During these recessionary times, with a fluctuating Canadian dollar, it may be tempting for Canadian technology companies to cut performing staff to reduce cash burn; before taking this step however, leaders would be well advised to consider alternatives, since the negatives associated with staff reductions are substantial and long-lasting.
When revenues decline, or the forecast is one of future declines in revenues, companies must ensure that they continue to keep opex in line with revenues to protect operating profits and maintain the confidence of various stakeholders (including banks, customers, and shareholders).
As a result, oftentimes, Company leaders will look to cut performing staff, since staff salaries are usually the highest single component of operating expenses.
There are alternatives however, and the repercussions of cutting staff first, can harm the longer-term prospects for business growth and success.
Let's examine the impact of cutting staff and then look at the alternatives. Note though that at some point it may well be necessary to cut staff. This should rarely though be the first step.
Some implications of cutting performing staff:
1. Remaining Staff-Morale and productivity are negatively impacted as employees grieve for friends who've lost their jobs and wonder if they are next. Managers and HR staff who've helped to bring the people being let go on board, are distressed at having to now be the ones to terminate their employment.
2. External Market-Regardless of the economy, most companies are always looking to hire for one or more positions. It is rare (but not unheard of) for a Company to impose a total hiring freeze. Instead, most companies introduce extra steps in their hiring processes to make it tougher to hire, such as requiring approval from the CEO for example in order to proceed. As soon as lay-offs are announced, potential candidates for jobs with your Company shies away from taking a position, since there is worry that they might leave an existing secure work environment, only to be cast loose by your Company in the months ahead.
3. Departing Staff-Staff who leave are ambassadors for your Company. They network both internally and externally and are a source for information about your Company to candidates whom you don't even know about. Depending on how they've left the Company, they may scare away great people you'd like to hire and as well, lure away great people from within the Company that you're looking to hang onto.
4. Work Environment-Cutting staff while continuing to spend money, say on marketing activities, or for executives' car allowances risks sending contradictory messages to staff, and breeds cynicism and may contribute towards a longer-term toxic work environment. It is amazing how much coffee talk there is (and none of it positive) when companies both cut and spend at the same time. This is not to say that both aren't possible; however, effectively communicating the rationale becomes doubly critical at such a time.
Alternatives:
There is much that companies can do to avoid cutting performing staff as a first or even eventual step, depending on the projected length and depth of any decline in revenues.
First, companies should take a look at areas for shaving costs. These can include a fixed percentage cut in overall discretionary spending. Areas where there is usually room to save include business travel, business meal, office supplies, conference, and other discretionary budgets.
Second, companies should take a look at accrued vacation time. In most companies, employees accumulate vacation spanning years, and the company accounts for this as though the vacation time were to be paid out (and as a result, a future operating expense). Companies can oftentimes substantially reduce this amount by requiring that employees take accrued vacation time. Further, companies can require that employees take earned current year vacation time as well.
Next, companies can take a look at total compensation. If the alternative is job loss, there may be a compelling argument for employees reducing base pay by some percentage and instead receiving Company options and/or the possibility of a bonus should future profit objectives be met. (The Company's leadership should set an example here).
Finally, companies can look at a reduced workweek for employees with resulting reductions in pay. These are not steps to be taken lightly, as there are implications in terms of employee morale and productivity. That said, if properly explained in the context of how much the Company values its employees; has a temporary imbalance between revenues and expenses; and is taking these steps to keep its workforce for the expected longer-term growth and success of the business, such action can be successful.
I have not talked about companies going back to their shareholders with a revised, reduced revenue and profit plan, in light of changed economic circumstances, although this is both a realistic, and (especially if the Board takes a longer-term view), attractive alternative to many of the above described alternatives.
In the end, companies only have one long-term asset; their talented, engaged, and productive employees.
It is in the companies' best interests to do all they can to protect this asset during both good, and (temporary) recessionary times.