Managing Layoffs at Startups: Best Practices for Investors and Founders

Over the last decade, India's start-up ecosystem has grown exponentially. A number of initiatives have been launched by the government and private sectors to provide a platform for young entrepreneurs to work on innovative ideas and projects. It is one of the most rewarding and challenging things to be taken off with utmost diligence and dedication.

It is crucial for any startup to cross profit margins and eliminate overhead costs. One such cost that startups usually try to cut off is manpower. Layoffs are a challenging but essential component of running a successful startup. With more intense competition and financial constraints, it is becoming more common for startups to consider layoffs as a means to maximise their resources. However, for investors and startup founders, layoffs should always be viewed as a last resort, available only after all other options have been exhausted. Founders and investors should adhere to best practices when making an effort to prevent layoffs. Some of the practices that can be adopted are discussed below.

Ensure adequate staffing levels: As a startup, finding the correct balance of the required workforce is critical. It can be tempting to hire an excessive number of employees to meet anticipated growth. While this may make sense in the short term, it can quickly lead to an overstaffed and overly expensive workforce that costs more in the long run or hampers growth. It is critical to have the optimum workforce levels for each project or function.

Forecasting and budgeting: Proper budgeting and forecasting are critical to preventing layoffs. Founders and investors should develop a business strategy that details their spending as well as a cash flow statement that tracks their expenses and income. With this data, businesses may make a more accurate assessment of their company's performance and plan for future disruption.

Offer flexible pay structures: Flexible pay structures, including bonuses, stock options, and other incentives, can also assist inspire employees and guarantee that their compensation packages are competitive in the market. This will assist businesses in attracting and retaining exceptional employees while also keeping expenses under control.

Utilize automation & outsourcing strategies: Automation and outsourcing can be important strategies in minimizing the need for layoffs. Outsourcing certain repetitive tasks can allow a company to reduce hiring costs while saving time and money. Automation can help improve efficiency, allowing a company to generate more revenue with fewer employees. It also helps to eliminate overhead costs that no longer serve the company’s goals.

Employ a hybrid/contingency model for hiring: It can be beneficial to quit the traditional hiring model in favour of a hybrid or contingency approach. In order to cut overhead expenses and potential liabilities, an increasing number of startups are resorting to contract workers, freelancers, and part-time employees. This enables entrepreneurs to have the personnel they require without the long-term commitment or risk associated with full-time employees.

Utilize flexible scheduling and remote work: Many startups are utilising new technologies to allow employees to work remotely and on flexible schedules. This can assist a startup in staying ahead of the competition while avoiding costly layoffs. Flexible work arrangements can help an organisation better manage its personnel while potentially improving the quality of life for all units.

Clear communication policies: Startups must have clear communication policies in place to keep all employees on the same page. Regular, both formal and informal, check-ins between top management and staff can assist address any possible difficulties that could lead to layoffs. Good communication can also promote a better understanding of what is expected of everyone in the organisation, resulting in a more pleasant working environment for everyone. This will ensure that teams are ready to pivot if needed and that everyone understands the financial stakes of the company.

If layoffs are unavoidable, it is important to have a strategic plan in place to handle the situation in the most business-savvy way.

Planning and communication

Before making any layoff decisions, it is critical to thoroughly plan and convey the process within the company. Begin by establishing a list of all affected employees and any adjustments to their jobs that are required. Then, create a timeline for implementation. If possible, be open about why layoffs are necessary and how they will affect the company. Consider how to offset any long-term effects of the layoffs, such as providing severance packages, job placement services, or retraining assistance to laid-off employees. Communication that is clear and straightforward is essential for ensuring that everyone involved understands the process and how it will affect them.

Formal execution

When carrying out layoffs, it is critical to treat the process with dignity and respect. Schedule meetings with relevant personnel and supply them with the necessary documentation. Discuss the details of their severance payouts and present any job placement tools available during the meetings. Make an effort to be encouraging and to lend a listening ear. Finally, document everything and provide an explanation of the reasoning behind the decision.

Moving forward

Following the completion of layoffs, it is critical to take steps to rebuild morale and a positive workplace culture. Recognise and praise those employees who remain for their hard work and dedication. Encourage remaining employees to take advantage of any offered benefits or services. Maintain transparency and inform employees of any future changes or disruptions.

Offer follow-up support

Finally, it is critical to provide follow-up support to employees who have been affected by layoffs. This could involve assisting them with job placement, financial counselling, and other sorts of aid that may be beneficial. Showing them that you are still prepared to help them after they have departed can go a long way towards convincing them that you value their efforts and contribution to the company.

Make it a learning experience

Although layoffs are never a pleasant experience, they can be used to learn new skills. To achieve a positive outcome, entrepreneurs and investors should assess the methods they used to make the decision, such as scoping out the potential, examining alternatives, and working with the human resources team. Evaluate the event and utilise it to guide future decisions.

Finally, investors and founders must be proactive in anticipating potential issues and implementing measures to prevent layoffs before they become necessary. This could involve investing in resources and technology to help expedite processes, as well as giving additional assistance in the event of an emergency.

Although it’s never easy to make layoffs, investors and founders must follow best practices to ensure that their decisions are sound and aligned with the best interests of their company. They must ensure that best practices, such as optimising team size and structure, budgeting and forecasting, and maintaining good communication practices, are followed. By implementing these practices, startups can prevent layoffs and position themselves for future success. Of course, no guarantees can be made, and layoffs could still take place. A well-planned and executed layoff process is essential for startups to effectively manage the downsizing of their workforce while still protecting their businesses.

(Author is a Founder & CEO, Techbooze Consultancy Services)