While no company ever wants to reduce its workforce, the decision to layoff employees is often a by-product of declining revenues and a necessary evil when looking to stem the tide of prolonged business losses. Restructuring is simply another fancy term for the eventuality that awaits companies confronted by a market contraction. The decision to proceed with layoffs is never an easy one. However, there are some simple rules and strategies your company can adopt to restructure its business without sacrificing its long-term future. So, given the difficulty of restructuring, what are some of these strategies and what should any company do when confronted with the uneasy task of having to reduce its workforce?
Defining the Conditions of a Market Decline
Before proceeding with those aforementioned strategies, it’s best to define the differences between a company’s business cycles and a sustained market decline. This relates to a company’s seasonal business volumes. For instance, is the decline in revenues a short-term affair, one that occurs regularly within the company’s business cycles? Or, is the decline prolonged, more severe and exhibiting a pattern never before encountered? In addition, what is the market itself saying and is there a growing trend among vendors, customers and the industry that the reduced business volumes are here to stay? These are just some of the questions that must be answered before any decision is made to layoff employees. Granted, for some companies, layoffs can become an annual occurrence.
These short-term layoffs are meant to offset the ups and downs in customer demand. However, for other companies, reducing the workforce implies substantial changes to the company’s structure. These companies see the reduction as a means to restructure the company for years to come. We’ll provide insight into five essential tools your company should use when looking to reduce its employee base.
1. Define Market Decline: While layoffs may seem like an eventuality of the current climate, it’s still important to define the current conditions in the market. There are essentially two reasons for this. The first is to validate the decision, while the second is to define the conditions under which similar circumstances should be handled. The focus should be to define whether this current downturn is simply a lull in customer demand, one that will be followed by an increase in business volumes, or something that is more permanent in nature.
- How does this decline compare to other business cycles?
- What is the duration of the decline?
- What is the perception within the market?
- Are vendors, customers and major market players, all saying that the downturn may be permanent and if so, for how long?
2. Protect Profit: While there are multiple views about the right and wrong way to manage a layoff, few would argue that the main purpose is to protect profit. In fact, the one substantive rule is to protect that profit at all costs. Avoid the temptation to cut your losses in half with the mindset that profit will return. Instead, make the cuts deep enough so that your enterprise can immediately return to profitability.
The idea is to get the layoffs over with and leave no lingering concerns about the company’s financial stability, be it among your managers, or the remaining employees. Imagine how impactful the message will be when the layoffs are performed once and you can provide a message to your workforce that the company is back to profitability. That is far more impactful than one where uncertainty abounds. In addition, don’t combine layoffs and salary reductions. The mindset following a salary reduction is that nobody warrants their salary. This is an opportunity to keep your best and brightest people. Don’t give them a reason to leave by reducing their take home pay.
The above video is from the post: Sample Back-End Rebate Excel Sheet for Customer Retention
3. Use a Balanced Approach: A balanced approach to the layoffs is an essential aspect of properly restructuring your business. You must find a balance between reducing labor costs amongst managers and employees. The wrong message is sent when only employees are laid off and vice-versa. The idea is to define the amount needed to return to profitability and use that sum to define those labor costs that must be eliminated. There are essentially two reasons for this.
The first is meant to show that no single worker is untouchable. The second is to show that serious consideration was taken when putting the list together. Again, layoffs are never easy, but focusing only on the highest salaries is no way to retain your best employees. After all, you’ll need them to move forward.
4. Retain Core Competencies: That aforementioned balanced approach must be structured around retaining your company’s core competencies. Look for employees who have demonstrated the ability to perform multiple business functions. Identify those employees who have demonstrated an unwillingness to adapt to a changing environment. A flexible workforce is essential. In addition, you must identify your company’s “nation builders”. These could be managers or employees who’ve put their own initiatives ahead of the company’s benefit.
A restructuring pushes companies to perform an honest assessment of their internal structure. For some, it can be a godsend, an opportunity to reduce overhead, while laying the foundation for growth. For others, it’s a chance to do away with cumbersome, repetitive internal processes, ones that don’t add any immediate value to the company’s operations.
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5. Define New Cost Structure: While this may seem rather self-explanatory, it really isn’t. Your company is guaranteed to have a lower cost structure. However, it’s essential that you take the time to define your company’s new profit contribution. This requires performing an entire profit contribution analysis around your company’s new fixed cost and variable cost structure. Use the following break even calculation to define your company’s new profit contribution.
The above graph is taken from Sample Break Even Excel Sheet for Small Businesses
Break Even = Fixed Costs / (Price – Variable Costs)
Fixed Costs: Your new fixed costs will include your company’s new salary structure, the costs of rent, insurance, and any other expenses that are covered monthly and are seen as vital to your operations.
Variable Costs: Your variable costs include those costs that fluctuate with the number of units sold or manufactured. Since labor is an important aspect of manufacturing, any changes to your production labor will have a direct impact on your variable cost structure. Raw material may not change, but labor costs definitely will.
Profit Contribution: The profit contribution portion of the analysis includes the price of your product minus your newly established variable cost structure. That new profit contribution must be monitored going forward in order to ensure that your company is again on a path to profitability.
Reducing a company’s workforce is by no means easy. The choices any company makes will surely reverberate for years to come, and that is ultimately the point. The idea is to perform the layoff once, restore profit immediately and establish a new corporate structure. Don’t go down the road of multiple layoffs. Don’t base your decisions on false promises, or hopes that business volumes will miraculously and suddenly return. Instead, base your decisions on your current revenue streams. If they increase, then your profit increases as well, and you’ll be in a much better position to rehire in the future, if need be. Again, make sure you structure your approach on immediately reclaiming profit. Base your decision on existing sales volumes and confirmed backlogs.
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