“Downsizing itself is an inevitable part of any creatively destructive economy.”
– James Surowiecki, Innovation Guru
Such a tough topic, but one we have to cover. A CEO once told me a story about his first month as the head of finance at a tough turnaround. The company had less than a month of cash left, and he had to lay off 50% of the finance team immediately. At first, everyone left complained they couldn’t get everything done. He told the team, “I don’t want you to do everything…I want you to focus on those things that keep the business running and add value.”
The first week after the layoff the majority of the team put in over 80 hours. The next week it dropped to 60 hours, and the next week it got down to about 40 weeks. They naturally figured out what was essential and what they needed to get done, albeit more efficiently.
Over time, without really tight controls, companies can grow headcount to an unnecessary level. Four reasons contribute to rightsizing. First, the business is contracting or stagnant, and the leadership decides to reduce headcount to increase profits. Second, headcount got ahead of business growth. Third, a new strategic direction necessitates a rebalancing of skills. And, fourth, leadership believes in periodic culling. To manage their “vitality curve,” the bottom 5-15% of employees are periodically let go. The vitality curve is a concept where the top 20% of employees drive the majority of value, the next 60-70% adequately contribute, while the bottom 5-15% aren’t adding value. GE, McKinsey, and IBM are examples of companies that actively manage their vitality curves.
What are the best practices of rightsizing?
Benchmark revenue per employee
It is tough to figure out how many people you need for a particular business. Of course, it depends on the business, initiatives, and industry. One of the most helpful metrics is benchmarking revenue per employee with competitors and best-practice companies in the industry or similar industries. It will give you a proxy to figure out the approximate target size of the organization. KentleyInsights.com has historical and forecasted revenue per employee in 1100+ industries.
Benchmark functional headcount ratios
There are government statistics by industry of the functional headcount ratios of different roles. KentleyInsights.com has headcount ratios on over 1100 industries.
The wrong way to rightsize is across-the-board cuts, impacting all departments in the same manner. Be strategic in your cuts. Try to protect current and future core competencies that are important to the competitive differentiation of the business.
Be collaborative with leadership
The leadership team needs to be a united front. Leadership is crucial because the organization will need to be picked up after hitting a collective bottom of anxiety, fear, and discouragement. Make sure the leadership team collaboratively problem-solves cuts, communication, and change management.
Focus on the performance and potential of people
When it comes down to it, you need to put names on a list. Some of those names will stay, while some will change or drop off. As you figure out the list, don’t just focus on the past performance of people, but also on their potential. You want to ensure you keep those people that have the potential to be future leaders and have the skills that you’ll need with the future strategic direction.
Be direct and supportive
I’ve had to fire and lay off my fair share of people. Be direct and supportive. In a dreaded layoff meeting, immediately tell the person that their position was eliminated. Try to limit your emotion, since the person will probably have more than enough emotions for both of you. Once you tell them the news, focus the conversation on how you would like to help them figure out their next steps, write a review for them, and be a reference. Then, focus on the immediate next steps of the termination, regarding cleaning out their area, and the paperwork they need to fill out. You should always have another person in the room, and typically it is best practice to have someone from HR, who should then take over the conversation.
After rightsizing, address the entire team
During and after a rightsizing, people are anxious about their jobs, their colleagues that need to find new jobs, and the future of the organization. It is critical to get the entire team together to address the “why,” and the road ahead for the organization. Be direct about the why and the path forward and compassionate towards the laid-off colleagues.
After rightsizing, use ECRS
Before someone leaves, you should always have them document all of their accountabilities and how much time each one typically takes. Then, use the ECRS framework to go over each accountability of the laid-off people. Work with the team to either eliminate the accountability, combine it with other peoples’ accountabilities, rearrange processes, or simplify the accountability.
I hope you've gotten some new ideas and perspectives from Stratechi.com. If you want some one-on-one support from me, Joe Newsum, set up some time here. I'm a McKinsey alum who has also been the COO of the 9th fastest growing U.S. company, managed $120 million marketing budgets, led the transformation of 20,000 employees, successfully started two companies from scratch, and amassed a load of experience over my 25-year career. I really enjoy coaching clients and they get a ton of value too. You can see some of their testimonials here. I have deep experience with this topic, strategic planning, career development, scaling up, workshops, leadership, presentation development & delivery, ramping up new roles, and much more. Read my take on developing a strategy. Click here to learn more about me or book some time.