Tuesday, August 16, 2011

Lesson #75: How to Implement Layoffs

Posted By: George Deeb - 8/16/2011


& Comment

Usually, startups are in growth mode, creating new jobs.  But, many times, things do not go as planned, and a startup needs to implement job cuts to "right size" their cost structure to the going forward revenue base.  Today's lesson will address key considerations on this difficult subject.

Cut early.  As soon as you have a sense things are not working out, it is in the company's best interest to make any cuts sooner than later, to preserve your limited remaining capital.  Don't wait until you run out of cash, and have no other options.  Not only, will early cuts help your balance sheet and income statement faster, it will make the company more attractive to new investors, with a lower burn rate.  And, cutting early, also leaves cash to pay for severance payments, to calm cut staff.

Cut deep and once.   It is absolutely critical you make the cuts deep enough, that you do not need to go back and make secondary cuts soon thereafter.  You only have one chance to tell your remaining employees, "we had to make one time cuts, the rest of you are safe, now let's get back to building greatness".  Which is a critical message to deliver the remaining staff to keep them motivated and not panicked looking for another job.  You lose all that trust, the minute secondary cuts are made.

Manage communications prior to cuts.  As you know, I am a big fan of open communications, in good times and in bad times.  Which means making sure your staff is aware of the business challenges via monthly meetings, so they can both help generate new ideas to resolve the situation, and not be surprised by unexpected cuts.  That said, if cuts are truly eminent, do not hint to it, on a random employee basis (who are sure to gossip amongst themselves).  You either tell everyone and make the cuts, or you tell no one and don't.  You can't have your entire staff in a frenzy, entirely unproductive waiting for the guillotine to fall.  And, risk your best staff, looking for the door in the process.

Manage communications the day of cuts.  Depending on the size of your staff, will dictate whether you tell people on a one-off basis, or tell people as a group.  But, it is important you tell people all roughly at the same time, so the rumor mill doesn't start swirling around in the interim.

Have witnesses.  At the time of cuts, make sure you have a second person in the room with you, to serve as a witness in case you are ever sued by the cut staff member down the road.  A witness can verify what was said to the cut staff member, and verify that the employee was not cut for any other discriminatory reasons (e.g., gender, age).

Get signatures.  Get good legal advice on what documents need to be signed at the time of exit (e.g., clearing you from any future claims, keeping news confidential, acknowledging their last day of service).  Remember, cut staff are not going to be in the mood to be doing you any favors or signing any documents.  So, whatever you need them to sign at the time of their exit, I would typically accompany that document with the offering of a pre-paid severance check, that won't be handed to them without the signed documents needed. 

Expect attrition/incentivize your remaining staff.  Regardless of how well you try to manage the situation, you are most certainly going to experience additional attrition from remaining employees quitting the company within a few months of cuts being made.  So, plan ahead for which employees are most critical to keep long term, and make sure they are properly motivated with additional incentives to stay.  And, even then, you still may need a back-up plan to quickly source replacement staff for key roles.  Hopefully, the more honest you treat your staff, the more honest they will treat you.

Treat cut employees fairly.  Remember that employees are human beings with emotions and mortgages to pay, not just a line item on your expense sheet.  So, if you do implement layoffs, make sure you treat your staff fairly.  That includes paying them at least 30 days of severance, to help minimize the pain and give them time to look for a new job.  And, make sure they know you will be a good reference for them, assisting them in any way you can in helping them find a new job. 

Beware the disgruntled employees.  Cut staff will certainly be upset.  So, if you can avoid it, cut staff should not stick around after they are cut (as that can be cancerous to the remaining staff and morale).  Their last day, should be cut day.  So, if you need any transition information from them (e.g., files, contacts, passwords), make sure you creatively get it before you make any cuts.  And, don't forget, cut employees may also be  good friends with the remaining employees and may try to stir up problems with the remaining staff after their departure.  And, remaining staff may also try to stir up problems on their own, between themselves, on behalf of their cut friends.  So, the better you can manage this process, the less casualties you will suffer on the back end.

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