That was the scary number generated from a week-long process with my CFO. It was the percentage of employees I would have to ask to leave the company to help us get closer to profitability. We had over 120 people on staff at the time, so that translated into laying off many people.
My team and I picked the names from every department including sales, marketing, engineering, success, professional services, G&A. The executive management team was not immune. There were a few names from that group too. It was the largest reduction in force (RIF) I had done since I was CEO.
I did it on one dark spring day. It was right after losing one of our biggest deals to date. It sent ripples through the company, scared the shit out of everyone. Feelings of sorrow, anger, and fear spread throughout the company like a wild fire.
I was deeply depressed. In one wave of my executive pen, some of our best friends were no longer part of the company family.
What I just described is one of the toughest experiences I lived through as a B2B CEO. It is something I do not wish on any CEO, but it is something that is likely in a growing venture.
Before I explain why there is one thing that might surprise you.
Nearly a year after I implemented the RIF, our company posted our best performance ever, and I wondered why I had not made those cuts sooner.
In healthy funding markets, it is easy to raise money. At times, in the right market climate, venture capital will come your way in truck loads. It is easy to fall into the trap of using a recent round of funding as a measure of success. As CEOs, we spend so much time fundraising, it is always a relief when the money hits the corporate bank account, and we can return to running the company. When we get back to the office, all we see is growth opportunities waiting to make use of this fresh capital. We run to spend the money, we grow the team quickly, betting on the future.
Inevitably, at some point during your venture’s life, you may likely be confronted with one or more of the following challenges:
• You are running out of money in a tight financing market
• You have raised substantial amounts of money and grew too quickly, ahead of your market
• There is fundamental change in your market dynamics or your assumptions about it
• Your team is not performing. (Usually, because you have too many low performing employees on staff.)
• You have prioritized product development without leveraging customer insight
• Sales are behind plan, again
• Your growth has slowed, and you are not sure why
• Your competition is executing better than you
• You have lost one or more of your largest customers
• You have not found product market fit as soon as you had hoped
• You are creating a new market, and you have made a few mistakes.
I am sure I have missed some, but these are the usual suspects that signal it is time to take a closer look at your burn and team makeup. For most CEOs, it is the last thing on their mind. They want to keep the team together and preserve the amazing “culture” they have developed. Sadly, it is the number one lever you have as a CEO to control your company’s destiny.
“Once you decide that you will have to lay people off, the time elapsed between making that decision and executing that decision should be a short as possible.” — Ben Horowitz, The Hard Thing About Hard Things.
Before I talk about preparation, I want to share one important rule to keep in mind. Any time there is a need to restructure the company’s operating expenses, take it as an opportunity to evaluate the most impactful people and roles on your team. Today’s most impactful person or position may not be next quarter’s (or next year’s). The current talent you need (across the board) must always synchronize with your “plan of record.”
Now, asking people to leave is tough, especially individuals who’ve been with you for some time. You will feel a sense of loyalty to them. You think, “He (or she) has been with us for so long and has been pivotal to getting us to this point.” Moreover, if it is your first time, it is even harder. You have yet to experience the emotions and rationalization that comes with ending a relationship you have developed over some time. Nevertheless, it is part of being a CEO. If this is your first time as CEO, I suggest you run some “fire drills.” It will help you build the muscle memory you will need to do an RIF when its time.
Here is a routine for getting ready:
(1) Keep a “cash flow” number on your dashboard. Ask your CFO (or finance lead) to provide you with a monthly and quarterly financial close report that includes at the top the burn number that gets you to cash flow breakeven. This figure should always be known to you as CEO.
(2) Twice a year, ask your e-team to give you a (confidential) list of their teams ranked and rated. They should list every member of their team using a rating of A, B, or C. They should then rank the team from top to bottom (most important to least important) to the company.
(3) Rank your executive team as A, B, C quarterly. (Btw, you should have frank conversations with each of them on a regular basis about their performance.)
(4) Once a year, perform a mock RIF with your HR lead to discuss the most important considerations
(5) Purge or “Top grade” your team annually. In other words, remove any C players at the bottom of the rank.
(6) Find out which of your managers is a “layoff newbie” and get them some training from HR.
The Disaster Plan
When disaster strikes, you will know it. Hopefully, you will be ready. It will be time to grab a red pen and draft an RIF plan.
Here are some things the plan should include:
(1) Have your CFO update the cash-flow number and ask her to translate it into an RIF percentage. The percentage of the team that must be removed to get to that number (assuming no other expenses have changed).
(2) Working with your e-team, develop a candidate list of people from the ranked and rated list you have previously prepared. If you have not done this, do it now.
(3) Review the plan with your board or investors. (Ideally, you do this before they ask you to do so.)
(4) Review the list with your HR lead and plan the implementation in detail including scripts and a punch list for managers.
(5) Prepare a detailed “next steps” summary for employees including benefits and support information.
(6) Plan to implement the entire RIF in one day if possible. It is important to complete this painful process swiftly. Mondays are best. (If folks are traveling or on vacation, try your best to locate them.)
(7) Plan an all-hands the same day or the next day. Then, keep open office hours for one week or so; where folks can pop in and ask questions.
(8) Be prepared to explain the rationale for the RIF, using no bullshit. Always be clear about why you are doing an RIF. (Everyone knows it is not to remove C players. Although, that is a plus.) The people remaining will be worried about the health and plans for the business. They will also suffer from “survivor’s guilt” as they say good bye to close colleagues. They may be thinking “I will be next,” it is important to let your critical people know what they mean to the business.
(9) Speak with each of the people who were asked to leave and wish them well. These are your friends, show them you care. In fact, ideally, do everything in your power to help them find a new job. (Nevertheless, you will later find they are doing very well.)
(10) Reinforce the company vision and goals for 6–12 months. Continuing doing this for the next three months, a lot.
The role of a CEO is fraught with tough decisions. Firing people is not easy, but it is part of the job. You need to be prepared to implement it with the precision of a general in a war-time army and with the grace of a close family friend saying goodbye. No CEO is born with this ability. Still, everyone eventually learns it. Be prepared.