Considering Downsizing? Proceed With Caution

Tony Grijalva, the Chairman and CEO of G&A Partners, advises oil & gas companies to look at all options before trimming talent in the following guest contributor article for OilOnline.

With crude oil prices having plummeted to the mid $40s per barrel and news of extensive layoffs, it is understandable that managers in the oil & gas sector are a bit antsy. No one wants to perpetuate doom and gloom, but they don’t want to be caught with their heads in the sand either. Many feel compelled to “do something,” and conventional wisdom often leans toward cost-cutting through workforce reductions. However, downsizing can have devastating effects on an organization, so it should be implemented with careful forethought and planning. Here are a few things managers need to consider first.

Weighing risks and rewards

Downsizing refers to the permanent reduction of a company’s workforce for the sake of immediate cost savings. When a company is struggling, eliminating the salaries and affiliated carrying costs of human capital (i.e. benefits, health coverage and employment taxes) can be tempting.

However, downsizing, rightsizing, reorganizing, restructuring or whatever you choose to call it, is not without risk, so proceed with extreme caution. Would your company’s potential growth be stifled because you don’t have the resources needed to attain or maintain new business? Could you damage goodwill with existing customers because of slow response times or subpar service? How will a layoff impact remaining employees? Would they be quick to leave if they feel overworked or overwhelmed?

When you run the risk of hindering your future success, harming your brand reputation or burning out your employees, don’t rush to reduce staff. Carefully calculate the potential savings, weigh the risks and evaluate all other options first.

Considering alternatives

Alternative cost-cutting measures can help some companies preempt workforce reductions. A quick and easy-to-implement first step is a hiring freeze. Depending on your company’s needs, you might limit this to only non-essential positions while you continue to strategically fill crucial positions or those that would immediately generate revenue.

When business conditions are uncertain, companies should also try to defer permanent cost increases, such as salary or benefit hikes. These measures are not always popular and can damage morale, but they send a strong message that the company is serious about cutting costs and thus encourage employees to do the same within their departments.

Choosing the right approach

If alternative cost-cutting measures are inadequate and downsizing becomes necessary, there are various methods to consider. In some cases, a company’s natural attrition might counteract the need to orchestrate a layoff. US companies lose an average of 10 percent of their workforce annually due to voluntary turnover – employees accept new jobs, move away or decide to retire. While associated cost savings are not immediate, allowing workforce reductions to occur organically may help companies avoid a layoff that could leave lasting scars.

Another downsizing method is to offer early retirement or ask employees to accept voluntary layoffs. This option can reduce headcount quickly and gives employees a degree of control, so remaining employees typically perceive it more positively. However, it does limit the company’s control over which employees leave. Also, while effective in cutting costs in the long term, this option can be expensive in the short term because severance or buyout packages may be necessary.

A strategic reorganization or restructuring calls for commercial business units or support functions to be reduced or eliminated entirely due to changing business needs. This method of downsizing requires time to plan and can be traumatic for everyone involved, but if orchestrated effectively, a smart restructuring can streamline and strengthen the organization.

Compliance and documentation

Compliance with state and federal employment regulations during a layoff is a very important consideration. For example, the Worker Adjustment and Retraining Notification Act (WARN) protects workers and their families by requiring employers with 100 or more employees to provide notification 60 days in advance of a mass layoff or a plant closing. Documentation is also very important. If downsizing becomes necessary, document your business justifications as well as evidence that alternatives were considered. Should any litigation result from workforce reductions, this documentation will help demonstrate that business reasons were the only consideration in layoff decisions.

Retaining critical employees

If forced to devise a downsizing plan, focus on developing strategies to keep your key talent. It is imperative that you retain your most critical employees who possess the core skills and experience you may need in the challenging months ahead as well as those that hold the firm’s memory, knowledge and relationships. The current slump may be enough to keep these top performers from actively looking elsewhere, but opportunities to further develop their professional skills and advance their careers will keep them engaged and motivated.

Sincere and straightforward communication

This is a time for prudency, not panic. Open and honest communication can calm employees’ anxieties and keep market pessimism from impacting their performance. Concerns about downsizing, whether real or rumored, are distracting, so if layoffs are not in your near-term plans, mitigate employees’ immediate fears without making any long-term promises.

If your company is encountering difficulties, be honest. If layoffs are imminent, notify employees as early as possible and keep them apprised of developments. You may not be able to give employees all the details, but don’t sugarcoat the situation – frankly communicating your company’s position will help employees better prepare for a worst-case scenario.

There is no crystal ball. Even industry experts can’t predict with certainty when the industry will rebound. However, this slump should not automatically trigger retrenchment. Agile, well-positioned companies will prevail if their managers can be prepared and proactive without succumbing to paranoia.

About the author:

Tony Grijalva is the Chairman and CEO of G&A Partners, one of the nation’s leading professional employer organizations (PEO) and human resources outsourcing providers. G&A Partners has been helping entrepreneurs grow their businesses, take better care of their employees and enjoy a higher quality of life for more than 20 years.