How to Downsize a Business Effectively

No business owner likes the idea of downsizing, but sometimes, it’s a practical requirement to keep the business running. If there’s been a severe downturn in your industry, or you’re in the midst of an economic recession, your business may be operating at a loss. If you’ve already tried other strategies, your last resort may be permanently reducing the size of your workforce so you can reduce costs and operate more efficiently.

If done right, downsizing can help you get through the tough period and rebuild from a more stable foundation. If done wrong, downsizing can ruin you.

So how do you downsize a business effectively?

The Balancing Act

Effective downsizing is a careful balancing act. You need to be able to reduce costs and streamline efficiency without doing more damage in the process. If you let the wrong employees go, you could end up sacrificing a major chunk of your existing productivity. If you manage downsizing the wrong way, morale could plummet, jeopardizing your entire operation. And on the other side of the equation, if you don’t downsize enough, you could end up hemorrhaging money and making your financial situation even worse.

Key Strategies for Downsizing a Business

These are some of the most important strategies for downsizing your business:

· Look for alternatives. Before you resort to layoffs, consider looking for alternative solutions. You’ve likely already tried a handful of business strategy adjustments, but have you considered mergers and acquisitions? Merging with another company and navigating this difficult terrain with greater organizational support could be the right move for your business.

· Prioritize legal requirements. No matter what, it’s important to prioritize legal requirements. You’ll need to remain in legal compliance throughout the downsizing phase if you want to avoid costly and time-consuming legal action in the future. Laws vary by location, so work with your legal team to ensure compliance.

· Be transparent. As much as possible, remain transparent with your team. Offering transparency builds trust and helps to maintain the respect of your employees. Explain the situation that your company is in, don’t try to make excuses, and never lie to your employees. You’ll be having many difficult conversations throughout this time, but it’s important to remain open and honest.

· Ask for volunteers. Before you start making the hard decisions, consider asking for volunteers. Some of your employees may be near retirement or may have been thinking about leaving the company for weeks or months; this could be the perfect opportunity for them to leave.

· Remain respectful. Throughout the process, always remain respectful of your employees, including the ones you’re forced to lay off. Tensions are going to be high no matter what you do, but you can ease employee pain and make downsizing easier on yourself by remaining polite, respectful, and understanding at all times.

· Focus on morale. Employee morale will almost certainly drop in the face of a round of downsizing. But you can mitigate that drop by supporting your employees however you can. Honest discussions, teambuilding events, and greater flexibility can all help here.

With these strategies in mind, you’ll also need to brainstorm selection criteria for layoffs. These are some of the most important factors to consider:

· Departmental performance. Are there any departments in your organization that simply aren’t performing well? For example, has the sales department seen dropping sales despite greater numbers of people and greater access to resources? If so, your underperforming departments should be your top priority. Beyond that, look for departments that aren’t critical to your organization, such as marketing and advertising, when making cuts.

· Individual performance. You’ll also need to think about individual performance within those departments. Your sales department might be struggling overall, but there are probably a handful of individuals responsible for skewing the performance in one direction.

· Skills, knowledge, and experience. Generally, you’ll want to preserve people with disproportionate skills, knowledge, and experience on the job. These are your most valuable employees, and the ones responsible for keeping your business afloat during these trying times. Consider selectively weeding out people with minimal skills, knowledge, and experience in your organization.

· Last in, first out. One of the most common approaches to the standard downsizing formula is a “last in, first out” model. In this approach, you’ll issue layoffs based on seniority. The people you hired most recently are the first ones on the chopping block, other people who have been with your organization the longest are more likely to stick around. This isn’t a perfect strategy, since it doesn’t take performance, knowledge, skills, or talent into account. But it’s a straightforward and widely accepted one.

Your business may be in a bad position currently, but it doesn’t have to stay there. With effective downsizing tactics, you can sharply reduce your operating costs and stabilize the foundation of your organization.