Four Mistakes Leaders Make When Downsizing

Avoid these management traps, and maybe your company can emerge from the recession in stronger shape

Back in June, I still believed our economy could finesse a soft landing, (, 6/27/08) but it turns out I underestimated our ingenuity for screwing things up. A perfect storm of dumb borrowing and easy lending, runaway derivatives and credit default swaps markets, and wooden-headed congressional and regulatory oversight is bringing the world's most productive economy down hard. Buckle up, it is likely be a bumpy ride.

If you're in a market segment that won't be hit too hard, you're lucky. If not, though, recessionary pressure need not spell disaster. If your company has been prudent in its use of leverage, you might even pick up a few points of market share as your competitors batten down the hatches. Just be careful to avoid the following four common mistakes leaders make when scaling back.

1. They kid themselves. No one likes to lay people off or close facilities. Faced with such nasty tasks, leaders tend initially to kid themselves in underestimating the scope of a downturn—and as a result, they find themselves chasing a falling revenue curve and risking death by 1,000 cuts.

Don't fall into this trap. Instead, get your core team together and take a brutally honest look at how bad things are likely to get for your business. Then size your business to make a profit at the level of revenue you think is most likely. Don't bet that the sales department is going to pull a rabbit out of its hat, or that some new product you are about to launch is going to solve all of your problems.

2. They make across-the-board cuts. A common approach in a downturn is to declare reactive, across-the-board reductions—which usually just make things worse. Tough times require leaders to think deeply about their business models and focus cuts in such a way that they can protect or even extend the core.

It should become clear that many projects, initiatives, and even departments hatched during good times are not at the core of your business. Indeed, it is vital that a company know exactly how much money it makes by customer group and by product. Roll up your sleeves and make a clear-eyed analysis of your company's position. Identify the 20% of the activities that produce 80% of the results—and protect them at all costs.

3. They fail to demonstrate generosity and concern. One reason some leaders perform poorly in a downsizing is that the process is painful for them. Many feel the situation may be their fault, and they attempt to minimize bad feelings by avoiding contact with those losing their jobs. Doing so makes them appear miserly with their time or their pocketbooks.

Show courage and commitment—meet with people you have to lay off, help them transition, commit to show a generosity of spirit. Survivors in the organization will be watching you closely, and they will judge your character based on the empathy you show to those who are losing their jobs. If they see even a hint of dispassion, they are likely to lose faith in you and begin to look for another job.

4. They clam up. For good reasons, communication with the troops about impending expense cuts is usually carefully and tightly controlled. But people get antsy when they know their job or department might be on the chopping block, and it's important that leaders send a clear signals on how serious the financial challenges are likely to be and exactly how the company will respond.

As soon as you determine a course of action, communicate fully and often to the troops (, 10/21/08). Send the signal that you fully grasp the seriousness of the situation, but that you also have a plan for helping the company survive and even flourish.

If you avoid the traps described above, you may even find that your business will emerge from the recession stronger than ever. Last week, I was with a retail lumber company in Oregon, part of an industry that has been ravaged by the bursting of the housing bubble. One executive told me: "Despite going from 186 people to 90, we haven't skipped a beat. It's amazing what challenge will do to show you what is really important in a company." Exactly.