The recent wave of layoffs within prosperous tech companies has been a wake-up call, especially for younger professionals who have not experienced previous economic downturns. However, those familiar with cyclical business trends or the relentless pursuit of “shareholder value” are neither shocked nor surprised.
Why Layoffs Happen
Layoffs often signal that a company’s executives believe there’s a pressing need to recalibrate the balance between the workforce and the firm’s mission or products. This misalignment could occur due to various factors:
- Unsustainable Business Model: In simple terms, the revenue generated doesn’t justify the costs of product delivery.
- Product Misalignment: The company may be investing in products that don’t align with its core mission or that are not effectively serving its customers.
- Irresponsible Hiring Practices: During rapid growth phases, some companies might hire recklessly, resulting in an inflated workforce.
- Overemphasis on Shareholder Value: When shareholder value becomes the primary yardstick for performance, both employees and customers suffer.
The Consequences of Poorly-Executed Layoffs
A common mistake is implementing across-the-board cuts based on arbitrary targets, such as reducing the workforce by 10%. This fails to consider that not all teams contribute equally to company inefficiencies.
Even worse, when layoffs are solely used to appease market expectations, they often become a recurring issue, indicating a lack of strategic depth in management decisions.
The Ripple Effect of Multiple Layoffs
Frequent layoffs can be corrosive to employee morale. After the initial round, those with the most employment alternatives often exit, leaving the remaining workforce vulnerable and increasingly disengaged.
When Layoffs Are Necessary
In unavoidable situations, leaders need to do more than just cut costs; they must refocus the company on core competencies and critical success factors. A well-planned approach can help the leadership credibly announce that further layoffs are unnecessary.
Best Practices for Conducting Layoffs
Effective layoffs should prioritize human dignity and clear communication. As outlined in TechCrunch’s article on How to Conduct More Compassionate Layoffs, the bad news should be delivered personally by a familiar and respected authority figure.
A Case Study: Tellme Networks
Perhaps one of the most conscientious layoffs I’ve experienced was at Tellme Networks. Founded during the tail end of the DotCom bubble, Tellme aspired to revolutionize voice-interface technology by joining the power of the Internet, the ubiquity of the phone, and the ease of voice interfaces long before smartphones and voice assistants were common. Within two years, the company raised $250 million and built a team of over 200. When the DotCom bubble burst, ad revenues plummeted, and the company was on track to run out of money within 18 months.
Faced with this dire situation, Tellme’s leadership undertook rigorous planning to pivot towards a more sustainable, enterprise-focused model. Initial target was a 50% staff reduction. The executives scrutinized every team’s alignment with this new focus and restructured accordingly. About one-third of the staff were to be laid off, with several others moving to new roles.
The exec held an offside with all the managers a day before the layoff was to be announced. They shared the financial outlook, how the company was going to pivot, and the need for an extremely painful layoff. The managers were equipped to answers questions and help people process the upcoming changes.
On the day our of the layoff, people who were to transition roles were individually called into a meeting with their current manager. They were told about a new role that their current manager hoped they would consider. Then they were told that a major restructuring was going to be announced later in the day which was going to result in their old position being eliminated. They were highly valuable, and everyone in the company hoped they would stay on in a new role. It was hoped that being informed that they still had a job would lessen the impact of the changes.
The individuals who were laid off were called into 1:1 meetings. They were told that the company was pivoting due to a failed business model and that if something wasn’t done, the company would be out of business in less than 18 months. They were told that being laid off had nothing to do with their performance, and that many of their fellow employees were losing their jobs due to the pivot.
Once the people who were most directly impacted by the layoff had learned about the changes a company all hands was called. During the all hands the company executives explained how the company’s financial situations required a change in strategy. All future all hands included a graph which showed projected cash on hand, revenue, expenses. Everyone knew the goal was to get to cash flow positive before we ran out of cash and how the company was doing compared to our plan.
People who were to be laid off were personally told by someone in the company’s leadership team they personally knew. This was not a task that was handed off to HR. People were told “Your performance was great… the problem is the company isn’t going to succeed in the current form. We had to make some really painful decisions to drop a lot of what we are doing.” The discuss was in a private location so the affected person didn’t have to worry about other people seeing their reaction. They were free to exit without having to interact with anyone, and come back later to retrieve their personal items. If they didn’t want to have to come back, they were free to grab their personal items before heading out. No one was “escorted out”.
Encourage Those that Remained
Once the people who had been laid off left the building an all hands was called. The key “talking points” of the meeting:
- Even though we had raised a massive amount of money, we would run out of cash before achieving profitability. Without a change, we would “fly the plane into the ground” in less than 18 months. From that day on, every all hands had graphical representation of projected spend and income focused on becoming cashflow positive.
- The company was pivoting to exclusively focus on servicing enterprises. The execs believed this strategy would result in the company being cashflow positive before we ran out of money.
- Hadi, one of the company founders and the VP whose teams were most effected by the changes would be resigning. His organization would now report to Matt who was better prepared to help them success given the new focus. Hadi made it clear he till believed in Tellme and would continue to be involved as an advisor.
- An acknowledgement that this was super painful. We all had friends and coworkers who were laid off. They were great people. No one deserved this.
- That all the options the people had earned… even if they hadn’t hit a vesting cliff, were vested, paid for by the company, and given to the people laid off.
- We should do two things from our colleagues that were just laid off:
- Use our personal networks to help them find jobs.
- Make Tellme succeed so the hard work they put in (and the stock they now held) would increase in value.
- Everyone was given the rest of the day (Friday) and weekend to process, and were encouraged to come back Monday ready to engage in the new plan and see success in our work.
The leadership demonstrated being transparent, care and respect for the people who were laid off, and reassured the people who remained that the company had a well thought out plan which would lead to a profitable company.
Layoffs are inherently challenging but handling them responsibly requires transparent leadership, a strategic focus, and a commitment to treating everyone involved with dignity and respect. Through ethical practices and clear communication, companies can navigate these difficult phases while maintaining their organizational integrity.