Budgeting

The lead-up to layoffs

While CFOs might be keen to shore up their balance sheets, hasty layoffs could affect a business for years to come
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· 4 min read

In recent weeks, layoffs have hit the tech ecosystem hard. From industry giants like Meta and Amazon, to ride-share company Lyft, and cloud provider Salesforce, many employees are now rearranging their lives in a fraught macroenvironment (and that’s not even mentioning Twitter, which has a set of unique post-acquisition issues all its own).

But how does a company decide when and how to let employees go—and is there a strategic checklist that CFOs follow when making the call to reduce headcount?

“What often happens is the process really starts well in advance of any type of decision,” Russ Porter, CFO of the Institute of Management Accountants, told CFO Brew. “And it starts with people doing strategic planning and scenario planning, and envisioning: What happens if the market turns down? What happens if our revenue doesn’t materialize the way we’re expecting?”

While layoffs can feel sudden for employees on the receiving end, Porter said the scenario planning begins when data starts trending downward. “It’s almost never about what I’m seeing today. It’s very often about what today’s results mean for the longer-term future.” Financial planning and analysis (FP&A) teams may even be asked to sign non-disclosure agreements (NDAs) while they’re running projections, to prevent word of job cuts from leaking out before the company is ready.

Laying employees off should never be the first line of defense, Porter told CFO Brew, and said companies facing lower projected revenues usually will cut back on discretionary or travel expenses first. “People are one of the last things that companies want to shed,” he said.

When determining whether layoffs are necessary, Christina Ross, CEO of FP&A planning company Cube, told CFO Brew that—even though most people don’t—it’s really the time to “understand and make sure you’re clear on your business strategy” before anyone jumps to conclusions around cutting headcount.

“Oftentimes, what was added over the last year or two was ways that companies could grow exponentially,” Ross said, and “sometimes those were things that were outside of their core strategy.” Excitement bubbled up on big ideas, like exploring new business lines, she said. Now, companies need to focus on their core strategy, since that’s where they should put all of their resources.

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Where the finance team really contributes to a layoff conversation is providing data, whether it’s about customer success, or sales, and whether the amount the company’s spending on sales and marketing is justified by the number of new customers or closed deals, Ross told CFO Brew.

But while a CFO might be able to immediately see more positive cash flow right after cutting headcount, it’s not something you want to do quickly, Ross told CFO Brew, as it can have lasting effects on an organization.

For newer finance chiefs, reaching out to your board of directors or securing a board seat yourself might help guide some of your decisions. Scott Dussault, CFO of talent-management software company Workhuman told CFO Brew that he learned from having a board seat that while a restructuring may work as a short-term saving mechanism, it can have damaging long-term effects.

If handled poorly, laying off people can bring reputational damage to a firm—when Better.com laid off 900 employees over Zoom, the CEO was widely criticized for his approach, so much so that he issued an apology statement saying he “blundered the execution.” But it’s hard to undo that kind of brand damage; the internet never forgets.

It also can get quite personal as employees’ skills are evaluated against one another, Porter told CFO Brew, noting that the work that has to get done doesn’t just go away. “It’s disruptive to the organization…and there’s often a lasting impact on the people who remain within the company.”

Porter told CFO Brew that while finance teams can be seen as “cold-blooded killers” in the layoff process, it’s a much more collaborative effort to make sure any decision isn’t too short-sighted (or only focused on raw data). “If we get to the next year, and three years down the road, [and] we lack the capability to adapt to market conditions, we’ve done something very wrong.” —KT

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