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July 05, 2006

The Art of the Layoff

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We’re in a bubble again. It’s not as frothy as last time, but hallelujah, this time we know what to do, right? One good thing about the dotcom implosion in 2000 is that we got lots of practice laying people off, and I’m afraid that this valuable knowledge may get lost.

If you are scoffing (“Guy’s clueless: We’ll never downsize because we’re growing so fast.”), then you’re my intended reader.

  1. Take responsibility. Ultimately, it is the CEO’s decision to make the cuts, so don’t blame it on the board of directors, market conditions, competition, or whatever else. In effect, she should simply say, “I’m the orifice. I made the decision. This is what we’re going to do.” If you don’t have the courage to do this, don’t be a CEO. Now, more than ever, the company will need a leader, and leaders accept responsibility.

  2. Cut deep and cut once. Management usually believes that things will get better soon, so it cuts the smallest number of people in anticipation of a miracle. Most of the time the miracle doesn’t materialize, and the company ends up making multiple cuts.

    Given the choice, you should cut too deeply and risk the high-quality problem of having to rehire. If nothing else, it enables you to declare victory: “We’ve turned things around and we’re hiring again.” By contrast, multiple cuts are terrible for the morale of the employees who have not been laid off.

  3. Move fast. One hour after your management team discusses the need to layoff employees, the entire company will know that something is happening. If you think you need to layoff people, then do so because it’s unlikely that a miracle will happen. Once people “know” a layoff is coming, productivity drops like a rock. You’re either laying people off or you’re not—you should avoid the state of “considering” a layoff.

  4. Clean house. Painful as it may be, a layoff is a good time to terminate marginal employees. It’s good for the company because it can take care of many personnel issues at once without having to differentiate between people who aren’t performing and positions that you’re eliminating. It’s good for the marginal employee because he’s not tainted with getting fired. Finally, it’s good for the employees who remain because they can see that you have a clue about who’s performing and who isn’t—assuming you’re not clueless in making decisions.

  5. Whack “Freddy.” Most executive have hired a friend, a friend of a friend, or a relative as a favor. When a layoff happens, all the employees will be looking to see what happens to “Freddy.” “Did he survive the cut or did he go? Is it cronyism or competence that counts at the company?” It should be true that Fred is dead.

  6. Share the pain. When people around you are losing their jobs, you can share the pain too. Take a smaller office. Turn in the company car. Reassign your personal assistant to a revenue generating position. Fly coach. Stay in motels. Sell the box tickets to the ball game. Give your thirty-inch, flat-panel display to a programmer who could use it to debug faster. Do something, however symbolic.

  7. Show consistency. I cannot understand how companies can claim that they have to cut costs and then provide severance packages of six months to a year of salary. You would think that if they wanted to conserve cash, they’d give tiny severance packages. Typically, there are three lines of reasoning for generous severance packages:

    • Cutting headcount, even with severance packages, is cheaper than keeping the employee around indefinitely, and we don’t want any lawsuits.

    • We have lots of cash, so our balance sheet is strong, but we need to cut heads to make our profit and loss statement look better.

    • Wall Street (or your investors) is expecting dramatic actions, so we need to do this to show the analysts that we’ve got what it takes to be a leader.

    None of these reasons makes sense to me. If you need to do a layoff to cut costs (and conserve cash), then provide minimal severance packages, cut costs as much as you can, conserve as much cash as you can. If nothing else, it’s a consistent story.

  8. Don’t ask for pity. Sometimes managers go to great lengths to show the person they’re laying off (or firing) how hard it is on them. This reminds me of the old definition of chutzpah: a boy murders his parents and then asks the court for leniency because he’s an orphan. The person who suffers is the one being terminated, not the manager.

  9. Provide support. The odds are the people getting laid off aren’t “at fault.” More likely, it was the fault of top management—the same top management with golden parachutes. Hence, you have a moral obligation to provide services like job counseling, resume writing assistance, and job search help. There are firms that specialize in helping employees during “transitions,” so use them.

  10. Don’t let people self select. We had a joke at Apple during the dark days of the late eighties that went like this: We should announce that employees who want to quit should come to a big meeting. Those who wanted to stay at the company should not attend. Then we would let the people go who didn’t attend the meeting and keep the ones who wanted to quit—because they were smart enough to know that we were in bad shape or that they had better opportunities elsewhere.

    The point is that if you let people choose to get laid off or retire, you might lose your best people. Deciding who to layoff should be a proactive decision: Select the go-forward team to ensure that you never have to lay people off again. You should not leave this to chance.

  11. Show people the door. With few exceptions, all you should do is let people finish the day—maybe the week. (My theory is that Friday is the best day to do a layoff because it lets people have a weekend to decompress.) Showing people the door seems inhumane, but it’s better for both the people leaving and the people remaining.

  12. Move forward. Let people say goodbye and then get going. This is when leadership counts because any yoyo can run the show in good times. It’s bad times when you separate the men from the boys and the women from the girls.

    After the layoff, this is what the remaining employees will be wondering about:

    • Guilt: “Why did I survive the cut and my colleagues didn’t?”

    • Future of my job: “Will I survive the next round of cuts if there are more cuts?”

    • Future of the company: “Will the company survive at all?”

    So you need to set, or re-emphasize, goals, explain what everyone needs to do to get there, and get going because the best way to move beyond a layoff is to get back to work.

  13. Circulate with the troops. You might want to retreat to your office, turn off the phones, stop answering emails, and avoid everyone. This would be the worst actions to take. This is the time for you to motivate by walking around. Employees need to see you, talk to you, and seek your help and advice. They don’t want to think their leader is cowering in some foxhole. The brave face that you put on may be a charade, but it’s an important charade.


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Comments

I have always had mixed feelings on layoffs. I have survived a few in my time and at some point, my luck will run out. That said, layoffs, in my experience, come into the following categories

1a. Cost Cutting - you got big too quickly. This is probably the one that you are refering to here. Downsizing in such a scenario is something that, if done well, is a prudent way to do things, right the ship and move on

1b. Cost Cutting - making the numbers work. Too many companies will trim people (note that its not always excess fat) with the shortsighted idea that once the costs are down, growth will follow. I have yet to see sustainable growth return with this option in all the layoffs I have seen around my industry.

2. It just ain't our day - Companies get a bad FDA ruling. Nothing you can really do about it. Drastic cuts are about the only way forward for many companies. Some use it to their advantage. They go back to the drawing board, pull up their socks and jump onto the next challenge with a smaller, motivated staff. The results can be very good. Others mismanage the downsizing, treat it like the end of the world and never recover

3. Bad management - I agree with some here. If consistently bad management necessitates downsizing, the buck stops at the top. The leadership must take responsibility.

One more thing: Don't delegate this job more than necessary. If you can meet every single laid off employee and tell them personally, do it. Only when that's impossible should you let someone else do it.

To have to tell people is a lousy job, and you do not want your staff to think you're a weasel as well as an orifice. One of them is bad enough.

lot of good points especially the one about cut once and cut deep. However, in our litigous times it pays to have a good employment lawyer and to be and to have been consistent in your policies in regards to layoffs/redundancies and outright dismissals for cause. if you have operations outside the US then be prepared for the complexities of that situation as well - especially in locales where the labor laws will force you to pay more severance (if you are lucky) than your US employees. And also being un-PC, you will have to make EEOC calculations whether you like it or not. sorry but that is the way of this world.

Great post Guy, nice to see that you still have some "Art of the ..."-lists up your sleeve.

Some time ago I read the story of a Belgian CEO in a Silicon Valley company. When bad times came he reduced salaries instead of laying people off, starting with a big cut in his own salary. When the market geared up again he still had his people and was able to respond faster and win market share.

I'd add that management should be cut in proportion to other cuts. During the last bursting bubble, one of the things that I noticed in the company that I worked for at the time was that they did everything possible to protect middle management and above and consistently only cut the do-ers in the organisation. And then sat around like jerks wondering why their overhead was so high. There was no consistency and absolutely no fairness.

This may have come from working for a larger company-- the order came down from HQ to cut, and the only thing that they were measured on was how many heads went away-- nothing more.

Large packages to executives, yes. Giving the average employee a chance to get back on their feet, seems like a compasionate move to me.

Maybe it's too idealistic, but I believe that if you invest in people, even those you're letting go, things will work out for the best. If you "give the shaft" to your former employees, they'll take every opportunity to bad mouth the company, and you can forget about hiring any of them back in a rebound (assuming they're not part of a house cleaning).

I agree with ann, the better way to go is probably consistency over generosity. Giving everyone a fair deal may still leave some hard feelings, but is easier to defend in the public eye.

You're probably right about the media Guy. I was thinking more about the "small-town-everybody-working-for-a-single-employer" type of setup, that probably doesn't happen much anymore though.

Love the discussion on this site...

To those saying the CEO should fire themselves if the company needs to do some cuts - it really depends on the situation.

If it was something outside of the control of the CEO that lead to things going downhill, that is the worst thing that can be done - you don't throw the captain overboard because the wind changed direction... nobody will be left to steer the ship.

If the reasons for the downsizing was due to executive level incompetence, by all means, off with their heads - and no severance should be given nor expected.

I must say though, firing should only be done by the CEO, face to face, privately with the employee in their office – the people on the chopping block have invested time and energy towards your dreams, the least you can do is respect what they are and will be going through. It is a traumatic experience no matter how you do it most of the time.

I have fired people who worked for me in the past due to changing market conditions... it's very hard to do but must sometimes be done... for me it was equivalent to choosing to cut a foot off or hoping the gangrene will go away on its own (which it rarely does).

Jon
Founder of myfoodcount.com
Free & Anonymous Health Monitoring
life: jon.legendarylife.com

Hi GK, how do you know that we're in a bubble again? Just for my information what's creating this bubble this time around.

******************

If you could see some of the deals that are coming in these days, you'd understand why I think we're in a bubble again!

What's creating it? The innate human desire to innovate. It's just that not all innovation will work out.

Guy

Guy - I really need your help with number 7. I agree that consistency is important - but I consider consistency BETWEEN severence packages to be the issue. I have never been laid off (just lucky I guess), but I've watched many where "the little guys" get nothing in the way of severence and the executives walk off with a year's salary! As long as the package parameters, whatever they are, apply to everyone - I can swallow this. If they don't, I really can't.

Other than that - this list is brilliant!

************

Ann,

Yes, there's that issue of consistency too. The consistency I'm addressing is where a company says it has to reduce costs but then spends $500 million in severance. This, I just don't get.

Consistency between packages, as you point out, is very important too.

Thanks!

Guy

IMHO...

1. People want to know reasons too.

2. Cutting once might not be financially optimal (although I agree that it is emotionally optimal for the remaining workers). Has anyone tried to quantify the cost of declining employee morale vs. rehiring cost? Can keeping others on make them work harder (the fear motivator)? Anyway, management can never guarantee that there won't be more layoffs, due to e.g. the reasons in your point #1.

7. Another reason: the employees are unionized.

8. Managers can suffer too, when they are forced to layoff below critical mass by higher-ups, sometimes at non-optimal times wrt project schedules.

10. Back in 1992 I was allowed to choose between a generous package or staying behind 'til the next layoff wave, with a possibly smaller package... everyone knew the company was going under anyway, so the choice was obvious. I appreciated being given the choice. Under such circumstances, good people will probably leave anyway.
A similar situation occured recently, and because I believed in the company I chose to stay, and survived.

I disagree that letting employees go on a Friday is a good thing. You want that employee to have access to professional and legal assistance right away and not have to stew over the weekend. Many will want to get the word out, seek legal advice, financial advice and personal advice while it's available during weekdays from a professional. Having to endure a weekend of pain won't let them decompress IMHO.

If CEOs had any integrity, when they called for layoffs, they'd let themselves go, too.

After all, if you're going to take responsibility, then you need to take the ultimate responsibility. It doesn't make any sense to fire a whole squad of people, say you're "responsible," and retain your job. It's your fault, anyway.

I've been through one of these as a dot-com employee, although I survived the layoff. If you're a CEO in the situation with a startup where you have to do layoffs, it's because you, the CEO, blew it. If you didn't take money or a customer you could have, and the troops know it, and then you have to do layoffs because the VC can't give you more money, it's all on you. If you don't have a plan to pay for your employees a year or two out, you're the dumb-shitake. My recommendation would be to just quit and let the investors appoint a new CEO.

The personal disruption of a layoff is huge. At a startup, if you have good people, some more than likely came from much more secure jobs. Some sold houses and moved to new communities or countries. Often times, they follow people they trust to your company. These might not be your "Freds", but other people's "Freds". When you as a CEO lay them off, you have also clobbered the credibility of the people who recruited them, and they will hate you for that.

As for if you get canned in a layoff. Make a beeline for a direct competitor. Most non-competes, if you were suckered into signing one, have clauses that require the employer to pay you if terminated to not work for a competitor for a particular period of time. Discuss the non-compete with the competitor, get an offer, and hit your old employer up for free money. Be part of the solution. The more people who get even, the less this kind of crap bred from incompetent management will happen. VCs will be more conservative about the responsibilities of their portfolio firms going on hiring binges. Also, sign nothing (severance agreement, etc.) until you can have a lawyer review it. A company that pressures you into signing such things immediately is digging a legal hole to China. If they have to cut people, they are in no financial position to bully the people they have to cut.

I really disagree with the second paragraph of (2). If you do layoffs, plan to not hire again for at least 6 months. Any new hire will be seen as a "trade" from any arbitrary layed off employee. If my dot-com's layoff situation, the new hires came in less than a month after the layoff. Turns out they were worthless dorks who spun a story of bringing customers and revenue to the company. Imagine your worst customer support recurring nightmare suddenly having desks in your office. Many of us saw them as a trade for two very valuable co-workers.

I am reminded of the old Japanese business executive tradition of committing suicide when he screws up and has to lay people off. It's pretty harsh, but given a one-or-the-choice between that and (12) plus (13) above, I think the Japanese way probably serves companies better. The lousy leader leaves.

Oh yeah, five years after a layoff I survived, it still fills my throat with bile ;-).

I'd add the importance of demonstrating a clean logic behind the layoff decision. In 99% of cases it's to save money. Then the management should explain how the cut will save the company, compare current burning rate to the expected one and convince that it makes sense. When there are 10 VP in California it makes a little sense to fire 3 developers in India. A layoff is done for the company (read - for the people that left, not those that leave). Nothing undermines trust as BS instead of clear explanations of any decisions, especially such a critical as a layoff.

Another thing is consistency. Once a decision is declared the management has to go the whole nine yards and make it done as it was announced. I know a case when a manager was fired (in a wide range of other employees) and it was publicly announced but a few days later the manager was re-hired because she had some secret tricks to influence the boss. The trust to the management was lost forever.

Unless the CEO is he techno wizard founder their head should be put on a pike by the front door or primary parking lot entrance as testament to the risks of bad management and proof that the best person to lay-off is the lame ass, suit with manicured fingernails who hasn't done a whit of real work since he last parked cars at Il' Fornai.
Salaries and most of all exec perks are so out of kilter in the Valley that if you're in media, it's hard not to write about it.
It's always been oddly interesting to me that Silicon Valley is one of the few locales: where the press forgets that its job is to report on the parade, not be the drum major of massed marching bands; unlike most industries when someone screws up royally and cost a company millions of dollars they're shown the highway leading to their next position selling time shares in Squaw Valley. howver in The Valley they and their bad management skills are constantly recycled.
Darwinism needs to be put back in place in the Valley. Open up the gene pool to new life and put the losers on the path to extinction. Our brothers' and sisters' retirement funds (which are much of foundation for risk capital) will be better for it.

Best,
Jim Forbes
curmedgeonly and comfortably retired in Escondido, CA.

**********************

Jim,

Tell us how you really feel! :-) I fixed two typos for you.

Guy

What about the PR involved in doing layoffs. It hurts your image as a company. While I agree that from a financial perspective giving small severance packages is the right thing to do, you have to keep in mind that you're seriously altering the lives of the people you're letting go. The media certainly will.

*******************

Are you saying that you think the media will be kinder to you if you give larger severance packages? I disagree. The media is going to do what it's going to do. The size of the severance package has little to do with its reaction. In fact, large packages to executives will exacerbate the situation.

Guy

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