The uncertain economic landscape of 2022 has left businesses and their founders between a rock and a hard place.
Many CEOs can’t afford to simply exist within the status quo frameworks they enjoyed as part of a rosy 2021. At the same time, they’re also struggling to raise fresh capital — and those who are able to raise money and extend runways are navigating the cultural complexities of down rounds.
The unfortunate reality is that many companies are instead having to cut back on staff to create more runway. This reduction in force (or RIF) is a more permanent version of a layoff where the budgetary changes that need to be made can’t be solved with a temporary change in personnel numbers.
A number of QED portfolio companies have had to execute RIFs. Many that have not yet done so are having intentional discussions about whether they should, particularly at a time when they’re dropping marketing spend and cutting back on both research and development plans and pet projects.
As experienced former operators, we have experienced these dynamics in the past. Candidly, we’re in a somewhat unenviable position of being able to help our founders navigate these choppy waters because we have been through it numerous times before.
Our best-practice advice to CEOs is to cut deep enough that they are confident there will not be a second round in the next few months.
Earlier this summer, we began sharing a five-page document that outlined our guidance with some of our portfolio company CEOs that was based on our personal experience and observation. The document was not meant to live in isolation — instead, it was a foundation upon which to build in collaboration with investors, board members and senior leadership teams. We have had extended discussions with most of our companies about the why, when and hows of making reductions.
We broke the process down into three parts — planning, execution and follow-up.
In some parts, the guidelines appear almost sterile — references to legal counsel, laws specific to local jurisdictions, shutting off access to email and Slack channels. The unavoidable reality is that while you’ll need to conduct the RIFs in an organized manner that is grounded in strong business rationale, there is always an overarching need to deliver the message with empathy and respect.
Not all companies that have executed RIFs have done so without error — even when the actual cuts happen as planned, avoidable mistakes can have a lasting effect on employees who remain.
Planning
The planning element of a RIF cannot be overstated.
It begins with assembling the team that drives the RIF and extends through risk assessments, scope, budget, scheduling and communications.
In a small company, that team may consist solely of top management. In a larger firm, representatives from different geographies, units and levels may be required. We’re working with our portfolio companies to answer a number of vital questions to be clear about the purpose, objectives and narrative.
- What is driving the need for a RIF?
- Could it have been avoided? What other options are or were available? What other actions are or could be complementary? If leadership erred, take responsibility for the mistakes.
- What will be the narrative? Tell the truth — your staff will know if you don’t.
- How will the brand be protected?
- How will you communicate with various stakeholders?
- Why now?
Regardless of how companies answer those questions, there is also a risk assessment that takes place. From a legal perspective, you have to ensure that you’re not violating laws in your jurisdiction. In particular, watch out for impact on demographics. In the U.S. for example, the WARN Act, ADEA/OWBA and other legislation may apply.
But even outside of legal concerns, there are operational, brand and morale-related issues to consider:
- How will the RIF impact both internal and external-facing functions?
- How will competitors and those laid off tell their version of the story and how will you counter it?
- What is the risk to retaining key employees and maintaining productivity?
To execute the RIF in the most effective way, leadership teams need to know which savings they are targeting and the timeframe over which they are examining. Our best-practice advice to CEOs is to cut deep enough that they are confident there will not be a second round in the next few months.
Other practical planning concerns include the selection criteria for employees to be severed. Teams should ensure their legal team reviews them and they are objectively tied to the business challenge.
- What percentage of total staff and staff by level or department?
- What will you offer as severance or outplacement support?
- Will you offer retention or performance bonuses to key employees?
- Who will qualify? Will you do it by division, segment or location? Ensure HR and legal opine on any deliberate or inadvertent selection criteria.
- When will you speak to them? Preferably at the same time as the RIF or immediately thereafter.
When it comes to your communications plan, brevity is important.
Develop a script for both internal and external use to explain the challenges and required actions and keep it short. Decide who is authorized to give the story, sticking to the prepared script and answers. If it makes sense for management to own mistakes, consider how to phrase that. Practice it and remember to avoid talking about how it is hurting you — this kind of narrative falls flat. After all, you still have your job.
Also, decide who from management — and possibly HR — will be present at each discussion and develop the schedule. Decide which meetings will be remote, and which, if any, in person. Try for individual instead of group discussions.
Execution
While executing the RIF itself comes down to timing and sentiment, arguably the most important aspect is to try to cut just once. Multiple RIFs result in a loss of credibility throughout the entire organization.
If possible, do it all in one day and don’t do it before a weekend or holiday. You’ll want to follow up with a town hall the following day for those that remain. Send out meeting invitations the morning of the meeting to avoid overnight anxiety and rumors and explain that you will hold a town hall or several meetings after the layoff discussions to answer questions. As the individual meetings are taking place, send out the companywide message that was prepared to explain the need and the plan.
During the meetings, expect anger, shock, confusion, sadness and pushback, but stay calm and stick to the script and the prepared answers. Emotions may understandably be running high — shutting off access to company Slack channels and email as the meetings commence may seem callous, but it protects from unauthorized heat-of-the-moment communications, either internally or, just as importantly, externally.
Anticipate a slew of messages from staff who have not been met with yet, as well as potentially from non-employees who hear about the layoffs. Have a communications response ready, because disgruntled leavers will often reach out to the media.
Follow-up
Plan for one or more town halls, depending on logistics. Have all of the management team attend even if only one or two will speak and be prepared for tough questions.
Employees will want to know whether management made a mistake and how much cash you have left before it runs out.
They might ask whether there will be another round, whether they’re for sale or how they’re expected to get their work done. Be prepared to talk about the future but in cautiously optimistic terms.
Over the following days and weeks, plan on spending extra time with the remaining team members, often one on one. You’ll want to ensure they feel appreciated and you can use the touch points to reassure them that leadership is committed to the path forward.
Importantly, a CEO will be able to reiterate the rationale for the RIF and ultimately reinforce the role they play in making the company successful.