The Goldilocks Effect – Staffing that is ‘Just Right’ – Part 2

Employees are one of the biggest expenses for any company.  Deciding how many people to employ is always a moving target for most businesses.  Leaders struggle with who to hire, who to keep and, especially, who to let go.  Layoffs are especially difficult because they aren’t a reflection of the person’s skills, value, or attitude.  How to keep staffing at just the right level can seem a lot like Goldilocks’ search for the bowl, chair and bed that was just right for her.  Businesses look not only at their own books but also at news reports and key indicators for cues of when they need to expand or cut back on staff.  But given today’s news, even the most savvy business owners may not know what to think.  It seems like a tale of two very different economies.

On the one hand, a rash of layoffs in the tech sector has been all over the news.  Tech companies laid off over 150,000 employees in 2022 and another 65,000 in January.  Thus far in February, Dell has laid off 5% of its workforce while HubSpot and PayPal each laid off 7% of their workforces.   Add to that rising interest rates as well as inflation which increased to 4.7% in 2021 and 6.5% in 2022.  Given all that, most economists and pundits predict a downturn ahead.  On the other hand, the U.S. Department of Labor just announced that total nonfarm payroll employment rose by 517,000 jobs in January 2023 (despite the 65,000 tech layoffs) and the unemployment rate dropped to a 54-year low of 3.4%.  And the Federal Reserve has slowed its interest rate increases and is forecast to raise the rate at most another 1% max this year. 

So how should business leaders reconcile all this conflicting information to decide what staffing is right for their own business?  First, it is important to understand that Big Tech’s layoffs were primarily the result of extreme over-hiring after the pandemic.  Many tech companies expanded their staff by 60% in 2020-2021, bloating their payroll.  This is the case of Goldilocks having a chair that was just too big.  Will other companies need to do the same?  Any company that went on a hiring spree 2021 — that was unsubstantiated by business fundamentals such as increased orders, expanded products or markets, new accounts, increased capitalization or some other solid growth factors — might need to lay off staff in 2023. 

Who Do Layoffs Hurt?  Everyone.

Some companies will follow trends and preemptively slash their payroll.  The goal of laying off staff, after all, is to reduce costs, adjust structures, increase performance and sales, and create a leaner, more efficient workplace.  That’s a good thing, right?  It helps the company (even if it is at the expense of employee jobs).  But do layoffs have the effect of making companies leaner, stronger and more efficient?  Not according to the research.

Studies reported in Workforce, Harvard Business Review and other business journals indicate that companies that downsize often end up with less productivity or less revenue than when they started.  In fact, it can even lead to a company’s demise.  That is what one study found. 

Researchers from Auburn University, Baylor University, and the University of Tennessee at Chattanooga set out to better understand the consequences of downsizing at U.S.-based corporations. Their findings were published in the Journal of Business Research.  They tested the theory that downsizing could lead to a host of problems, eventually increasing the likelihood of bankruptcy. Among those variables:

• downsizing firms lose valuable knowledge when employees exit;
• remaining employees struggle to manage increased workloads, leaving little time to learn new skills; and
• remaining employees lose trust in management, resulting in less engagement and loyalty which increases turnover.

They argued that these effects had long-term consequences, such as reduced innovation, which aren’t reflected in short-term financial metrics.  For the study, they examined 2010 data from 4,710 publicly traded firms (not including financial firms because of the impact of the Dodd-Frank Act on bankruptcy) and determined whether they declared bankruptcy in the subsequent five-year period. The firms spanned 83 different industries, including the service, high technology, and manufacturing industries. They found that 24% of the companies they reviewed – 1,130 companies in all — reduced their workforce by 3% or more in 2010. 

To ensure their results were accurate, their study controlled for known potential drivers of both downsizing and bankruptcy including:

• size of the company;
• changes in market capitalization;
• prior performance; profitability;
• trajectory toward bankruptcy;
• a large number of employees per sales relative to their industry peers;
• the % of employees reduced in each downsizing event;
• the number of acquisitions in the previous five years, since downsizing often occurs after acquisitions; and
• industry differences.

Once they controlled for all factors which would skew results, they found that the 1,130 companies that downsized through layoffs were twice as likely to declare bankruptcy as the other 3,580 companies that did not downsize.  While producing positive outcomes in some cases, such as saving money in the short term, it put companies that had mass layoffs on a negative path that made bankruptcy more likely. While not always fatal, downsizing does appear to significantly increase the chances that a firm will declare bankruptcy in the future.

The researchers then looked at why some companies that had mass layoffs in 2010 declared bankruptcy while others didn’t.  Why did the negative effects of the layoffs hurt some companies and not others?  They looked at the intangible resources (the value of the firm not captured by its balance sheets), financial resources, and physical resources of all 1,130 companies.  They found that abundant financial and physical resources did not mitigate the effect of losing laid off employees who fulfilled multiple roles as workers, knowledge bearers, and cultural contributors.  Ample capital was not a corporate cure-all preventing bankruptcy for downsizing firms.  The differentiator was the intangible resources.

Alternatives To Layoffs

So companies that want to reduce costs, adjust structures, and create leaner, more efficient workplaces should try all other options before laying off staff.  Layoffs should be the path of last resort, not first.  Here are 10 strategies to consider.

1. Keep Staff with Varied Skills and Deep Knowledge of the Company
   While the temptation might be to cut the most expensive salaries (who are often the most experienced employees) first, that actually hurts the company more.  Instead, retain multi-skilled employees with company knowledge that can be utilized to revamp or replace processes that were interrupted or establish more effective ones.  Also leverage key players to attract partners that can fill the gaps left by downsized employees and thereby soften the blow for the company.
2. Cross Train and Redeploy from Within
   Identify the skills needed to meet goals. Retain and retrain employees who can meet future challenges.  By linking the skill mix of today’s employees to the skills the company will need in the future, the organization allows employees to determine what they need to do to remain employed.  Successful redeployment requires the company to have a sophisticated career management process so that managers and employees are aware of open positions.  It must also provide career assessment and development activities that allow people to get ready for positions.
3. Do Succession Planning
   Work with mid-level managers to identify candidates with the management and technical skills needed for various positions, and create a plan for succession if key players – rattled by the layoffs – leave.
4. Offer an Employee Buy-Out with Revenue-Enhancing Opportunities
   Offer an “Employee Buy Out” within the organization and encourage employees to create a new business or line of service that the company can help market as part of the employee’s severance package.
5. Create a Cost-Cutting Plan Now
   Map out a series of strategies and steps employees can use as an alternative to downsizing. If the first step doesn’t get the needed savings, they move to the next.  Once it gets to reducing staff, areas of focus can include cutting compensation, hours, wages and finally placement.
6. Reduced Hours
   Put a policy in place that shifts everyone in a particular job category to a flexible working arrangement. The goal is to reduce the number of hours worked by each employee so that the cut-back inflicts a small amount of hardship on all rather than a huge hardship on just a few.
7. Lower All Employee Wages Temporarily
   Reduce staff wages to save money.  Everyone taking a moderate pay cut might save the company from laying off many employees.  Make the cuts smaller for hourly workers and entry level positions and a bit higher for management.
8. Voluntary Attrition

Ask staff if there is anyone who wants to retire early or leave on their own by offering a severance package. 

• Leave of Absence
  Encourage employees to take a leave of absence with full benefits for a specified period of time to help the organization weather a downturn. Those who do are promised a job upon completion of the leave but perhaps not the same job at the same pay level.  Those who have family demands (sick parent or newborn), alternative career training (master’s degree) or the financial resources to take time to pursue other interests (travel or writing a book) might welcome the opportunity without leaving the company.
• Shared Ownership
  Invite employees to trade pay increases or pay cuts in return for company stock.

Final food for thought.  While some may see layoffs as a normal and perfectly acceptable option during an economic downturn, research shows that that should be the last possible choice.  Not only does it send the wrong message to remaining employees and increase the risk of bankruptcy, it might also prove difficult to hire employees once again when boom times return.  Indeed, according to the U.S. Chamber of Commerce report published on January 23, 2023, “The latest data shows that we have over 10 million job openings in the U.S.— but only 5.7 million unemployed workers.  We have a lot of jobs, but not enough workers to fill them. If every unemployed person in the country found a job, we would still have 4 million open jobs.”  Companies might have a really hard time filling vacancies down the road. 

So How Many Employees is “Just Right”?

So how does a company ultimately determine how many employees it needs?  It is at the leadership’s discretion, but there are more technical ways to decide if a company needs to grow, downsize or is just right.  To figure out the optimal number of workers a company needs:

1. Management should look at the financial, sales and marketing Key Performance Indicators for staff vs. results including:

• Gross Profit Margin
• Profit Margin
• Net Profit Margin
• Operating Cash Flow
• Earnings Per Share (if applicable)
• Debt Retrieval Rate
• Revenue Growth
• Total Profit Added
• Budget Variance
• Revenue
• Monthly Recurring Revenue
• First Contact to Closed Deal
• Client or Customer Acquisition Rate
• New Paid Customers
• New Recurring Revenue
• Repeat Purchase Rate
• Average Order Price
• Opportunity Win Rate
• Close Ratio
• Sales Meetings
• Leads
• Customer Lifetime Value
• Customer Acquisition Cost
• Social Media Reach
• Website Traffic
• Click-Through Rate
• Share of Voice
• Instagram Engagement
• Newsletter Subscribers
• Ad Spend ROI
• Cost Per Lead
• CPA
• Churn Rate
• Net Promoter Score
• Customer Satisfaction Score
• Customer Retention Rate
• Client Renewals
• Cost Per Resolution
• Average Response Time

2. Review current staffing.  Ask the hard questions:

• How much money do we need to save?
• How much might we need to cut?
• How many people does that include?

While there are compelling reasons to hold on to good people, companies that are heavily overstaffed and don’t want to have to do multiple rounds of layoffs will have to make difficult decisions.

3.    Consider the company’s needs and areas where staff are over or underworked.

4. Analyze employee ROI. 

Once the leadership takes the time to go through each of these processes, a clear picture of how the company is operating will emerge and whether the staffing is too many, too few or just right.

Quote of the Week

“Employees are a company’s greatest asset – they’re your competitive advantage. You want to attract and retain the best; provide them with encouragement, stimulus and make them feel that they are an integral part of the company.”
Anne M. Mulcahy, former CEO and chairwoman of Xerox Corporation

© 2023, Keren Peters-Atkinson. All rights reserved.

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