Considering the recession that we find ourselves in, I guess it is not surprising that I find myself having many discussions about how to handle the situation where cuts needs to be made. Unfortunately, I have watched many leaders take an overly optimistic view and totally underestimate the dip of the market and then over estimate their available resources to weather the storm. For startups with limited resources, this can be fatal.
In this graphic, I have used the blue line to denote the revenue coming into a company. The red line denotes the expense reductions that the company is making with the exact points of reduction marked with the A, B, C and D markers. The area marked in green between the two lines is the bad zone for companies without sufficient reserves to weather the downturn. Unfortunately, I have also seen the plug getting pulled because of insufficient funds.
Although this approach is fairly common, it tends to have a rather disastrous affect on the people in the company. The people are under continuous threat of additional cuts and therefore some of them resort to some rather significant self preservation behaviors. In these circumstances, the teamwork takes a backseat and as such the productivity also take a massive hit. In addition, talent retention is an issue and in most cases the best people walk first, because they can, leaving the lower caliber folks behind.
This graph shows a totally different behavior and the blue line shows the incoming revenue while the green line shows expenditure. In this case the expenditure has been drastically reduced when the incoming revenue has declined. In this graph, I have created the impression that there is very little between the incoming revenue and the expenditure but there are some very successful companies that follow this model but have a much healthier buffer between the the incoming revenue and the expenditure. In this case, cuts in expenditure are made at points A and B and these cuts do mean job cuts. Nothing should be spared from the cuts. e.g. it is far better to sacrifice the free sodas instead of your office mate.
The purple area is where the company is doubling down and investing for the market upturn. This investment, provides the company with a head start on their competitors. This approach has some significant benefits because the people trust the management more because they are actively managing the situation. In addition because a strategy is being followed, it creates an open environment that is predictable for the employees and leads to much less fear and uncertainty. I have found this approach to be much more acceptable to the high performers and therefore allows you keep the staff that you want to keep.