The Most Effective Way to Downsize in a Downturn

Last Updated Nov 20, 2008 7:35 PM EST

It's a sign of the times; companies are restructuring, downsizing, and laying off workers in droves. And while layoffs should be a last resort, when it's time to do it, company executives need to learn how to do it right.

Yahoo recently broadcast a coming layoff well ahead of the details, so everyone got to sit around for a few weeks and wonder if the ax was going to fall on them. Not the first thing Jerry Yang has screwed up in the past year and a half, to be sure. I know, he's on his way out, but the board remains, and they're the ones who hired him.

One of the biggest mistakes companies can make when downsizing is the "death by a thousand cuts." Look at Sun, for example. Not only is the company in a multiyear turnaround struggle, but flailing CEO Jonathan Schwartz can't even restructure right.

According to the company's most recent 10-K, it initiated Restructuring Plan VIII in May. That would make the most recent layoff announcement Restructuring Plan IX -- or is it X? I seem to have lost count. As if investors need yet another reason to hate the stock.

"Death by a thousand cuts" restructuring is a really bad idea for a couple of reasons. It kills morale and productivity as everyone waits around for what will surely be another shoe to drop. And from an operations standpoint, it's grossly inefficient. Best to cut once and cut deep, then let the healing and momentum begin.

Here are a couple of analogies to explain why:

  • When you're driving into a sharp turn, if you brake through the turn, it's easy to lose control of the vehicle. Rather, it's best to brake hard just before the turn, then accelerate through it. That's how you maintain control and actually get through the turn faster.
  • Have you ever tried to sell a house during a housing slump? Your instinct is to price it as high as you can, and reduce in increments. But since the market is continuing to decline, you end up chasing an ever-shrinking price that would actually attract buyers.
The tech sector is usually ahead of the curve on this sort of thing. That's because many tech businesses, like semiconductors, are cyclical by nature. So executives are used to managing their way through boom and bust cycles.

According to John Challenger of outplacement firm of Challenger, Gray & Christmas Inc., the electronics, computers and telecommunications industries combined have announced over 140,000 job cuts so far this year. That's the way to do it â€" take your lumps and move on.

Since this economic crisis is likely to get worse before it gets better, my recommendation is that if you're going to cut, cut early and cut deep. If you're lucky, you only have to do it once. That's the most effective way to downsize in a downturn.

But that's just me. What do you think?