5 Ways to Strategically Downsize Your Business

Downsizing is one of the most stressful tasks HR professionals face. In 2023 alone, tens of thousands of employees have been laid off as Salesforce, Amazon, Disney, Accenture, and more than 20 other enterprises chose to downsize.

As you guide your company through downsizing, executives and employees will look to HR for help navigating its many challenges. Common struggles include:

• Internal communications
• IT security, including managing accounts and permissions
• Public relations
• Implications for business profitability
• Managing the morale and retention of employees who stay

While downsizing may be an appropriate choice under difficult circumstances, it is an emotionally difficult experience. HR professionals can play an influential role in ensuring downsizing is legally compliant and as compassionate as possible.

Read on to discover best practices for managing downsizing, offboarding employees, and protecting the business's long term health.

What Does Downsizing Mean?

The definition of downsizing is the permanent reduction of a company’s workforce. Sometimes this is done to reduce staff costs, because of the business relocating or if a portion of the company's operations become automated.

It’s usually a decision made in the company’s best interest, not due to a fault or misconduct from the employees.

When Should You Downsize?

It’s hard to know the right time to make such a large business decision. Most high-profile corporate downsizing happens in periods of uncertainty – for example, if your industry is declining, or your country is facing an economic recession.

During economic downturns, the general public has less cash to spend. Consequently, businesses have less demand for their goods and services. So, in order to stay afloat during these times, companies sometimes need to cut costs.

One of the easiest ways to do this is by reducing the number of employees a business has. The benefit of cutting costs this way is that a business can remain operational – albeit on a reduced scale – while it weathers the economic storm.

What Is the Key to a Successful Downsizing Effort?

The most important thing to remember is to be transparent. Downsizing has a huge effect on lives and livelihoods. To limit this, you should prioritize treating your employees with professionalism and respect throughout the entire process.

One crucial element of this is communication. As early as possible, it would be best if you made your employees aware that layoffs are a possibility. You should then maintain clear communication at every stage of the process.

This allows you to give affected staff the greatest possible notice period, which will give them the time they need to find a new role. If you communicate poorly during the downsizing process, you’re likely to hurt employee morale. In turn, this will see your productivity and employee retention suffer.

5 Ways to Strategically Downsize Your Business

Your next—and most difficult—task is to figure out which employees to let go.

There are third-party auditing and consulting firms that will do this for you. However, these are often expensive and may fail to recognize some of the value that individual employees bring to the table.

In a 2023 BambooHR survey, we found that 65% of HR professionals rely on a "last in, first out" policy. The basic logic is that you calculate the percentage of your workforce which you need to cut to stay afloat. You then lay off this percentage of employees in order of who joined the company most recently. While this is sometimes the easiest to explain, it isn’t any better than choosing employees to fire at random.

Here are five key things to keep in mind when it comes to corporate downsizing:

1. Keep It Legal

It may be obvious, but one of the most important considerations in any downsizing exercise is your legal position.

Depending on where you’re based, you may be subject to a range of legal requirements before you can downsize a business. These may include:

• Standardized selection criteria
• Minimum requirements for severance packages
• Proof that lay-offs are unavoidable
• Appeals procedures
• Procedural requirements

If you don’t meet these properly, you may find yourself on the losing end of a lawsuit or suffering reputational damage. It’s wise to seek out expert legal help when you’re dealing with furloughs or layoffs.

2. Consider Asking for Volunteers

It may sound funny, but some of your employees could actually be happy to lose their jobs. There are likely to be some people in your organization who would like to change careers, start their own businesses, or go back to school.

You could also consider offering early retirement plans. Employees who have been with your business for longer generally have higher salaries for the same roles. Older employees may also already be part of a more generous pension or retirement plan than their younger counterparts. This often reduces the additional costs of early retirement schemes compared to voluntary redundancy. You may find that employees will knock down the door to receive an early retirement package.

3. Focus on Departments

Another effective approach for strategic business downsizing is to focus on specific departments while ringfencing others.

One way to do this is by using a little bit of common sense. For example, a sales team of 100 people may be able to operate effectively after a 30% job cut, but an accounting department of 3 people probably wouldn’t.

Similarly, you may wish to classify certain departments or job functions that are mission-critical. A hospital is a good analogy for this. Here, the organization wouldn’t be able to achieve its bottom line if it reduced medical staff like doctors and nurses, so these would be mission-critical. Job losses would then be limited to non-mission-critical staff who work in administrative or business services departments.

4. Create a Dynamic Selection Criteria

A more in-depth strategy for selecting staff for layoffs is to create a list of different criteria and score each staff member based on these. You might even weigh each based on their relative importance to the business.

These criteria might include:

• Seniority
• Experience
• Unique skills & knowledge
• Management skills
• Recent performance

The benefit of using an employee evaluation strategy like this is that your remaining employees will be those best suited to keeping your business afloat. You should communicate this criteria ahead of time to ensure transparency and trust throughout the process.

5. Have a Post-Downsizing Plan

Last, and definitely not least, have a plan for what’s going to happen after your company has downsized. It’s essential to know how your business is going to ride this storm, even after the employees have been laid off.

You may have had to combine roles or change existing job titles. If this is the case, ensure that the remaining staff have been cross-trained accordingly so that all tasks are completed to the same – if not better – standard than before the downsize.

This will help ensure that the remaining employees do not feel overworked and will keep their morale up. You may also decide to give back and make small sacrifices for your remaining staff to regain a positive working environment. This could be in the form of flexible working hours, a surprise team away day, or even a bonus.

Downsizing is never an easy decision. It must be carefully considered, and all parties must be respected. Make sure that you stay transparent and empathetic throughout the entire process. Ask your staff how they feel and listen to their concerns and see if you can ease their worries in any way that you can.

Now you understand the meaning of downsizing, you can start to put steps into place to strategically downsize your business by employee offboarding.