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5 Ways to Strategically Downsize Your Business

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Downsizing is one of the most stressful tasks for HR managers. In 2023 alone, tens of thousands of employees have been laid off as Salesforce, Amazon, Disney, Accenture and more than 20 other companies decided to downsize.

As you lead your company through downsizing, managers and employees will turn to human resources for help in dealing with the many challenges. Common problems include:

  • Internal communication
  • IT security, including managing accounts and permissions
  • Public relation
  • Impact on the company's profitability
  • Managing the morale and retention of employees who stay

While downsizing may be an appropriate decision in difficult circumstances, it is an emotionally difficult experience. Human resources managers can play an important role in ensuring that downsizing occurs legally and as compassionately as possible.

Read on to learn the best practices for dealing with downsizing, laying off employees, and protecting the long-term health of the company.

What Does Downsizing Mean?

The definition of downsizing is the permanent reduction of a company's workforce. Sometimes this is done to reduce labor costs because the company is relocating or when part of the operation is automated.

Typically, it is a decision made in the best interests of the company and not due to an error or employee misconduct.

When Should You Downsize Your Business?

It's difficult to know when the right time is to make such a far-reaching corporate decision. Most high-profile corporate downsizings occur during times of uncertainty - for example, when your industry is in decline or your country is experiencing an economic recession.

During economic downturns, the general public has less money to spend. As a result, companies have less demand for their goods and services. In order to stay afloat during these times, companies sometimes have to reduce their costs.

One of the easiest ways to do this is to reduce the number of employees in a company. The advantage of this type of cost cutting is that a company can maintain operations - albeit at a reduced scale - while weathering the economic storm.

What Is The Key to Successful Downsizing?

The most important thing is to be transparent. A job cut has an enormous impact on life and existence. To limit this, treat your employees with professionalism and respect throughout the entire process.

A crucial element here is communication. It would be best if you informed your employees about the possibility of layoffs as early as possible. You should then have clear communication at every stage of the process.

In this way, you can give the affected employees as long a notice period as possible so that they have the time they need to find a new job. If you communicate poorly during downsizing, you're likely to harm employee morale. This, in turn, will negatively impact your productivity and employee retention.

5 Ways to Strategically Downsize Your Business

The next - and most difficult - task is figuring out which employees to let go.

There are external auditing and consulting companies that can take on this task for you. However, these are often expensive and may not recognize the value that individual employees bring.

In a 2023 IceHrm survey, we found that 65% of HR managers operate on a last-come, first-served basis. The basic logic is that you calculate the percentage of the workforce you need to cut to stay afloat. Then you fire that percentage of employees in the order in which they last joined the company. While this approach is sometimes the easiest to explain, it is no better than arbitrarily selecting which employees to fire.

Below are five important points to consider when downsizing your company:

1.Legally Flawless

It may be obvious, but one of the most important considerations in any downsizing is your legal position.

Depending on where you are based, you may need to meet a number of legal requirements before you can downsize your business. These can include:

  • Standardized selection criteria
  • Minimum requirements for severance packages
  • Evidence that layoffs are inevitable
  • Appeal process
  • Procedural requirements

Failure to properly comply with these requirements could result in losing out in a lawsuit or damaging your reputation. It is advisable to seek legal advice in the event of layoffs or terminations.

2.Ask for Volunteers

It may sound strange, but some of your employees might actually be happy if they lose their jobs. There are probably some employees in your company who want to make a career change, start their own business, or go back to school.

You might also consider offering early retirement options. Employees who have been with your company for a long time usually receive a higher salary for the same tasks. Older employees may also already be part of a more generous pension or pension plan than their younger colleagues. This often reduces the additional costs of early retirement compared to voluntary redundancy. Employees may slam the door in your face to receive an early retirement package.

3.Focus on Departments

Another effective approach to strategic downsizing is to focus on certain departments and narrow down others.

One way to do this is to apply a little common sense. For example, a sales team with 100 employees can still operate effectively after a 30% reduction in headcount, but an accounting department with 3 employees probably cannot.

Similarly, you can classify specific departments or functions that are critical. A hospital is a good analogy for this. Here, the organization would not be able to achieve its goals if it reduced medical staff such as doctors and nurses so that they would be classified as mission critical. The job cuts would then be limited to non-mission-critical employees working in administrative or business departments.

4.Creating Dynamic Selection Criteria

A more in-depth strategy for selecting employees to fire is to create a list of various criteria and evaluate each employee based on those criteria. You can even weight each criterion based on its relative importance to the company.

These criteria could include:

The advantage of such an employee appraisal strategy is that the remaining employees are the ones best suited to keep your company afloat. You should communicate these criteria in advance to ensure transparency and trust throughout the entire process.

5.Have a Post-Downsizing Plan

Last but not least, you should have a plan for after your business downsizes. It's important to know how your company will weather this storm, even after employees are laid off.

You may have had to combine functions or change existing job titles. If this is the case, you should ensure that remaining employees have been appropriately retrained so that all tasks are completed to the same - if not better - standard than before the downsizing.

This will help the remaining employees not feel overloaded and maintain their morale. You may also decide to make small sacrifices to the remaining employees to restore a positive work environment. This could be in the form of flexible working hours, a surprise team outing, or even a bonus.

Downsizing is never an easy decision. It must be carefully considered and all parties must be respected. Make sure you remain transparent and empathetic throughout the entire process. Ask your employees how they are feeling, listen to their concerns, and try to ease their worries as best you can.

Now that you understand the importance of downsizing, you can begin taking steps to strategically downsize your business by laying off employees.

Navigating downsizing is challenging but essential. IceHrm provides insights for a strategic approach, emphasizing legal compliance, considering volunteers, focusing on departments, creating dynamic criteria, and post-downsizing planning. With IceHrm's guidance, companies can execute downsizing empathetically, ensuring the organization's long-term well-being.

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