The Sequence of Staff Layoffs and Right-Sizing

I heard one rumour that when Elon Musk did what he did to Twitter, it looked horrendous to many. But there may be enough bosses out there that wonder seriously whether that is the fastest way to solving their problem.

Tom Lee mention on The Compound podcast that a large company track what their employees do through all the keyboard clicks and mouse movements and realizes 80% of their employees are not necessary.

If you fire these employees and the majority of your cost is staff cost (for tech firms), you can sustain your margins.

This is the bull case of how EPS can look better.

But it leaves a bad taste to fire employees around Thanksgiving and Christmas, but now that is after those festive periods, perhaps the firing can start.

Layoffs.fyi tracks the state of the tech layoffs:

Byrne over at The Diff has a good write-up on how layoffs in the technology space are usually carried out.

I think a lot of you are managers, lah… so you would be familiar with this stuff, but it is always helpful to see them in sequence.

There is a reason why a company develop excess employees more than they need.

Hiring is challenging to optimise in a good economy, especially if you are unsure if you can hire the person you need successfully. Most of us are habitually switching jobs, especially if we think we are underpaid. Companies assume that their job offers will be topped and that some members of the existing teams will depart. The equilibrium is to overhire, but that is okay.

The math that makes it work:

While my company is 25% overstaffed, if revenue is going to grow by 100% in the future, the overstaffing issue will be solved organically.

A common question: Why can’t the company have grown a little more slowly, be more prudent in hiring in a more optimized manner?

If your company is competing with your competitors, and you need your competitors to grow slower and more prudently. But very likely, if all your competitors is doing that, you will swallow the whole market.

So this kind of game theory dynamics will most likely not happen until a specific trigger.

So during this period, when money is pulled out of the system, there is a smaller pool of money for everyone:

1. Growth slows -> Need to right-size -> Firing
2. Discount rate goes up -> Renegotiate supplier and customer cost

The sequence of cost reduction usually goes this way:

1. The first step is to do generic belt-tightening. Remove the fancy pantry incentives, such as the branded foodstuff. This will confuse the employees.
2. In good times, doing this will irritate the employee, and they will leave or make it difficult for you to hire when word of mouth gets around. These perks are also your compensation but less tangible.
3. This signals that the company is worried about small sums of money (not good) or that you are giving up on something that distinguishes you from other companies.
4. Cut some services your company subscribe to.
5. Cut the amount reimbursed for corporate benefits such as air travel.
6. If you do #1 to #5 and the margins are still bad, then it is time to reduce the headcount.
7. You need to understand the position you wish to put the company in. Most often is to be stable but stability depends on the business situation. Recently, the talk is to breaking even in cash flow or earning high enough margins so that your stock price can tick up.
8. Specific projects are cancelled immediately, especially those newly acquired projects or R&D projects.
9. Make a list of hard-to-replace people. These are the handful of people that know what a big customer likes, or that they deal with one specific sales person, or have specific local knowledge. The impact of cutting them is bigger than the cost savings.
10. Also, figure out those people who were a great fit when they were hired but not anymore.
11. Go specific from % of payroll to the specific people that you wish to trim.

If your perks are reduced, it may be a sign that the company is cautious, but it may not eventually result in significant layoffs. But knowing this, I wonder if my fundamental analysis of the landscape would allow me to spot if my company is in trouble.

If you are in a role that has less responsibility, maybe it is the time to worry. If you are on a proof-of-concept R&D function, this might be an anxious time as well.

While serving important people or key functions can be demanding, right now, busy is better than no work next time.

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