November 15, 2022
Insights

Trying to avoid downsizing? These are the best alternatives to layoffs

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In times of economic uncertainty, companies tend to grow concerned about their future financial profitability—a totally reasonable response to downturns. In the current landscape, inflationary pressures, rising interest rates, and news of a potential recession are strong forces that may significantly impact profits. Organizations are battening down the hatches, looking for ways to cut expenses while avoiding layoffs.

Following the Covid-19 pandemic, many companies experienced record revenues and opportunities for low-cost financing. However, times have changed, and it’s grown much more expensive to procure business loans and private equity investments thanks to many external factors. Now, organizations are seeking  to minimize the impact of a weaker economy through cost-cutting and other options.

Multiple companies have announced workforce reduction plans. Some of the most prominent include Twitter. Elon Musk’s recent purchase of the popular social media platform came with an announcement that he would cut 3,700 jobs or approximately half of the workforce.

Another significant report of layoffs includes the meal-kit company HelloFresh, which plans to close its production facility in California and eliminate 600 positions.

Peloton, the famous fitness equipment manufacturer that thrived during the pandemic, plans to eliminate 500 jobs or 12% of its workforce. The new announcement marks the fourth round of layoffs for the company this year. It now has less than half of the employees it did during its peak period of 2021.

While workforce reductions are a typical method for achieving cost savings, many businesses recognize the impact on employee morale that layoffs can have. A report from Harvard Business Review notes that companies that performed the best following a recession refused to cut their staff during tough times. Instead, they looked into other alternatives to downsizing, such as furloughs and early retirement packages.

So what should companies do during times like these, where the economic outlook is not as rosy as it once was? If you’re leaving layoffs as a last resort, there are plenty of strategies for you to tighten your balance sheet and put your company in a position to navigate any turbulence. In this article, we’ll talk through some strategies for businesses to implement as an alternative to layoffs. 

Why should companies look for alternatives to downsizing their workforce?

While layoffs provide immediate savings to the organization, they come with long-run costs that businesses endure for years.

Once a company lays off an employee, it dampens the spirits of the remaining workers. Rumors will dominate the office water cooler conversations, and people will wonder if another round of cuts is just around the corner.

Losses of workers result in a knowledge drought in the organization. Every time an employee leaves, their expertise goes with them. It’s hard to recover from a knowledge gap, and existing employees often struggle to accommodate the changes.

If the business can successfully navigate the economic downturn without going bankrupt or falling prey to an acquisition, it will eventually need to rehire new employees. The cost of training new workers is expensive and time-consuming.And  hiring needs often overcome the savings from the initial layoffs.

What are the alternatives to downsizing?

There are multiple alternatives to downsizing if the business owner or senior management team is willing to look.

Furloughs

A furlough is a mandatory leave of absence that the employer institutes to save money. During a furlough, employers tell specific employees they will not receive pay and cannot work for a short time. Once the unpaid leave ends, the employee returns to work full-time or with reduced hours.

Furloughs can last for several days, weeks, or months. While employees don’t receive pay, they do retain their jobs.

Companies that use furloughs to cut costs should consider how they apply them. It’s best to handle furloughs in cycles, so everyone experiences the financial impact. Furloughs work best when they are short. If they last too long, employees won’t be able to cover their expenses without finding a new job.

Offer employees a voluntary short-term sabbatical

Some workers are better financially able to take time away from work than others. They may relish the opportunity to retain their jobs without pay while working on their personal projects or goals.

A voluntary sabbatical allows employees to do just that. Employers offer the sabbatical program, and interested employees can sign up for a few weeks or months away from their work responsibilities. During that time, the employee is empowered to work on their own goals or benefit from a mental break and vacation.

Consider pay cuts

Pay cuts work best when you have a knowledge-based business with employees making higher salaries. If you decide to cut worker pay, you’ll first want to start with the most highly-compensated employees.

That way, if you need to make additional cuts to your lower-level staff, they’ll see you’re cutting costs for everyone, not just those who will suffer the most.

Not every organization will see significant savings from cutting worker pay. For instance, a company with primarily minimum-wage workers may want to consider other alternatives.

Establish a hiring freeze

A hiring freeze stops all hiring activities for a given period, typically lasting until the business sees signs of returning to its normal operations. During a hiring freeze, the organization does not replace employees who leave the company.

If you plan to implement a hiring freeze, it’s best to begin cross-training your workers. Cross-training can ensure other employees know how to perform the essential functions of a position if the currently responsible worker decides to leave the company.

Cross-training has the additional benefit of improving employee engagement. Workers can enhance their skills and learn new ones while also getting the chance to work on projects they might not otherwise experience.

Offer early retirement

Organizations with older workers nearing retirement age may consider offering an early retirement severance package. Early retirement packages encourage workers to leave their positions in exchange for certain benefits, like a severance payment and the retention of health care insurance and other coverage for a set period.

Often, older workers are reluctant to lose their jobs as they near retirement because they want to ensure they receive full social security benefits. Others enjoy the workplace and aren’t ready to make the significant life shift to retirement.

If you think early retirement packages can help you cut costs without resorting to downsizing, it’s a strategy worth pursuing.

Cut work hours

If you have many hourly workers, cutting the number of hours available to your workforce can save significant money without laying off employees. Start by asking if any employees would voluntarily reduce their hours to a part-time schedule. You may find that some workers will like the idea of spending less time at work, especially if they have young children or other responsibilities.

If voluntary cuts don’t result in enough cost savings, you can reduce hours across the workforce. Try starting with a slight reduction in hours, and let your workers know you’ll return to full capacity once economic conditions improve. You can also consider shortening the workweek to four days. For instance, if the business is usually open on Mondays, but you don’t have a lot of customer traffic during that time, you could consider closing the office on that day.

Consider Ramp to help you extend your runway and avoid layoffs

Ramp offers a host of options for businesses looking to reduce their expenses. Our business budgeting software solution analyzes each expense transaction, looking for potential savings. You’ll receive notifications of potential rewards and recommendations for new ways to save and reduce cash flow burn rate.

Ramp helps to monitor the cost of your subscriptions and expenses. Using our integrated technology, you’ll learn when you’re overpaying for an expense and what similar companies pay for the same features.

Our in-house team can act as your partner in significant contract negotiations. On average, our team can help you reduce the cost of your contracts by 27%, and sometimes even more.

Ramp also offers a customized business card for all your business expenses. Our Visa card guarantees 1.5% cash back on all purchases. While running a business in times of economic uncertainty can be challenging, there are other alternatives to layoffs. Contact Ramp to learn about our solutions for developing a healthy spending culture in your organization.


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