Mistakes to avoid when downsizing your business
In a difficult economic environment, it may make sense to downsize your business rather than closing doors altogether. Load shedding, inflation, and the current high interest rate environment have left little disposable income in consumers’ pockets making it very challenging for SMEs to be as profitable as before. Downscaling a business may result in better profitability in the short to medium term.
“If you are one of the many businesses considering downsizings, there are a few factors to consider so that you avoid a backlash,” explains Palesa Mabasa, FNB Business Development Head: SME Funding.
- Don’t compromise on quality and standard of service
Larger companies may find it more difficult to retain control over the products and services they offer. If your company is smaller, you are able to maintain tighter control. If you are choosing to let staff go, review their performance levels instead of simply going with the adage of “last in, first out”. This will allow you to trim your workforce to retain the most efficient staff. Also consider offering voluntary retirement where it is possible.
- Have clear contracts when outsourcing
Often, outsourcing a job rather than having a full-time employee can cut down on costs since you are paying for the work done and not for any fringe benefits. This can help you release capital for your business but be sure to draw up a clear contract with specific deliverables, so that both parties are clear on what they have committed to.
- Get legal advice
The last thing you want to do is end up on the wrong side of the law. You need to have a concrete reason for choosing to let someone go or have a rule if you are going to adopt a strategy of periodically downsizing to keep your company small. “For example, you can set certain key performance indicators for employees and review every six months. If an employee fails to meet or achieve anything near their key performance indicators (KPIs), you can use this as a legitimate reason to let them go when you downsize,” Mabasa says. The last thing you want is a lawsuit for wrongful termination or a bitter employee trashing your reputation.
- Learn from history and other companies’ lessons
You aren’t the first company to downsize and unlikely to be the last. Look at how other companies have managed the process and learn from their mistakes.
“Finally, remember that although your decision may be focused on your business, downsizing often affects your employees directly and you are dealing with people first. Be compassionate and treat them with respect,” Mabasa concludes.
