This is an AArete Profitability Improvement insight

Layoffs affect every sector at different times and for different reasons. While we’re not currently in a period of higher-than-average layoffs, a handful of leading tech organizations have announced cuts in recent months after plans for major post-pandemic expansions didn’t come to fruition. In financial services, deal flow is down, leaving companies with more employees than needed. And retail and manufacturing continue to feel the effects from the drop in consumer spending caused by inflation.

At the board level, members don’t typically involve themselves in an organization’s day-to-day decision-making, provided they have confidence in their executive team. That said, when it comes to company strategy, members can certainly weigh in if they view their organization as being too fast to implement layoffs rather than exploring other cost-cutting strategies first. The perspective and wisdom of board members can be pivotal in helping CEOs and CFOs drive profitability and long-term value again while maintaining workforce stability.

Avoiding the Easy Solution

Whether organizations are eliminating positions to compensate for previous over-hiring, or their workforces are being right-sized because of business shrinkage, layoffs are rarely the best way for organizations to reach long-term stability. Although layoffs can be helpful for short-term cost reduction and appease public investors and board members, they’re hard on company morale, they’re hard on future growth and they’re hard on stabilizing a business to manage through ups and downs. Layoffs rarely result in recovery. Board members can do their part by supporting leadership to establish both short-term and long-term cost reduction initiatives across the organization beyond just layoffs.

Layoffs tend to be the easy answer — but they shouldn’t be your first answer. There may be no way to completely avoid layoffs at some point, particularly in the midst of a prolonged economic downturn, but businesses can avoid putting themselves in a position where they’re constantly having to evaluate reductions.

Here are three strategies that board members should encourage their organizations to incorporate today to stay sharp and nimble, making force reductions a rarity.

1. Establish a Culture of Cost Containment

Every company wants to contain costs, but many don’t approach it with the necessary level of commitment. If a client doesn’t have a strategy of continuous improvement and cost reduction, the opportunity is now to set this strategy moving forward. For cost management to be done companywide, it needs to be an ongoing leadership initiative that’s clearly communicated from board members to C-suite executives to entry-level employees. Costs continue to rise, but that doesn’t mean they have to rise for you. Everyone in an organization should be encouraged to be good financial stewards within their own spheres.

Organizations are usually good at easy strategies, such as switching vendors or requesting proposals. This may stave off price increases but rarely brings the meaningful impact needed to drive profitability. By establishing a cost management culture, organizations will be able to explore innovative strategies to boost productivity, reduce licenses, and have better visibility to their third-party cost drivers.

For example, the time has come for every organization to pressure their software licensing. Software licensing can be confusing and tends to be a major cost driver within IT, but these expensive tools tend to be duplicative and unnecessary if there is not a uniform strategy to managing and optimizing your application infrastructure. Companies should investigate how extensively certain software tools are being used by employees and adjust the company’s licenses appropriately.

By constantly evaluating where money is going, down to an individual level as much as possible, organizations can often find the necessary dollars to reinvest into growth and innovation. It also allows them to look further into the future and potentially alleviate any short-term financial pressures that might normally lead to layoffs.

2. Scale Efficiently and Productively Without Over-Hiring

Generally speaking, public companies, with the support of their boards, react to growth by making additional hires — more technologists, more salespeople, and more support functions. Many organizations establish a standard KPI for each employee, then staff up to gain a predefined level of added capacity — 20% more people to create 20% more growth, for instance.

Instead, board members should encourage their organizations to maximize the productivity of existing staff by investing in technological tools and resources to reduce repetitive work. Pushing the scale so that employees feel a bit of tension in their workday is not necessarily a bad thing, though managers have to be extremely careful not to risk burning out dedicated employees.

Outsourcing non-core functions to a third party can allow companies to essentially turn a nozzle on and off without affecting their core workforce. However, this option should be used sparingly to avoid pushing off too many responsibilities to the third party. Businesses that pressure-test with the goal of remaining agile and productive can stave off reductions while continuing to invest in growth.

3. Modernize Processes

The most common approved investments from public boards are focused on modernization. But, to most public companies, modernization means simply staying current with their ERP and CRM platforms. It goes much deeper than that. Where organizations often lag is in updating the essential business processes that connect employees, customers, leadership, company data and everything else in between. In their place are stopgaps or manual workflows that ultimately inhibit employees’ ability to work efficiently and productively.

Companies can begin exploring their possible shortfalls by asking these questions:

• Do you have systems in place that allow employees to reach peak productivity and performance?
• Do you have the right data availability to allow people to make faster decisions?
• Do you have transparency into how your resources (both technological and human) are allocated?
• Do you have the right tools to drive growth from a customer experience standpoint?

Prioritizing Top-to-Bottom Efficiency

The larger a company is, the more difficult it can be to ask the hard questions that can result in company-wide cost savings and increased efficiency, but board members might find that by emboldening management to make small but meaningful changes companywide, they can extract greater value from the structure that already exists.

By modeling a commitment to greater efficiency throughout an organization, board members and executives can create a snowball effect among employees. The result is a company that’s better prepared to weather occasional downturns and doesn’t need to consider layoffs as a last resort.

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