What to Do (and Not Do) when Downsizing Becomes Necessary

by Granville Triumph

Downsizing, sad business woman Sitting on StairsIn my last post, I discussed some of the risky aspects of business expansion along with the many positive results expansion can bring. Even well-planned growth can put unpredictable pressures on your staff, your business processes and your bottom line. At the same time, expansion can enable you to attract bigger customers and top-notch employees, and give you the financial clout needed to fuel further growth.

But what if expansion doesn’t deliver the expected benefits? What if you move into a new market or geography only to find that you just can’t compete? What if your industry suddenly takes a nosedive, or a new technology takes away your competitive advantages? In other words, what if you need to downsize your business?

Downsizing is defined as a reduction in workforce in order to improve the financial standing of the business. Once relatively rare, the practice has become commonplace in the U.S. and many other countries since the 1970s. In fact, many business leaders regard downsizing as a preferred method for improving organizational performance.

Some experts suggest that the reliance on downsizing may be misplaced. Downsizing focuses on short-term cost reductions and financial results at the expense of productive capacity and skill sets. Productivity suffers not only because of a reduction in force but because of the degraded morale of those who remain. Evidence suggests that the financial benefits of downsizing are short-lived if not illusory. The most successful companies bite the bullet and invest in human capital during economic downturns.

That’s not always possible for small organizations. The very survival of the business may depend upon rightsizing the workforce. If you’ve cut other expenses to the bone and still need to let some employees go, here are some things to keep in mind:

  • Use a scalpel rather than a machete. Make sure that you retain at least one skilled person in every functional area. If you must eliminate an entire location or division, try to reassign some of those workers. The key is to maintain as much organizational knowledge as possible.
  • Consider outsourcing areas that aren’t core to your business. Payroll and IT are commonly outsourced functions but there may be others. Make sure the outsourcing arrangement will scale when your organization is ready to grow again.
  • Consider making investments in new technologies that will make your smaller workforce more productive. Are your systems up to date and performing optimally? Are there applications and services that could automate or streamline workflows?
  • Communicate more, not less. Your team will know something is amiss, and speculation is often worse than reality. Reveal as much as you can and be as frank as possible. Let everyone know you did all you could and have no choice but to downsize.
  • Be prepared to reassure your customers that you’re in it for the long haul and you’ll work hard to ensure that service doesn’t suffer.

The decision to downsize can be gut-wrenching, particularly for owners of small businesses. All of the energy and drive focused on building the business must suddenly be applied to making it smaller. Your finances, your reputation and the livelihood of employees hang in the balance. Downsizing is never easy but with a thoughtful approach that emphasizes communication your business can weather the storm.

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