Sometimes it’s helpful to remember that the technology industry is cyclical. There are times of tremendous growth, when investors are flush with cash, and other times when buyers cut their budgets and investors wait on the sidelines. These cycles are hard to predict, but if you’ve only seen the boom years of incredible growth and ever increasing funding multiples, it can be hard to readjust.
A lot of companies that were funded at peak valuations in recent years will face a reckoning. This is not a temporary change that you can wait out, but more of a fundamental shift to establish a new normal. Not surprisingly, many companies that expanded their hiring and their marketing spend during the growth period are now facing a cost structure that is completely out of proportion with their revenue. And no matter how much the current investors believe in the strategy or the team, few are willing to fund deepening losses, and certainly not at peak prices.
Cut Your Burn Sooner To Create More Runway
Most tech companies will need to drastically reduce their burn in. Many already have. In some cases the cuts will reduce bloat and improve efficiency. In other cases, it is a matter of survival. This is true both for large public companies and even more so for private venture-backed startups.
As soon you as start wondering if you should do a layoff, it’s probably the time. Or more objectively speaking, if you are missing your quarterly targets by more than 20% for two quarters in a row, and have not adjusted your costs, it’s time to take action. Sadly, I have seen companies miss for three or four quarters before doing anything beyond worrying. Sometimes they are hoping for a few big deals to save them, a new product launch, or, worse, they are afraid of “how it looks” to do a layoff. This is the wrong thing to worry about. Don’t worry about how things look, worry about how things are.
Unfortunately, when you are burning money, the longer you wait to make cuts, the bigger the hole you are digging and the worse the situation will be when you finally deal with it.
If you are still uncertain, maybe it’s just been one quarter of weak results, then you should at least stop additional hiring and curtail marketing programs or other spending. Whether you call it a hiring pause or a freeze, doesn’t matter. The important thing is to not make the situation worse. You may wish to distinguish between a few strategic roles that must be filled (a new VP of Sales, for example) and routine hires for future expansion. If you think there is a risk of having to do a layoff within the next two quarters, remember, every additional hire you make will mean one more person to be cut later. As painful as it is to stop hiring, it is nothing compared to the pain requiring a larger layoff. So if a role is strategic and helps you grow revenue, keep recruiting. Otherwise, be cautious and put it on hold.
Once it’s clear that spending is out of line with planned revenues, you need to sit down and plan for the reduction. For many tech companies, headcount is the biggest cost factor, so doing a layoff will be necessary to reduce your spending. Even though it’s difficult, once you emerge on the other side, you will often find there is an increased focus in the company.
Better To Cut Deep
Most companies do a lousy job of layoffs. Make sure you cut enough cost that it substantially improves your trajectory. A cut of 5% or 10% is unlikely to reshape your culture and often results in everyone attempting to do the same amount of work, but a little worse. And then six months later, you need to cut again.
Better to cut deeper, a minimum of 15% and be clear about what projects are no longer going forward. Also, make sure you understand the rationale behind the decisions in each department and that the decisions across adjacent organizations make sense. For example, if you’re pursuing a larger Enterprise strategy (as opposed to small business, or download-driven product-led growth) then you want to make sure that every department is able to support that focus and is not holding onto teams or tactics that are no longer the priority.
In general, layoffs should be done quickly, within days or weeks of discovering the need. While you don’t want to spook the employees, you will want to ensure that there is participation from executives and director level managers so that the people you want to keep are able to weigh in and shape the organization. If the executives and leaders are not part of the process, it will be likely that the decisions are sub-optimal and you’ll have a lot of last minute scrambling as you discover that some people on the list are actually essential to your operations. Or worse, you’ll find out only after the fact.
Typically, in the months after a layoff, you can expect a wave of further attrition (typically 3-4%) as nervous employees look elsewhere. If there are key employees you need to retain, make sure you are talking to them. Understand their concerns and be prepared to address them. If you’re asking people to step up to bigger roles, make sure you are rewarding them.
Focus On The Top Initiatives
Narrowing the focus of the company is the key to an effective layoff. You must look carefully at all the initiatives across the company and determine the two or three most important things to focus on. Everything else can be sacrificed. Most venture-backed startup companies have a lot of “Type A” leaders who want to do many things. There are new product initiatives, expansion into new vertical markets or geographies, new reporting or analytics systems, new branding initiatives, etc.
Doing a layoff requires making a clear distinction between the vital few initiatives that define the future of the company versus the optional programs. It’s not that these initiatives won’t be useful down the line, but if they are not critical for right now, put them on hold. They might be things you can re-start six or twelve months later if business picks up. Be careful of worrying about sunk costs on such projects. Don’t let the investments of the past fool you into continuing to invest in low priority initiatives.
You must also be clear with the management team and across the company on the few top priorities. Everyone must understand what the company is saying yes to and what it is saying no to. One of the worst feelings for employees is if they feel that there’s a reduction in staff, but the workload is going to stay constant. Instead you must be very clear about what things the company will no longer do.
Ideally, your reduction in staffing is related to specific projects or initiatives that are being cancelled, rather than spread across the board. For example, if there are certain product lines, marketing investments, or sales programs that have not yielded great results, you should cull them. At the very least, you should be able to identify the people and budgets associated with such efforts and rank them according to their net impact. In this effort, you must be ruthless in assessing the actual results, not what you hope they might achieve some time in the future.
Keep in mind the proverb: It’s hard to get the pigs to slaughter themselves. No manager or employee is likely to come forward and say that their team should be eliminated. If there are excellent people working on sub-optimal projects you may be able to re-allocate them to higher priority areas. But you can’t keep them doing unimportant work.
As you examine the organization, look for where it may have become top heavy with too many management layers. If you have managers with only 3-4 direct reports, consider combining related functions and eliminating management roles. Good managers should be able to lead groups of 8 people and slightly more for short periods of time.
Also take a hard look at staff roles, meaning those outside of the main line areas of product, engineering, sales, marketing and customer service. Staff roles, such as those in human resources, data analytics, operations, sometimes grow as the company staffs up in general. While no headcount reduction is without pain, staff roles can sometimes be reduced without harming revenue.
When you go through a layoff the idea is to cut away at functions that are “nice to have” so that you can focus on the absolute core capabilities going forward. Any project or team that is not critical to the next stage of the company should be considered for reduction.
Your goal is to re-emerge with greater focus on the two or three essential elements of your strategy. Your executive team must understand and be in sync about these priorities. In turn, you want them to pick the most essential leaders and highest performers to be part of the go-forward strategy. Any leaders who are not up to the task, anyone whose contribution is uncertain should probably be let go at the same time.
Treat People With Respect
While there is often a cold brutality in working through the layoff list, assessing costs, and so on, remember that every employee who is being cut is a person with a career, a family and a life outside of work. Treat people as best as you can. Give them a decent severance. Let them say their goodbyes to their colleagues. If you can help introduce them to other companies or provide references that will be appreciated. A layoff is always difficult, but if you treat people with respect on the way out, they can leave with their head held high and move onto something better.
Has your company done layoffs? How was it handled? What was done well? What could have been better? Post a comment and share your observations.