How to Decide if It’s Time to Downsize

Many large companies seem to be downsizing their workforce recently in what appears to be a reaction to current economic difficulties. 

“In times like these, when there’s uncertainty in the market and we’re seeing high-profile layoffs at some of the most successful companies on the planet, the trends look concerning to smaller businesses,” says Monica McCoy, business strategist and CEO of Monica Motivates, which offers education and consulting services to women and underrepresented entrepreneurs.

But, she says, it’s important to not get caught up in the headlines because every company’s situation is unique and different.

“As a small-business owner, you need to take a deep dive into the specific opportunities and threats within your own organization and decide what’s the right course for you,” says McCoy, who has spent 15 years working in the corporate sector.

She notes many of the current layoffs at large companies are likely the result of overhiring. But those macrotrends aren't necessarily the full picture, says McCoy.

“Small-business owners need to look at the trends within their own organization and among their competitors," McCoy says.

Understand the Metrics

Savvy business owners regularly use planning and financial management tools such as business plans, forecasts, and balance sheets. McCoy notes keeping closer track of your numbers can be crucial. 

“Look at metrics such as your orders, sales contacts with customers, and cashflow,” she says. “Are you missing your targets?”

Questions to consider asking:

• Have orders slowed significantly?
• Did you experience unrealistic growth you don’t anticipate can be sustained, or are you seeing much smaller dips or seasonal slowdowns that are far less alarming?
• How different is current performance from prior performance on a longer timeline?

Look for Missed Opportunities

Before considering headcount reductions, you can look for other ways to cut costs, whether that’s tightening your travel budget or improving efficiency by automating manual processes. Then, you can expand your outreach to previous customers and also look for new revenue streams, McCoy recommends.

“The first conversations should be around how you can bring in different ways of generating revenues,” she says.

That’s exactly what TekRevol did. The six-year-old, California-based digital transformation company has grown 827% in the last three years and now has about 250 employees in several countries. Co-founder and chief marketing officer Abeer Raza says the biggest driver behind growth has been the need to cut costs. TekRevol turned this need into new revenue streams, spinning off and incubating several new companies.

“We had too many designers or too many people on the marketing side, for example, so we created a new design company and a new marketing service solution to sell those services ‘on the side,’” Raza says. “It was a way to convert costs into revenue and diversify.”

Approach Difficult Discussions with Empathy

Despite that strategy, TekRevol couldn’t avoid layoffs completely. Raza says downsizing typically involved those teams where growth had reached a ceiling. TekRevol gave affected employees several choices: leave with two months’ severance pay, consider a new role in another part of the company, or pursue new growth targets in their current area.

“The biggest thing we’ve learned with layoffs is that sitting on the decision and mulling it over to see if the situation changes is the worst thing you can do. [...] Make the decision fast and swift, and be as humane as possible and show empathy.”

“We found that the B and C players left asap, but about 20% – the A players – would stick around,” Raza says. “Then we’d look at them more granularly to see what initiatives they could fit in.”

Whatever decision you make, it's important to communicate transparently with employees, he notes.

“The biggest thing we’ve learned with layoffs is sitting on the decision and mulling it over to see if the situation changes is the worst thing you can do,” Raza says. “Make the decision fast and swift, and be as humane as possible and show empathy.”

McCoy adds leaders should be careful not to sugarcoat layoffs with euphemisms like “right-sizing” because it “could create a lack of trust and affect the ability of everyone to move on, recover, and rebuild.”

Leading with empathy means recognizing the human consequences of layoffs, McCoy notes. Things like engaging an outside firm for placement assistance can help provide a softer landing for those affected.

“Studies have shown experiencing a layoff ranks in the top 10 of most stressful life experiences,” she says. “Be as generous as you can with the severance package and other resources.”

Build Upon Skills to Avoid Layoffs

Dr. Ximena Hartsock, PhD, CEO and co-founder of apprenticeship solution company BuildWithin, says businesses can also “get ahead of downsizing” by hiring based not on credentials, but on a person’s current skills and ability to evolve with the job in the future. That’s how she’s prevented layoffs at the previous company she founded, which grew to several hundred employees before getting acquired.

Hartsock believes upskilling is a new trend businesses should embrace. A November 2022 survey of 1,005 American workers by staffing company Insights Global found fears of recession motivated 73% of respondents to focus on “upskilling – the process of learning and improving their skill sets or taking on additional projects at work – to help ensure they keep their job.” 

“Jobs today are no longer static – they’re always evolving because of technology and changes in your industry,” Hartsock says. “When you hire people for the skills they bring to the table and later upskill them, you increase employee loyalty and also save money because you’re not competing for talent like you were with a smaller pool.”

Raza agrees upskilling and retraining employees whose job may soon become redundant is a good way to improve your business’ productivity and avoid layoffs.

“Layoffs should be a ‘do-or-die,’ worst-case-scenario decision,” he says. “If you’re simply doing it to optimize profitability, then you’re thinking short-term rather than strategically.”

Photo: Getty Images