For the last few years, startups have been preparing for an economic slowdown. It was inevitable. Plans were put in place to be ready in every scenario by modeling burn rates, projecting cash-flows, and predicting drops in demand, but COVID-19 and its catastrophic effect on the global economy is unlike anything we could have ever predicted. Assuming the pandemic is somewhat contained by the second half of 2020, economists anticipate a moderate sequential recovery in growth as lockdown measures are removed and policy stimulus takes effect. That being said, economists also expect that we will not see GDP reverting to its pre-virus levels until late 2021.
Taking those first challenging steps
As a former Chief Human Resources Officer and now the Founder & CEO of a Tech startup WhiteBox HR, I’ve spent the last few weeks on endless calls and virtual meetings with leaders across all sectors and regions. Among the various topics discussed, one that is of utmost priority is exploring innovative solutions that avoid further layoffs. The economy has been hit hard as it is, additional increases in layoffs will only further exacerbate the economic ripple effect.
Let’s be clear, cost-cutting in a time like this does make sense, it’s the responsible thing to do. You are obligated to take these measures to ensure that your startup survives and for some, that unfortunately means employee layoffs. However, layoffs can have a drastic impact on employee engagement, productivity, morale, customer satisfaction and confidence. It will also have repercussions on the cost of rehiring, as well as your company’s brand and reputation as a whole. There’s an opportunity cost to everything, so this needs to be a thoughtful and strategic decision, weighing the pros and cons, along with a full understanding of the applicable labour laws, employment contracts, and policies.
As a community, the more our unemployment numbers rise, the worse the impact will be on our society as a whole. As leaders in our startups, we need to stop the financial hemorrhaging to survive. Therefore, at some point, you may need to consider taking action to address your largest expense, albeit your most important asset: your people.
The most important thing you can do right now, above anything else is to talk to your team members. Everyone has different needs, expectations and priorities. There is not one single solution that will work for everyone, so it is essential you have one-on-one conversations with each of your employees, to understand what could work for them before any of these measures are implemented. Employees may prefer taking unpaid leave, a pay cut, or working a 4-day work week, rather than seeing their business shut down. You need to understand their individual needs and particularly given our current climate, ensure their physical and mental wellbeing is of top priority, above all else.
10 alternative cost-cutting strategies to consider before resorting to layoffs:
1. Institute a hiring freeze for all non-essential positions: This goes without saying, but is worth mentioning. You can strategically continue to hire in roles that will immediately generate revenue for the business, but other than that, it’s better to hold off. If you have vacant positions that need to be filled, consider redeploying and reskilling your current team members that are being underutilized at the moment. They may be excited and grateful for the investment and opportunity to learn another part of the business.
2. Involve your team: Crowdsourcing ideas with team members can help solicit suggestions on ways to cut costs and stay afloat. They have a right to understand the full state of the business. In doing so, you will promote solidarity, foster trust, and increase engagement; your team will appreciate the transparency and inclusivity. Prioritize ideas that have lower capital requirements and can have an immediate impact. This will help make your employees part of the solution, instead of a victim of the circumstances.
3. Reduce unnecessary expenses: ‘Nice to haves’ should be reduced. From office perks, unnecessary subscriptions and tools, to marketing and advertising spend reduction, non-vital equipment upgrades and anything else that can be reduced or cut, should be.
4. Sell or lease assets: Selling off non-essential assets that aren’t required anytime soon can bring in much-needed cash flow and protect your workforce. Look to any unused vehicles or equipment that can be sold or leased out for the time being.
5. Renegotiate contracts: Many startups and organisations are now offering discounts, deferrals, perks and incentives. Don’t miss the opportunity to cut costs by re-negotiating your contracts with vendors, suppliers, and other stakeholders.
6. Embrace secondments: Look into the possibility of exchanging employees with other startups or organisations. We are all in need of different skills and talent, so sending some of your employees to temporarily work for another company is not a bad idea. The company pays for their salaries and gets to use their skills for a defined period of time (full time or part time). This gives you temporary wage relief and retention of your people.
7. Reduce your workweek: This works for roles and departments currently experiencing a decrease in demand. For example, moving from a five-day to a four-day workweek reduces payroll by 20 percent. However, if a five-day workweek is still required, then this point may not necessarily apply as it may make morale worse.
8. Manage employee leave: No one wants to be forced to take paid leave when they’re not even allowed to leave their homes. However, if it’s between taking leave and letting their peers go, hopefully your team members are empathetic enough to take the hit for the greater good. Companies are starting with paid leave, then moving to unpaid leave by asking for volunteers first, then taking it from there as required. Others are encouraging study leaves or sabbaticals, but this is certainly an option to explore.
9. Reduce salary and benefits: If you absolutely must reduce salary or benefits, I encourage you to really think through the ramifications of this decision and how it will be perceived. Every organisational culture is different. Some cultures have a “we’re in this together” attitude and are willing to take a hit for the greater good of the entire team and company, while others may not have the same trust levels in their leaders and comradery spirit.
It’s also important to consider your top talent, the ones you need the most and want to retain, who are not only critical to your company’s future but are also in high demand. How this point is communicated is absolutely critical and will be the ‘make or break’ for most companies. If you are about to implement this measure, consider a structured and thoughtful approach where the more senior in the hierarchy you are, the higher the cut, versus a blanketed 10% cut across all levels. For some people, that 10% cut translates into an inability to pay rent, while for others it will mean they have to make lifestyle adjustments. These are two very different realities and should be taken into account. Pledge to review this decision periodically and provide a time frame in which employees can expect an update. Bottom line, true leaders take sacrifices before they impose sacrifices on others.
10. Engage in barter: Instead of acquiring inventory, merchandise, services, and other assets, investigate barter agreements. They’re mutually beneficial for both businesses and can free up cash flow. Bartering is not a new phenomenon by any means so reach out to your peers and find ways to support each other through this as a community.
If you have truly exercised every measure possible, then at some point you will have to make the tough decision to start layoffs. Delaying the inevitable does not benefit anyone and you have a responsibility to ensure your business survives. You also have a responsibility to your people, so look at every possible alternative to retain your talent. After all, they are the lifeblood of your company. These are incredibly unprecedented times, but if you lead with compassion, and take thoughtful and well communicated measures, you will touch the lives of your employees in an extraordinary way and come out of this crisis stronger than ever before.
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