Layoffs Should Be Your First Resort, Not Your Last
Every economic prediction is right eventually. Things that go up go down. Things going down go up. If you’re reading this, it’s probably one of those “things are going down” times.
At its most basic, business math is straightforward: To succeed, you need more money coming in than going out. And during down times, bringing your business back into the black can be delicate, stressful and even heartbreaking.
What do you do when your bank account refuses to go up?
There’s that moment when you look at your cash flow and realize that the trend over the past several months has been down instead of up … and it’s not turning around. You feel it in your stomach like a big burrito, heavy and gross. You know that fixing the numbers likely means laying people off — the part of business that you were hoping to magically avoid forever.
As someone who has been through this process before, making tough financial decisions about your company is an anxiety-inducing, guilt-ridden, recrimination-filled situation that will keep you up at night. Contrary to the take in pop culture, most bosses hate, hate, hate laying people off.
So they avoid it at any cost, often even to the detriment of the business.
There’s a common path that business owners take when it comes to “ideas that aren’t layoffs,” and they happen in this order:
- Cut non-employee expenses. If that isn’t enough …
- Cut owner pay. If that isn’t enough …
- Cut hours and make full-time people into part-time people. If that isn’t enough …
- Eliminate one position. If that isn’t enough …
- Eliminate one more. If that isn’t enough …
- Rinse and repeat numbers 4 and 5.
This is one of those business ideas that’s so ingrained in us that it’s almost automatic. But you know what? Trying half-measures instead of layoffs — and then having to lay people off anyway — kills employee morale and buries it in a vault underground never to see daylight again. Bad morale leads to employees quitting, and the ones who quit are *always* your favorite, best, hard-working employees. It’s the bad ones who cling to the life raft … the ones who know they’ll have trouble getting employed elsewhere. You won’t get your business back on track by losing your best people and keeping your worst. #BusinessAdvice
Since we’re all about busting old ideas here and talking about what actually works, here’s the truth.
You need to consider layoffs first*
Wait … doesn’t that list start with cutting expenses? Absolutely it does … and it won’t fix the problem. In some rare cases, your expenses may be so wildly out of control that you can find huge savings there. However, 99% of the time the only expenses available to cut are the ones that will crush your business.
Yes, you can reduce your marketing spending to zero … and then how will you get out of this hole with no new customers?
Sure, cancel the CPA contract and … good luck filing your taxes?
You’ve got a few extra $29/month subscriptions to cull — I get it. You should definitely do that, but I rarely see this move the needle enough to avoid layoffs. Usually, it just hurts the business in weird ways.
I once had a client cancel all recurring services and tell employees to use free software they found online. This managed to piss off super in-demand engineers, start a giant virus infection in their network and get them fired by their largest customer when the work quality suddenly plummeted from using substandard tools. Don’t … do that. And yes, they eventually did still do massive layoffs.
If that isn’t enough, it’s time to jump directly to layoffs. And even further, you should err on the side of cutting harder, not keeping more.
I said what I said.
Why? Because people will accept one round of layoffs with only a minor impact on morale. Yes they’ll be shook, and you’ll have a rough couple of days. But if you gather them together with a strong message that this action, as horrible as it was, returned the business to good financial health and there will be no more layoffs, they’ll breathe a sigh of relief.
But if you cut one person tomorrow, another in three months and then reduce hours for some people, you’ll create an unstable work environment that will send your strongest employees straight to indeed.com.
*The one thing you can do before layoffs is to cut owner pay. But here’s the rub: You need to do it quietly. Don’t go around bragging about it to staff like you’re making some huge sacrifice — that makes them feel worse, not better. Just do it.
Why Hours Cuts are a Bad Idea
The natural tendency to try and do something other than layoffs is simple: Everyone feels horrible even thinking about it. No boss wants to sit across from an employee and tell them that their position no longer exists. They instead introduce half-measures to try and avoid what may be inevitable, but the longer you wear a Band-Aid® the worse it hurts when you finally have to rip it off.
Cutting hours doesn’t work well for two reasons: One, it creates two tiers of employees in your company: the lucky ones who kept all their salary and … the other ones, now forever “marked” as less valuable. (Watch the social cliques form like your business is a high school on fast forward.) And two, reducing hours across the board creates a vacuum in employee morale that may never be filled again. People assume that their jobs and companies are safe, secure and stable, so if you poke a hole in that belief and destroy that trust, you’ll likely never get it back again — even from the people who didn’t get cut, because they now suddenly realize it’s a possibility.
As a colleague once philosophized, “It’s way better to let some people go and sustain the morale of those who remain than cut three toes off each foot and then wonder why they don’t run fast anymore.”
That said, if you are determined to try hours reduction first, it has to be voluntary. You can ask your team if anyone wants to work less during the slow period in order to help save money until it’s busy again. But that needs to come with a (kept) promise that their hours will be returned to full time after the slow period is over, if they choose.
Remember, their rent and car payments stay the same and they’re mostly living on the edge financially already. How exactly are they supposed to get by with 25% less money?
You’ll Do All These Things Anyway
In my experience, I have yet to meet a business decision-maker who has the stomach to go directly to layoffs without the experience of how much worse it is to try other things first. Despite oodles of statistics and experienced advice, they go down the road of half-measures and hope they’re the exception, not the rule. I’ve seen clients burn through 100% of their savings — and their entire credit line — in order to avoid layoffs, only to make the decision anyway when they could no longer afford payroll.
I’m not exempt from this resistance. I tried all kinds of half-measures the first time I came across this in my business. I tried cutting two days a month from schedules, implementing temporary salary reductions to be paid back later and even cutting my pay to $0.
Guess what. None of it worked, and I had to lay people off.
The unwillingness to go there isn’t a value judgment on anyone. It’s simply one of those things in business I think you need to experience first-hand in order to believe. And if you stick to the traditional path, here’s what to say to your staff (please steal this and use it word for word):
“We’re putting this plan (hours reduction/expenses cut/etc.) into place so that we can say we ‘did everything’ to avoid layoffs. Our #1 priority is keeping this great team together. I can never promise the future, but we’re going to do everything in our power to avoid layoffs and we hope these changes get us there.”
Stories from People Who’ve Been There
Hearing stories from business owners who’ve navigated these tricky waters always helps me gain some perspective and new ideas, so I gathered a few real-life examples:
Keeping the right people
“After fixed expenses, there is only so much payroll you can shoulder to stay at 10% net profit. [Our company] only turned around post-COVID when I went back to that basic. And we did waaaay better after the job cuts than I could have imagined, because I took that opportunity to finally let go of people who were not our best.
“The shock of the layoff wore off quickly and was replaced by a lovely buoyant feeling of having the right-sized team with the right people and solid financials week after week, even though the company was suddenly 2/5 of the size it had been.”
-CEO of a large retail chain that survived COVID
Transparency is key
“When my business first hit the skids back in 2008 and 2009, I did half-measures like crazy and it was the worst thing ever. Going deeper than you would like on the initial cut will suck, but I would be really open and transparent with the team that stays about why you did what you did and how you made really hard decisions for the sake of the organization.
2023 was also really rough for us. By mid-August, we got together with a bunch of the other partner companies in our group and came up with a giant list of cost-cutting/austerity measures. It was not fun, rolling them out. But we tried to over-communicate with the team while we were doing them and then sharing our P&L results in the coming months as we saw improvements and things like gross margin and net profitability.
It really sucked to tell all of our managers the things we were tightening, like cutting their employee-fun budgets, getting serious about minimizing overtime and making layoffs on underperformers, but we were able to really start to turn the business around within a few months. I was recently re-reviewing the P&L from the last four months with a group of employees, and one of our excavation crew leads told me he was super grateful to see how we were able to move the needle on cost savings with a bunch of our subcontractors’ expenses and said ‘it was cool to see some of the things that we were doing were actually making a difference’ to the bottom line.
I have found that many employees can be very grateful when they know that we’re making hard decisions and trying to do what is right for the organization.”
– CEO of a home services company
The bottom line
You may read everything in this article, but refuse to do it. And that’s okay. But as your experience grows and you head through the ick and the muck, take everything that you learn along the way to heart — even the tough stuff. Remember that leadership is damn difficult sometimes. And if you have the opportunity, pay it forward.
It’s way better to let some people go and sustain the morale of those who remain than cut three toes off each foot and then wonder why they don’t run fast anymore.