How and When to Do Layoffs


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.

How Much Data Is Too Much?

Dashboard 2 car

We live in a world that is rich in analytic software and fabulously scalable databases that let you pivot, ply and bend trend lines in fantastically interesting ways. Which is great, because it enables companies to have much more comprehensive data than ever before.

However, the multitudes of data also provide ample distraction and conflicting indicators for those who are disinclined to make decisions.

To be sure, there are a few key metrics in every department that you should focus on. These include measuring Annual Recurring Revenue (ARR), burn rate, cash runway, the cost of acquiring customers, average deal size, net expansion and churn, customer satisfaction (typically the Net Promoter Score or NPS), uptime for a cloud service and so on. Even the basics are a lot to measure.

And if keeping track of these core metrics is good, maybe tracking more metrics is even better, right? In my experience, tracking metrics are like drinking shots of espresso. A little goes a long way. Too much, and you can easily introduce jitter into the system.

The problem with measuring too many metrics, is you lose focus on what is the most important metric. For example if you’re measuring the efficiency of your customer service team do you track Net Promoter Score? Or the customer satisfaction rating of each support ticket? Or the churn across customers? Or the number of support incidents per customer? Or the time it takes to resolve each incident? Or how many touch points it takes to resolve? And should that be the average or the median? Should you categorize it by customer segment? Or by subscription plan? If you measure all of these and some are trending up and some are trending down, what does that tell you about your business? And more importantly, what should you do about it?

In short, the more metrics you measure, the more likely you are to get conflicting views about how you’re doing. And when teams have conflicting metrics, they will naturally emphasize the metrics that are improving and downplay or ignore those that are going in the wrong direction.

At the executive level, it’s better to focus on a small set of metrics. Focus on the basics, like growing ARR, reducing churn and increasing uptime and customer satisfaction. Make your product easier to use, easier to buy and get customer input when you build your product roadmap.

At the departmental level, there might be a need for further drill down to get more operational detail. For example, in Marketing, it makes sense to measure the results of specific campaigns and the resulting pipeline, marketing qualified leads (MQLs), sales accepted leads (SALs) and so on.

But be careful of creating a culture where analysis takes precedence over action. Metrics and analysis are a means to an end, not an end in itself. If the data does not drive action, what is it for?

I was on the board of a company that was in the analytics space itself. They had grown to over a hundred million an annual recurring revenue (ARR) and the CEO was an absolute wizard when it came to analyzing the performance of the company. They used their own software to analyze leads, customers, sentiment, forecast, projections, churn, you name it. But they rarely hit their quarterly sales targets. I remember one board meeting where the head of Sales presented the results. He had missed his target by 60%. But he made a point of saying that his forecast of the miss was dead accurate. This is not the kind of culture you want to create.

Boards and investors often put a premium on predictability of the business. The holy grail for venture investors is to take a high growth company public and that requires a high degree of revenue predictability to gain confidence in the public markets. However, for startups, and especially those under $50 million in revenue, it is expected that there will be a high degree of volatility in the business. Typically, in the early stages of a company, the number of large revenue deals (%100k or more) is extremely lumpy. Some quarters you might get several deals and sometimes there may be none at all. That doesn’t mean the business is bad, it just means it has not yet achieved sufficient volume to be predictable. Or said differently, if you have a run rate of 10 $100k or larger deals per quarter, one or two slipping can be managed. If you only get one or two and one or both slip, that’s hard to make up.

Be careful in your quest to make the business predictable you are not over-indexing on analytics at the expense of taking action. After all, if the reporting of metrics does not result in new insights and action items, why are you collecting them?

What’s the essential data in your organization? What do you measure every week? What actions result from this data? Let me know by posting a comment below.

Hiring A VP

Lego business-3948314_1280

Hiring senior people into a company can help accelerate your growth. But done poorly it can also change your startup culture in ways that can set you back many months. And remember, no matter what your board or investors have told you about how much they like certain candidates or what to look for, at the end of the day, it is the CEO’s responsibility to build the right team. So no matter what pedigree a candidate has, no matter how highly recommended, it is always your responsibility. If you are not comfortable with a candidate, don’t hire them.

First, a word of caution when hiring senior leaders. Everyone who has put in a decade or more into their profession and risen through the ranks is going to look pretty good on paper and sound great in an interview. Your job when you interview them isn’t to trip them up, but you will need to probe to understand in some detail what they have done and what others did in the organization. Sure Sally Sales may have grown the revenues of an admired company from $10m annually to $200m over several years, but was she the driver or a passenger? What were the specific initiatives she ran that led to the growth? What were patterns she uncovered that identified more profitable customer segments? How did she evolve pricing and packaging to improve upsells? What campaigns did she develop with Marketing? How did she train her team to compete against larger, more established competitors?

Your job is to try to understand what the candidate can do for you. I have found the best way to do this is to drill into examples of the work they did and then share the hard problems you’re dealing with in your own company. You want to understand their thought process. It doesn’t mean that everything they say will be directly applicable to your business, but you want to understand how they think and what they can bring to the table.

If a candidate declines to weigh in on questions about your business because of a lack of information, gently ask them again. If they still demur, do not hire them. In a startup, you never have perfect information and executives who always want more data, more information, more time are unlikely to change their behavior once they are inside the company.

If you don’t get two or three good ideas when interviewing a senior executive, don’t expect to get any once they’ve started. Also, be careful of any execs who “have a playbook” because sometimes it means they have one style and one way to operate and if your company is a bit different, well, they’re going to keep using their same tried-and-true approach no matter what happens.

I think it’s good to share real problems that you are facing to see how candidates would approach these problems. After all, if you hire them, these and other problems will be what they need to work on. And since not every candidate will make it to the finish line, you might come away with a more diverse perspective on things.

I am always skeptical of big company executives who claim they want to work in a startup. Anyone who has spent six years or more inside a 3,000 person or larger company in unlikely to be able to operate in a startup without a massive budget, a big organization a slew of consultants, unless they joined the company when it was still small or through an acquisition. In general, large company executives operate as caretakers in existing steady-growth businesses. Which is fine if your goal is to rinse-and-repeat existing operations. But if you’re trying to innovate, get to product-market fit and launch new things, you need people who are flexible in their thinking and can get stuff done themselves.

It is unlikely that big company execs will be willing or able to roll up their sleeves in an environment that demands hands-on action, rapid decision making and focused execution. Worse still, they can bring big company process and politics that kill the momentum you need in a startup.

Finally, always check references personally. Do not delegate this to the recruiters. Ask about their impact, what projects they led, how they got along with others. And always ask the fundamental question: would you hire them again? If you get anything less than a glowing endorsement, keep looking.

Have you seen big company execs be effective in a startup? Let me know your thoughts by posting a comment below.

Build A Strong Middle Management

Managers backlit

One of the most important elements of scaling a business is you must develop a strong middle management layer. Often when a company first starts to expand, people are made managers somewhat haphazardly. Perhaps they are the least worst for the job, the most outspoken, the first hired, the tallest or some other random criteria. Sometimes people become managers without ever being told what that entails. Some figure it out. Many do not.

Yet, the middle management layer is the key to scaling a company. If you don’t have a solid front line management and second level directors, you are unlikely to build a high-performance culture, no matter how good your executive team is.

Why is that? At a fundamental level, the middle managers outnumber the executives. They also have more direct impact on the work of their teams. So the span of influence of the middle managers is greater than that of the executives. You can come up with all the great ideas and strategies at the executive level, but without buy-in and leadership from front line managers, very little will get done.

So it is critical that you develop the performance of the middle managers. Their influence and abilities will determine whether your company will scale to great heights or whether you will be a company with brilliant strategy and lousy execution.

The guiding principal should be to push as much decision making as you can further down into the organization, close to where the action is. The idea is that those closest to the problem usually have the best context on how to solve the problem. You want to empower front line managers to make the decisions on what work gets done, how to prioritize and when to make exceptions.

But, wait a second — how can you trust these inexperienced managers to make decisions?

It helps if you have a meaningful set of values and principals that guide your operations. These can’t platitudes. They must be guidelines that will actually help people.

As an example, at Gatsby one of our values was to prioritize the customer. But we didn’t just talk about it, we lived it. We would go the extra mile to help customers out when they were going live into production with our product. Sometimes that meant 5am calls with our engineers and managers working side by side with customers. It won the customer’s trust and support. It also demonstrated inside the company, that we were serious when it came to providing great service. And if a customer was unhappy with the service, for whatever reason, we would let them out of their contract. And it wasn’t me making these decisions. It was the front-line managers.

It isn't easy to be customer focused. But over time, we turned it into a competitive advantage. We often won customers from competitors because they felt screwed-over or trapped into contracts that left them angry. Everyone in the company understood the competitive value of helping our customers. They saw that the managers and executives focused on customers, so they did, too. We gave examples in our regular town hall meetings. Values like customer focus were part of our annual review process. When someone was promoted, we showed how they helped customers. This encouraged employees to take initiative themselves, without having to ask for permission.

At Zendesk, I remember one time Mikkel the CEO asked me “Why do I have a line outside my door every morning?” It was because he was letting people escalate decisions to him. With every decision Mikkel made, he was reinforcing the behavior, instead of encouraging people to make decision themselves.

I never like it when people bring me decisions that they should handle themselves. It makes me anxious because they likely have more context than I do. And often, by the time the decision gets to me it’s become quite a thorny customer situation or a struggle between two different departments. If I can, I will ask questions to elicit more information, discuss the tradeoffs and encourage the manager to make the decision based on our values.

Scott, our director of Finance at Zendesk came to me one time and asked me to implement a discount approval schedule, along the lines of sales reps could approve up to a 10% discount, managers 20%, directors 30% and perhaps the VP up to 40%. Anything beyond that would require my approval.

I said no.

Scott was stunned. “What do you mean?” he stammered.

I told him we didn’t need a discount schedule. I trusted the sales VPs and their managers to implement whatever discounts they felt were necessary.

“So you’re saying if Matt wants to discount the product to 90% you are ok with that?”  (Matt ran our European operations and was one of our most trusted executives.)

“Yes,” I said. “Matt is an experienced guy. He’s not going to discount something if he doesn’t need to. He’s also not likely to do anything radical without discussing it with me. He runs his region and he knows his customers and the market in Europe better than we do. So if he needs to provide a discount, he’s the best person to make that decision.”

Scott walked off infuriated. He was used to a command-and-control model where headquarters made the rules and slapped people down when they got out of line. I understood where Scott was coming from. After all, that was the model at every large software company, including Salesforce where Scott had worked previously.

But the role of an executive is not in approving things. The goal is to add value. The best way to do that is to create a resilient, high-performance culture. One of the ways to do that is to empower your front line managers and executives and teach them to make good decisions. If people want my input, I provide it. But I don’t hire people so that I can second-guess them. I want managers to grow in confidence so that they are making good decisions, developing action plans and communicating.

In my experience pushing decision making close to the action is the best way to operate. Most people will think things through when it’s their call. I want to cultivate an organization so that when the stuff hits the fan, managers don’t panic and instead they muster their problem solving and communications skills to tackle the problem. And they can’t do that if they’ve never been given the responsibility and trust to make decisions.

How does your organization make decisions? What decisions come your way that could be handled by someone closer to the issue?

Setting and Measuring Objectives


One of the things that I see routinely in early stage startup companies is a lack of accountability around execution. Sometimes this is because there are unclear objectives. Or sometimes there’s a process around objectives which has become dysfunctional or fallen by the wayside.

When I joined Duo Security, the founders Dug and Jon were proud of having an OKR (Objectives / Key-Results) system in place. But as I went around the company to speak to various managers, it became evident there were problems. People wrote down all kinds of ambitious objectives at the beginning of the quarter, but then no one looked at them again until the quarter was over. There was a perfunctory assessment of the results, they were shared in an all-hands meeting and life went on, un-impeded by the objectives. 

OKRs were originally developed at Intel and then became more widespread in the startup world after Google used them. Unfortunately, somewhere along the way, OKRs were corrupted. One of the main problems that I discovered with startups using OKRs was the belief that objectives should be extremely ambitious (also known as “stretch goals.”) Therefore, if you only got 70% of your objectives that was considered a good outcome. I am not sure if there are other disciplines where 70% attainment is graded as 100%. 

Unfortunately, this is a primary source of OKR dysfunctionality. Because it can lead to an almost random de-prioritization or dropping of 30% of the objectives. What happens if the Engineering team commits to an ambitious set of features to be delivered in the quarter and then mid-way through the quarter drops 30% of them? What if Marketing spent the first month of the quarter working on launching those capabilities and instead dropped some other features from their list? And what if Sales has been training people on new features that no longer exist? 

It becomes quite clear that by being overly ambitious, we have created a lot of thrashing across departments. The intersection of what needs to be done is hampered by sub-optimal decisions made at a departmental level. 

The solution at Duo was to create a less ambiguous process and brings a higher-level of clarity and coordination across departments. It begins by having a small but clear set of objectives at the corporate level. In an early stage company this likely includes things like:

  • Launch new Enterprise edition by July 15

  • Expand into EMEA with translated product in German, French

  • Improve reliability by having no unplanned downtime 

  • Raise Net Promoter Score (NPS) to 30 or higher

  • Generate 1,000 MQLs and sales pipeline of $2m

  • Generate $1m in new bookings

Each department that worked for me (which was initially sales, marketing, product, customer service) would create their departmental objectives, taking into account the overall company objectives. However, we were not obsessed about forcing departmental objectives to line up with specific corporate objectives. Sometimes a departmental objective is just its own thing. Worrying too much about which initiative departmental goals align to can obscure the more fundamental decision: is it worth doing or not? 

Although there are lots of different tools that you can use for writing and managing goals, in my experience the tools don’t matter. (And in fact, fancy tools with too many capabilities can add more confusion, for example surfacing debate about how to weight various objectives.)

I like to keep things simple.  Write out the top 8 or 10 or 12 objectives in a text document in an enumerated list. I weight them all equally. So if one goal is substantially bigger or harder than others, consider breaking it into two. The objectives should be SMART, e.g. Specific, Measurable, Attainable, Realistic, Time-based. Most fundamentally, at the end of the quarter, we should be able to determine whether the goal was completed or not. I like to make sure that executives have skin in the game so we tied half of executives bonus to be paid based on company objectives (usually oriented around the Annual Recurring Revenue, or Sales bookings) and half based on attainment of their departmental objectives.  

I also make it clear that the executives must coordinate with their colleagues across departments. So, for example, the head of sales and the head of marketing must be in agreement about what are the appropriate objectives around lead generation, sales tools, training and so on. It helps to reinforce the “client” relationship that exists between departments.  That is, I want the head of marketing and the head of sales to recognize that a big part of the marketing department’s role is to help sales close more, bigger deals faster. I want them to work out these things together rather than throwing it over the wall, or worse, sending it up the organization to the c-level executives to determine the appropriate trade-offs. If the heads of two departments can’t work together on the same side of the table to prioritize goals, then its unlikely that people in their departments will work together either. The executives must set the standard for collaboration. (If they can’t, they probably shouldn’t be in the company.) 

My direct reports are usually fairly senior, so I tell them if they get 80% or higher of their objectives, life is good and their bonus will reflect their accomplishment. At 70% it means we did not set the right objectives or I did not manage them well enough, so I will manage them more closely. At 60% or below, they can’t work for me. Since I also say this in the interview process, it helps candidates who are not goal-oriented or do not want to be held accountable to opt out of the process. 

However, I try to be flexible in one respect. I tell people that they can come to me any time during the quarter and if there’s something they set as a goal that they view as no longer useful to the company, we can strike it from the list. However, we don’t drop something because it is hard, only because it’s no longer the right priority. In my experience, it’s fairly rare for people to take me up on this, but it prevents people from working on something they realize is no longer important. I also remind them that they cannot come to me at the end of the quarter and say the accomplished a whole bunch of other work instead of what we agreed to.

It’s good to follow up with people mid-quarter or in some cases, monthly, to review their progress on the goals. This is an important reminder process sometimes things have either not started or we’re not yet seeing good results. It also helps frame a conversation around the objectives, what is blocking them, and how we can increase the likelihood of success. 

Setting objectives at the company level and even the departmental level is not easy. It requires focus and discipline. Often high-growth companies are filled with people who are ambitious and want to do lots of initiatives. Most organizations in a growth phase benefit from doing fewer things better rather than being spread too thin on too many things. You have to say no to some things. 

Of course, there are many more things that get done in a department than the eight or ten top objectives. But it helps to identify what are the most important items that will move the company forward. 

I have found that if you roll this kind of framework for setting, measuring and rewarding objectives at the top level after one or two quarters, it can be rolled out more broadly, to the next level of management. I would not suggest rolling it out out across the entire company all at once. When rolled out too quickly, it can easily lead to chaos at the end of the quarter with employees chasing down their colleagues in other departments to do work in pursuit of “their” objectives. It is better to take a measured approach. Get good at setting objectives at the departmental level before you expand broadly.

How does your company set goals? Does everyone know the overall company goals for the next quarter? How often do you follow up on the goals?