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  • Writer's pictureMatt DeLong

Why do corporations layoff employees in the name of cost savings with a $M in reserve and surplus?

Until you are in a position of leadership where you have to make tough decisions, it’s tough to understand…

  1. Most companies have times of the year where business is booming and some times where revenues are “very lean” (this is very common in all size companies). That means you need to grow/shrink your expenses in synch with these seasons and try to shift “fixed costs” to be more “variable costs”.

  2. In one of my software companies, my team had to always get rid of the “bottom performers”. Sometimes they are the new hires, sometimes they have worked with you for years. When I looked at our expenses, almost 65% was LABOR COST. Yes, it was a software/tech company with high salaries, but at times it was crippling us and choking the life out of the company. We would NEVER be profitable if changes were not made.

  3. Just because we had $$$ in the bank didn’t mean it’s a good idea to retain weak staff — just in the name of morale and kick the problem down the road 6 months to a year. I always tried to make decisions in the context of “where are we” (yes, we have money in the bank) and “where are we going” (we want to grow the company — but have people not doing their jobs). Tough decisions had to be made.

  4. During good months, we made a little bit of money, during bad months, we lost a lot of money. Over time, this is a loosing proposition and we could NOT stay at that same spot — we would have gone broke. Make $1 for every $6 we lose, then make another $1 — then lose $6. Do the math — it doesn’t add up well — more time just digs a deeper hole unless tough decisions are made.

  5. We had to make some tough decisions despite our positive cash balance. When it came time to make cutbacks, do you think we cut our star sales & engineers or the ones that couldn’t do their jobs or meet their goals?

  6. Think about it — this is also a lesson in doing your best — at all times! You never want your name on the cut list. If your best wasn’t cutting it — let’s do each other a favor and part ways now. You can find a career you really love and I can stop wasting money hoping for a miracle.

  7. My job as CEO was to do what was in the best interest of the company — even if it meant stepping down as CEO, even if it meant firing people you were friends with. We weren’t a charity — we were trying to grow the company.

  8. I personally guaranteed a $200k line of credit from our bank to launch the company. If the business failed, I'd be out of a job with a $200k debt I'd have to REPAY PERSONALLY. Founders often take enormous risks and they require you to be ‘all in”. Years later, I look back and think that was a little crazy to do, but in the end, it all worked out spectacularly. Do you think I will risk all that to keep weak team members around longer?

  9. On one hand your board of directors is pushing for cuts on the other sometimes these cuts were your friends. As ruthless as this is — the day you decide to make emotional decisions is the day your company bank accounts (you worked so hard to build) start their decline towards ZERO — passing zero — onto LARGE NEGATIVE NUMBERS — you end up with debt that you have to “personally repay”. Then you are forced to make the decisions you would have made 6–12 months prior.

This is a brutally honest account of my experiences. Hope that helps.

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