Rightsizing

Austin Morgan
Every company must plan for and react to changes in their industry. You should often ask yourself, do I need more or less staff to meet my current demands? Here you will find out the difference in downsizing and rightsizing and how to accomplish appropriate staffing decisions that will enable you to remain competitive in your industry.

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What Is Rightsizing?

Rightsizing reacts to changes in the market (often a decrease in demand) by altering the number of employees and company structure to match the new demand.

Rightsizing vs. Downsizing

Imagine yourself as part of a company that serves 12,000 clients in a year. Each client pays $100 for your services which equates to $1,200,000 in revenue each year. With this revenue stream, you hire 50 employees at competitive rates to support the needs of your clients. The company enjoys a 30% profit margin on all services.

Scenario 1: Downsizing. The CEO comes to the administrative team and states they want to increase profit margins from 30% to 40% with the current revenue stream. The CEO demands the company to downsize the workforce to decrease payroll expenses. The company reduces the current workforce by 20 employees which forces the remaining 30 to meet the client demand. The remaining employees work longer hours and are more stressed than before the staffing cut. The company maintains a revenue stream of $1,200,000 and enjoys the new 40% profit margin on all services.

Scenario 2: Rightsizing. The CEO comes to the administrative team and states that the annual revenue stream is decreasing from 12,000 clients with $1,200,000 to 6,000 clients with $600,000. The CEO advises the company to rightsize the workforce. The company takes the current workforce of 50 and lets go of 25 staff which allows the remaining 25 staff to meet the decreased client demand. The company reacts to the decrease in revenue while maintaining a 30% profit margin on all services.

Why Is Rightsizing Important?

This method helps your business survive and thrive after reacting to changes in your industry or share of the market. Although it can be a difficult decision, rightsizing allows the company to increase profitability by eliminating unnecessary redundancies, redefining job duties, and placing available talent in the most fitting job.

Methods of Rightsizing

Cost Center

These company centers do not directly add profit. Are your accounting, marketing, research, and development departments using a disproportionate amount of assets? If so, these centers could be the focus of rightsizing.

Performance-Based

If a company has been performing stay interviews or regular job performance reviews, identify the lowest-performing employees. These would be the natural first choice for elimination during the rightsizing process.

Seniority Based

Some companies prefer retaining long-term employees to potentially higher performing new employees. The famous phrase “last in, first out” suggests eliminating newly hired employees above senior staff based on the tenure of employment.

How To Rightsize Your Organization

When you have decided that rightsizing is appropriate for your company, you will question where to start. Below we’ll cover questions that should guide you to your starting point and how to appropriately rightsize to benefit your company and its employees.

  1. Determine what change is forcing the conversation. Is it a short-term or long-term change in revenue? Has a new competitor entered the market making your product or service obsolete? Has there been legislative changes/regulations?
  2. Identify the quantity of change. Will your revenue be decreased by 10%, 50%, or more?
  3. Calculate a rough budget needed to base payroll and operations costs.
  4. Select key employees and positions to retain. Who in upper management can best help the company going forward? Are there mid-management positions that can be combined to become more efficient? How many front-line staff will it take to handle the new demand?
  5. Consider a decrease in variable and fixed operating costs. Can overhead costs be reduced? Can vehicles or machinery be sold to use funds for other expenses?
  6. Layout the timing and method of rightsizing. Will you do one or several waves of layoffs or restructures? Will you tell employees in a company-wide email or one on one?
  7. Increase communication with remaining employees. How can you give a sense of closure and security to remaining employees while making workforce changes?
  8. Plan operation and growth going forward. Will you stay at this new size or immediately make plans to increase your market share as the new goal?

The Risks of Rightsizing

Decreased Morale

A successful rightsizing of a company will retain talent for the future and encourage remaining employees that better days are ahead. The rightsizing process is an opportunity for the company to become a leaner and better version of itself. This may include returning to the former client demand and associated revenue or making the new demand the new company norm.

Loss of Positive Employer Brand

Employees who have been selected for involuntary separation may have hard feelings toward the company going forward. They may choose to “boycott” your service or product in their personal life or leave negative reviews on sites like Glassdoor or Google.

Choosing the Wrong People

If an employer does not carefully select who to keep, the quality of service may decrease, leading to a loss of clientele.

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Questions You’ve Asked Us About Rightsizing

When should a business start rightsizing?
When there’s an unexpected, consistent loss of profit over a time. Once you have identified short or long term changes to your market, you can determine the focus and scope of rightsizing.
Can rightsizing become a legal liability?
Yes. As you select people for separation, pay special attention to protected classes or incidental discriminatory demographic trends. You may be liable for unemployment claims if they are involuntary terminations.
Austin Morgan

Austin came to Discovery Connections in 2021 after working as an Account Manager for a Section 125 benefits and COBRA administrator. He graduated from Brigham Young University with a Bachelor of Science (BS) in Exercise Science in 2019 and from Southern Utah University with a Masters of Business Administration (MBA) with an emphasis in Organizational Leadership in 2021. Originally from Oklahoma, Austin enjoys trying new foods in new places he travels to, watching college football, and snowboarding the local resorts in Utah. He has been married to his wife since 2019 and owns a cockapoo named Hershey.

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