Rightsizing For Profitability

These days, most companies are looking for ways to save money, and downsizing is one obvious option. The magic number for layoffs seems to be about 10 percent; companies feel they can cut this number of staff as a quick way to boost profitability. But downsizing has a lot of risks: people get demotivated, they become anxious, and some will even jump ship thinking another organization is more secure. On top of this, companies may find themselves with too little talent to bring in new revenue and provide the level of service needed to retain existing clients.

When Drake's HR consulting group talks about 'rightsizing' we are not using a pleasant euphemism for job cuts; we are talking about a disciplined process that will improve an organization's profitability. Effective rightsizing focuses on creating success and avoids the dangerous downward momentum that can come from poorly planned downsizing.

How Much Can You Safely Cut?

If your company has decided to reduce staff levels, the question becomes how many people you can safely cut? Far too often companies take an accounting driven approach: 'We need to save $2.5 million, which means we ought to cut 12 percent of payroll.' The trouble is that cutting that many staff may lead to reductions in revenue that completely undermine the cost savings. The solution is to analyse operations before making any decision on the number of staff to cut.

Drake's HR consulting group believes the safest route to rightsizing is through workforce optimization (see Vol. 14. Optimize Workforce Planning - A little planning eliminates a lot of panic). When organizations conduct a workforce optimization analysis they look at the annual fluctuations in workload. Once the minimum and maximum workloads are known, they can better determine how many permanent staff is required to handle the ongoing workload and then plan to handle the peaks in workload by using temporary staff.

With this approach you know the minimum number of permanent staff required and can be confident there will be no impairment of your organization's ability to generate revenue since temporary staff can provide sufficient numbers to meet customer needs. The trick here is to work with a staffing agency that understands the type of work to be done and can provide trained people with the right skills and the right cultural fit.

Some people think HR's role in rightsizing is just to handle terminations. A good HR consulting group will add value to the decision making process by providing an operational analysis. It's that analysis that lets you know where you can safely make cuts and where a staffing agency can be used to fill in any gaps caused by fluctuations in demand.

Who Can Be Let Go?

Once a company has done the operational analysis that tells them how much to cut, the next question is who to keep and who to let go. How do companies make this decision? Circuit City infamously made the decision to cut its experienced staff since they were more expensive—a move that led to no end of bad publicity and a decline in the ability to serve customers on the sales floor. More traditionally, companies let go of those most recently hired and keep long tenure staff. Another popular method is to share the pain by insisting that every department cut a couple of people. Unfortunately, none of these decision rules do anything to guarantee that the company will be positioned to achieve profitability after the job cuts.

Clearly, the smart thing to do is to keep your best performers. To do this you need a reliable method to identify them. Drake's HR consulting group has long been encouraging companies to conduct Top Performer Profiling (TPP) so that they understand what distinguishes high performers from average ones. Top Performer Profiling involves looking at the three areas that lead to high performance:

1) Knowledge & experience,
2) Skills & abilities, and;
3) Behaviours & characteristics.

Once a company has determined what mix of attributes leads to success it can rate people against that profile.

If the organization has been conducting Top Performer Profiling then they will already know which people they can afford to let go. However, even in the absence of having done this sort of analysis in a rigorous way, companies should bring in an HR consulting group to help them through the thinking process of identifying who to let go. It's important to remember that in rightsizing the goal is not to just cut headcount – it's to improve profitability. Unless you have a good process for deciding who to keep and who to let go, this end result won't be achieved.

Follow-Through: From Downsizing to Success

Any sort of downsizing, even a well run rightsizing process, requires that the HR consulting group uses good change management practices. First and foremost there has to be a great deal of communication. Experience has shown senior management consistently underestimate how much communication is required. People need to understand what is happening, how it will make the company stronger, and what it means to them.

One of the important aspects of communication is that the leadership has to show it is competent and is leading the company to a better future. This is one of the benefits of rightsizing as opposed to a downsizing. If employees see that management is taking a thoughtful approach to workforce optimization they will feel much more confident about the leadership than if all they see is a sharp round of layoffs. The company needs to be explicit in what organizational changes are being made to accommodate the fact that it will have less headcount, but the same amount of work.

Alternatives to Downsizing

At this point we hope you see how rightsizing can cut costs in a way that leads to greater success. We also hope that you recognize the risks of downsizing and understand that if it's badly done it will hurt the company.

Remember that the goal is to improve profitability. You can improve profitability by reducing costs or increasing revenue. Often cutting headcount seems like the easiest thing to do. Regrettably the income statement makes no distinction between unnecessary costs and the costs that lead to revenue generation. If you cut the wrong costs you damage revenue and that leads to lower profitability. So before resorting to drastic downsizing companies should consider programs such as:

Salary cuts and bonus program elimination/modification
Reduced benefits programs
Reduced facilities cost (rents, utilities, etc.)
Reduced travel (through leveraging Web conferencing and other technologies)

More importantly, new revenue initiatives should also be considered, such as:

New product offerings
New markets/applications for existing products
Price increases
Expanding into new geographical markets

A downturn is a time to be smart about cutting costs and creative about increasing revenues. Drake's HR consulting team knows how to ensure that if you do cut staff, you do so in a way that makes your company stronger.