blooded when approaching the assignment. Reserve empathy and emotion for when delivering the news. As a leader, you owe it to those affected to give it due weight and not make such decisions under duress.
First, File->New
Start a spreadsheet that has your team (or teams). At the very least, it should have their name, salary, and starting date. There should be a column you will fill, which is the phase and will be a number between 1 and 3. More on this later.
This spreadsheet is an “in case of fire break glass” tool. The instructions have to be clear and the outcomes predictable. And like all emergency tools, it has to be simple, efficient, and effective.
Phase 1: The 10-15% Cut
This is the first cut. The criteria is relatively simple—find the low-hanging fruit. Every department has some slack in its budget. Whether it comes to pet projects that seem important, in the give-and-take that is the budgeting cycle, you got that extra allocation you didn’t think you’d get.
Any expense in this nice-to-have category would fall into this phase. Subpar performers also fall into this category. Go through the spreadsheet, and put a 1 in the “Phase” column.
Some organizations automate this phase, where 15% are cut annually as part of culling underperformers or a last-minute push to conserve cash. This is not an excuse to be careless, flip, or lackadaisical. These are tough decisions that impact people’s livelihoods. Yet, you have to be ruthlessly pragmatic.
If you had to cut your team by 15%, where would you start and why? A 15% cut is usually a response to changing market conditions and is a near-term way to conserve capital. It is the starting point for the proverbial belt-tightening.
Given this phase’s relative optionality, managers have discretion on the timing. I, for example, set a company deadline of October 31, after which any layoff that fell in this bucket could be pushed off to January. The holidays are stressful times, even in the best of times. There is no need to spoil the holidays of entire families just because we, as a company, couldn’t plan.
It’s two days before Thanksgiving or a week before Christmas, and cash conservation is an emergency. If it is truly an emergency, we should cut deeper, which brings me to phase 2.
Phase 2: The 20-25% Cut
This is the cut that happens when a major strategy has gone wrong. A Go To Market (GTM) model has not panned out the way the company had hoped. Any first-order and second-order initiatives driven by this strategy must be stopped or scaled back. Go through the spreadsheet, and put a “2” for anyone who falls under this umbrella.
Phase 3: The 40-45% Cut
You are preparing for a long winter. Conditions are terrible, and you need to cut to make it through to better times whenever they turn up. Here you start by trying to keep as many individual contributors as possible. You will find yourself looking at eliminating middle management. You might also be looking at eliminating yourself.
A Personal Sidebar
I stumbled upon this approach after meeting with an investor early in my career. The company was going through a tough time. After an extensive, multi-hour operational deep dive, the investor ended the meeting by saying, “You, I like. You, I’ll keep. But the moment I see my money in danger, I’ll be sitting next to you telling you who to cut.”
I will admit, I was taken aback. The pleasantness only put in clear view the cold calculus behind the message. An outsider would never have enough context to know who to cut and yet have enough power to barrel roll through cost savings. The best I could do was to prepare for that situation. That night, I stayed up and started working on my version of the spreadsheet.
The first version was hard. But I have always kept an updated version at every job. I figured it is one of those things as a manager you do. As my team grew, I asked key leaders to create versions of this for themselves. Like with my spreadsheet, I asked that they not share it with anyone (including me). This is a personal exercise. How well they’d been practicing will show when I ask them to execute.
Finally
Every phase builds on the previous one. A 25% cut includes 15% of the last phase. So if the first stop is a 25% cut, start with the names who are part of Phase 1 and then build on them. This is rare, but if the first stop is a 45% cut, you start with Phases 1 and 2, then go to phase 3.
According to the DMV, your probability of being in a road accident is 100%. As a manager, your probability of participating in a layoff too is 100%. Lead long enough, and you’ll either layoff people or be let go yourself. It is best to be prepared. We’ve discussed one way to ensure you don’t let your heart rule your mind.
Who to cut should be a quick decision for you. There is no emotion because you’ve done the work. You have grappled with the emotional and intellectual issues in your head. Now you must execute with empathy.