How to downsize your company as low oil prices bite

Firing people is not always the most effective way to cut costs, writes Sabah Al Binali.

I have been involved in downsizing at many companies and have been exposed to both the theory of downsizing and the horror of the reality. In today’s business environment we are seeing faster downsizing than usual, but in many cases still not the most effective approaches.

Where senior managers and business owners make the biggest mistake is in understanding their biggest risks in these scenarios – morale. The problem with morale is that it takes time to build and is easy to shatter. The idea that damage to corporate morale can be quickly regained is false and leads to counterproductive strategies.

The first of these strategies is spending far too much time between the time the decision to downsize comes and the actual downsizing happens. This creates a massive unknown for each employee – will I have a job or will my employment be terminated at the beginning of an economic downturn? Worse, each time a manager is asked a question to which they do not have an answer. Nothing creates fear like a frightened imagination.

The solution to this is pre- planning. I was chairman of the business information company Zawya for more than a decade and we had such plans ready and agreed in advance. What is even better is to place such issues within a larger context to help maintain morale. In 2008, Zawya updated its crisis response plans even though we did not know the impact. In 2009, when it became clear how serious the issues were for the economy, we were able to immediately, and confidently, answer employees’ questions.

The second strategy is to place downsizing as only one part of the expense management process. At Zawya we had a defined formula that looked at rolling 12-month sales, receivables growth and changes in cash at hand as part of our triggers. We were willing to absorb some sales loss, some delay in revenue payments and especially partially use our cash buffer before we considered downsizing. Employees always like to feel that they will not be fired to save a dirham.

The best strategy I saw was a suggestion that we made to the employees. Instead of firing people, if certain negative performance triggers were hit, we would cut salaries for everyone to reach the necessary savings. They unanimously agreed. That is how powerful out-of-the-box thinking can bring employees together. Morale was not dropping, it was increasing because we were coming together.

Senior management extended this plan. They suggested that they should take cuts first and then middle management if necessary and so on. Well, the board of directors were not going to be left out and joined in. Whereas nearly every other company was keeping their high-cost managers and firing the lower employees, we were doing the opposite with our salaries. You can bet your bottom dollar that this approach keeps morale high and increases loyalty. I wonder how many boards and senior managers took pay cuts before firing their hardworking employees.

People say be humane. I say be a leader.

Which brings me to the speed of downsizing that is happening, and it is breathtaking. The most probable cause of what seems to me an irresponsibly fast downsizing is the fact that the managers got caught out in 2009 and not wanting to repeat that are cutting employees as if it is 2009. Yes, oil has dropped dramatically and this will effect government spending. But low oil spurs the global economy. Ever think of that?

The only other reason to cut this fast is if the business is dependent predominantly on government business. That is what happens after, when things are good, managers get lazy and use the government instead of doing the hard work of diversifying their business. If that is the case it is the senior executives who need to be fired. After all, they made the mistake.

The worst thing that I have seen in downsizings is the corporate politics. Decisions are not made using true performance measurement of the employees but instead the decisions selecting the employees for termination are based on corporate politics. Boards are well advised to keep an eye out for that.

I fear a scenario whereby panicked managers overreact and hurt our long-term sustainable growth. I hope that they can think outside the box and find solutions that can protect the downside without damaging our human assets.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com

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