Know why you must cut costs, envision the company's future, set a cost reduction target, keep those who are essential to your future, and conduct layoffs with respect.
Business leaders these days are under increasing pressure to reduce costs. Why are costs suddenly too high? Here are some of the reasons:
Inflation is driving up the costs of raw materials and labor.
Higher interest rates are increasing the cost of borrowing. Fears of recession and customer budget cuts are slashing demand. Venture capital firms are refusing to fund their portfolio companies' operating losses. Companies are responding to this pressure by managing out their people, according to LinkedIn. Since many CEOs have little experience with layoffs, there is a danger that they will make mistakes that could endanger the company's future, such as:
Cutting highly-paid people who are making a significant contribution to the company's future.
Dismissing people who the CEO does not like -- regardless of how much value they bring to customers and other employees.
Slashing people who work on fast-growing new products in favor of those supporting declining core products.
Mistreating laid off employees during and after the process of managing them out of the company.
To do layoffs in a way that minimizes the pain they cause and that creates a brighter future for your company, business leaders should follow these five principles.
1. Know why your company must cut staff.
Cutting staff is painful for business leaders and many people who lose their jobs. Before embarking on this unpleasant path, have a very clear reason -- possibly selecting from the list above -- of why the benefits of layoffs will exceed the costs. Make sure you can succinctly communicate the reason for the layoffs to everyone who will be affected.
2. Envision your company's next five years.
Companies should resist the immediate urge to set a target for the number of people to cut and to make a list of people to let go.
Instead, business leaders should identify powerful growth tailwinds and envision which new products they will build to win market share over the next five years. Lacking such a vision before cost cutting, your company could initiate a doom loop in which a string of disappointing quarters leads to more layoffs.
3. Evaluate the skills needed to realize that vision.
With a clear picture of its future, leaders should identify the skills that the company will need to realize their vision.
More specifically, leaders should articulate the specific talents -- for example, in product development, marketing, sales -- that will be essential for designing, building, and selling new products that can benefit from the market tailwinds.
Next, leaders ought to assess the company's current organization through the lens of these skills. Specifically, leaders should ask:
Which of our current people are critical for realizing the company's five-year vision?
Who in our organization is needed to keep our current business running effectively?
Which skills must we hire in order to realize this vision?
Which people are not essential to realizing our future vision or keeping the business running effectively?
4. Set a cost reduction target.
With the answers to these questions in mind, this is the time for business leaders to set a specific cost reduction target.
If a key reason for cost cutting is to lower your company's cash burn rate, you should set the cost reduction target based on how long you estimate the company will need to run without raising new cash from investors.
Before cutting jobs, business leaders should consider actions they might take -- such as streamlining inefficient processes or negotiating lower input costs from suppliers -- to meet their cost reduction target.
If those measures fall short, leaders should make a list of non-essential people and estimate how much cost savings the company might achieve by managing them out of the company.
5. Respectfully manage people out.
Finally, leaders should manage people out of the company in a respectful manner. Here are some key process steps to follow:
Call an all-company meeting and explain why the company must cut costs.
Schedule immediate meetings in which managers communicate the severance package and other support the company will provide to those who are being laid off.
At the same time, managers must meet with the people you want to keep, tell them how important they are to the company's future, and that the company has no plans for further layoffs.
Communicate the cost cutting actions with customers, suppliers, investors, and the general public.
Layoffs are painful for all involved. Business leaders should adopt these five principles to minimize the pain layoffs cause while helping to secure the company's long-term success.
This article was originally published by The Inc.