The Strategic Downsizing

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Downsizing in an economic crisis is appropriate, but cuts need to be strategic or they can be disastrous for future succession and growth.

At the beginning of the COVID-19 crisis, Dr. Nancy Messonier, director of the CDC’s National Center for Immunization and Respiratory Diseases, put out a statement that essentially said it was no longer a matter of if but when virus would spread in the U.S. and how deep its impact would be. Even now, we can ask the same question, and probably get the same answer, on corporate restructuring: not if—but when—and how severe will the impact be.

PwC’s recent CFO Pulse Survey indicated more than 80% of corporate CFOs expect a reduction of revenue and profits due to COVID-19, up from 60% a few weeks ago. More than a quarter anticipate some type of cost reducing restructuring to occur in the immediate future, up from 16%. Both of those trend lines are going in the wrong direction and, based on my own unscientific survey of CHROs and CFOs in my network, things are going to get worse before they get better.

If corporate restructuring is indeed inevitable for a significant number of companies, how will organizations plan and implement it in a manner that preserves the company over the short-term without decimating its prospects, particularly from a talent standpoint? Well, if recent examples are any indication of future behavior, these initiatives will be implemented in a manner that has damaging and far reaching implications to a company’s ability to retain and develop talent.

The last time we managed a crisis that approached the magnitude of what we are experiencing now, was during the 2008 financial meltdown. As that crisis took hold, cost-containment initiatives led to downsizing, particularly at the middle management level. As middle management positions were eliminated, those who remained took on the work of their departed colleagues. They essentially were asked to do the same work they were doing previously, just more of it.

At a senior level, restructuring operated differently. Because there are fewer senior level positions within an organization, there is less duplication of work amongst the senior peer group. When a senior level executive’s position was eliminated, their peers picked up the slack, much in the same way as it occurred at a middle management level. However, those peers picked up additional work that was substantially different from their normal responsibilities.

To use finance as an example, when you reduce staff from three accounting managers to two, the remaining managers usually pick up more of the same work that is left over. Restructuring makes them go narrower and deeper. But, when you eliminate the vice president of tax position, you may give that leader’s responsibility to your treasurer. Since the work is not duplicative, the new vice president’s of tax and treasury responsibilities go broader.

That combination is a disaster for succession planning. Adding in the fact that most companies also slashed their executive developments at the same time, corporations decimated their succession pipeline in a matter of months. As the economy recovered and talent needs grew, it was nearly impossible to promote from within as the gaps between levels had become so great. Consequently, when a senior leader left for a new opportunity or retired the company needed to seek outside talent to replace him or her. My industry got rich as a result.

There is a real danger that corporations will repeat the mistakes of 2008 in the current crisis. The recent furloughs and layoffs that have impacted the retail and hospitality industries are only the first wave. As other sectors of the economy are impacted, and more deeply, additional cuts will be made that will more directly impact the management and executive ranks.

Smart companies will deliver short-term cost reductions while avoiding dilution of critical, long-term talent needs. In evaluating how to accomplish both objectives, management teams must keep the following factors in mind:

• Don’t mortgage your future. While preserving the financial integrity of your enterprise, adopt a differentiated approach to downsizing where the longer-term talent needs of the organization are part of the decision criteria. Avoid generalized cuts that neglect to account for high potentials and individuals you’ve invested significant resources developing. If you need to separate a high potential employee, at least make sure it’s an informed decision.

• Consider the implications restructuring has on development and succession. Be thoughtful regarding how the organization and work will be structured after a downsizing. If possible, provide opportunities for high potentials to take on different work and not more of the same work. Be mindful not to increase gaps between levels that will make internal progression more difficult when things rebound.

• Have a talent recovery plan. Given that training and development budgets will most likely also be cut, be sure to identify inflection points where improving business conditions will allow for their reinstatement. Just because you can live without these initiatives doesn’t mean you should. This may only become apparent when your current generation of leadership retires or leaves, but when it does it will be risky, and expensive, if you need to replace the majority of them from the outside.

• Be transparent. The more your employees feel they can trust that you are being open and communicative through a difficult transition, the more loyalty you can engender. This is particularly true of your high potential employees. Create an individualized plan for keeping those colleagues close as they are the greatest flight risk and will inflict the greatest long-term damage if they leave.

It appears that the global economy will sputter along at about 80% capacity at best until we are on the other side of this crisis. Restructuring and downsizing under these conditions is both appropriate and inevitable. But, if we can learn anything from 2008, it’s that yielding to the pressure of delivering immediate cost savings at the expense of the future generation of enterprise leaders will become an inhibitor of growth. While it may appear expeditious or even egalitarian to cut across the board, strategically reviewing the impact of restructuring on mission critical positions and high potential development will improve your ability to remain agile and resilient throughout this crisis and enhance post-recovery success.

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