Reducing the staff head count in a business is never a pleasant task - on either side of the desk. However, it is often a fact of life in business. This article distills out some of the business wisdom on Redundancy Planning.
The material we have collected is presented as a Profit Savvy Menu as there is no single solution for this issue. You can pick and choose from the topics to assemble your own redundancy plan.
Keep in mind that down-sizing staff is a very emotionally charged activity and requires a good understanding of the relevant legislation so that you do not find yourself in hot water.
Reasons for Redundancy
Some of the things that lead to redundancies include:
- Cost reduction.
- Surplus staff after merger/acquisition.
- Plant/office shutdown.
Cost reduction is a common reason for redundancy.
Staff are typically 50% - 70% of a businesses’ overhead costs. Therefore a fast way to reduce costs is to reduce head count.
Savings are not only limited to very large companies. Take a small company, with (say) a 10% profit margin and staff representing 12% of the total company costs. A 25% (1/4) reduction in staff, gives around an extra 3% (12% * 25%) profit to the existing 10% or an improvement of 30% in profits.
Keep the Right People on the Bus
Jim Collins, in his well-known "Good to Great" books, uses this term to refer to having appropriate people ready to work on your business. He argues that it is more important to have the right people, before you start on a business or project overhaul, than it is to try and get them as you are part way through the overhaul.
There should be no doubt in your mind that you are embarking on quite a difficult task.
Managers are often the sort of people that can put up with more uncertainty than more junior staff. This means that you might be comfortable with the amount of change that you are about to introduce to your organisation, many of your staff may not.
They will quickly divide into 3 groups:
- Those against you.
- Those largely indifferent.
- Those in favour of what you are trying to do (probably not many in this case).
Early on, you should take something of a mental stock-take on the personnel that you have available to you and roughly categorise them into these three groups. If you have very few that are likely to support your efforts, you might want to consider whether this is something that you are ready to embark on or whether you should take time to change your staff until you get those who might support you.
We also write more on this topic in our Change Management articles.
Broad Cuts First in a Redundancy Plan
If you have specialist administrative positions, for example, legal, human resources, accounting, IT, finance, in a small organisation, they could be made redundant and replaced with outsourcing services.
These jobs might be thought of as “unproductive” in that adding more or removing these staff does not have a direct impact on production which is the determinant of profit.
Each of these persons on your full-time payroll will try to demonstrate that their skill is necessary and thereby contribute to the additional workload for other areas.
Outsourcing these ‘unproductive’ jobs gives you several advantages:
- You obtain only the fraction of a person labour inputs that you require rather than adding a whole person at a time.
- You can change the outsourcing company if you are not satisfied far more easily than changing permanent staff.
- The outsourcer is a specialist. They are likely to both have better skilled staff and be better able to manage their specialisation.
- If they make a mistake, you can seek legal redress against them which you can’t with your own staff.
- You may not have the knowledge of the specialisation to know if staff are doing a good job or not. When outsourcing , you are essentially hiring a specialist manager for this role
Who Goes, Who Stays in a Redundancy Plan
As part of your re-sizing process you will have decided that you need a certain number of, for example, sales people. To choose which sales people to keep, we want to perform an 80/20 analysis on them.
The first step is to determine some method of scoring an individual’s contribution. This might be on several different criteria such as wage, skills, flexibility, attitude and location. With several people, this can become very complex very quickly.
Attitude/Skill Matrix Staff Analysis
A comparatively straight forward approach is to put people in a cell on a 4 cell matrix.
On the left-hand side is Attitude - first row is positive; second row is negative. In the columns is Skill - first column is high; second column is low. You can quickly place people into one of these cells.
|High Skill||Low Skill|
|Positive attitude||1. Positive attitude, high skill||2. Positive attitude, low skill|
|Negative attitude||3. Negative attitude, high skill||4. Negative attitude, low skill|
Clearly the people in Cell 1 (positive Attitude, high Skill) are keepers and you should hang onto them for dear life. Some people in Cell 2 may be able to be improved with additional training or counseling. They have the right Attitude but their Skill is low. However, if they do not seem to have the ability to improve their Skill, then they might be one to go.
The person in Cell 3 (high Skill but negative Attitude) is someone to be wary of. These are probably bright people but their poor attitude is likely to channel some of that talent to try to bring you and the project down. If you cannot move their Attitude, it might be a good idea to let them go.
People in Cell 4 (negative Attitude and low Skill) are not as dangerous as those in Cell 3 because they are not necessarily competent enough to fight back as comprehensively as the people in Cell 3 can. Nevertheless, they are not attractive people to continue in the employment of the business and are also candidates to be made redundant.
A successful manager would aim to have all staff that they retain in Cell 1 insofar as possible and Cell 2 if necessary.
Weights and Score Analysis of Staff
For a more "scientific” approach, we suggest that you build a Weights and Scores Matrix (see Weights and Scores article).
Put the various selection criteria on the left-hand side along with an importance weight for that criteria. Across the top of the matrix place each of the individuals and score them. When you multiply the scores by weights for each person they will get a value at the bottom. This will quickly allow you to see what to rank each person’s contribution to your business. You would normally then begin by retaining the highest scoring individuals up to the point where you have the number of staff you believe you will need to staff, in this case, the sales function.
An exception to this might be if you start retaining people who score less than an acceptable score from the maximum possible score. Typically, if they are dropping below 60% and certainly below 50% of the possible score you might find that these people need to go and be replaced by better sales people.
This is a laborious process but it will give a rigorous analysis identifying the ability of an individual to contribute to your profit turn around.
Study your Organisation Chart
A study of a Management/Organization chart of your existing organisation can be an enlightening way to see where managers can be removed.
There is a management concept called the "Span of Control". This argues that people should typically have at least 8 direct reports and, in some organisations, many more. At General Electrics, for example, it was reported that the number was an average of 15. One can see a functioning example of this in the Armed Forces when you look at the ratio of Sergeants and Officers to Privates in the Army.
If your organisation chart shows many Managers with fewer than (say) 8 direct reports you could merge the several direct reports for each manager under one manager and the other would then be redundant. An exception might be if the Manager is a technician actually being ‘productive’ in their job. If they are solely supervisory, Parkinson’s Law (see Parkinson’s Law article) says they will be micro-managing their direct reports to prove their worth.
Also, you can eliminate some positions by combining their roles. In a small organisation with a small span of control, you could have the Sales Manager both managing the rest of the sales staff but also being an active Sales Agent. This doubling up of roles might be particularly useful within geographic locations where an existing functional Manager (say Sales) can also be the Location Manager.
Read more in our Streamlining Organization Trees article.
How Deep do we Cut in a Redundancy Plan
Parkinson's Law (see Parkinson's Law article) tells us that "work will expand to fill the time available". This effectively means that there is work being done by staff that doesn't add a great deal of value to the business. Reducing the number of staff effectively takes out some of this hidden surplus capacity and the remaining staff do not necessarily need to work harder; just smarter by selecting what work really does need to be done.
People experienced in rationalising staff numbers say that in most white-collar organisations up to 1 person in 4 can be made redundant without any reduction in worthwhile output. Sometimes this can be as high as 1 in 3 or 1 in 2.
The reason for this is:
- Much of the work is unnecessary (Parkinson's Law).
- Much of the necessary work is done inefficiently (see our Multi-tasking article).
- In almost any organisation the poorest performing 25% of people simply aren't very good at what they do and are not adding much value.
By pruning these people early, their salaries are saved. These are typically 60% of a services businesses costs.
Managing the Redundancy Process
Letting people go is a very difficult exercise.
In a larger organization, there will likely be an HR Department to advise and assist with the process.
In a smaller organization, and if there are several people to be made redundant, you might want to consider hiring specialist talent to do this. They are likely to be:
- Better at it than you are because they do it for a living.
- Able to save the distraction of your other management resources in a one-off exercise.
- Able to reduce the psychic damage on the managers that you are retaining from having to let people go.
- Aware of the necessary legislation and follow that correctly.