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January 11, 2024 in Human Resources

Navigating Downsizing: A Strategic Approach for Small Businesses in 2024

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Introduction

As we step into 2024, small businesses in the United Kingdom are facing unprecedented challenges that have required a critical examination of their operations. The economic landscape, influenced by factors such as global market fluctuations, increased technology dependency and investment, and the lingering effects of the recent pandemic, has prompted many small businesses to consider downsizing as a strategic move for survival. In this article, we’ll explore the considerations for small businesses, how to mitigate the effects on your business and how you can safely navigate this delicate process should the need arise.

Reasons for Downsizing

Several factors may contribute to the decision to downsize, and it’s crucial for small businesses to identify the root causes before taking any measures. Common reasons include economic downturns, changes in consumer trends and increased competition. In the wake of the COVID-19 pandemic, businesses have also been re-evaluating their workforce structures to adapt to remote work trends and address financial uncertainties.

The good news is that the UK is tipped for a speedier rate cut after a surprise inflation fall during December 2023. But while inflation is well down from its peak in 2022, it’s still almost double the Bank of England’s target of 2%, and many businesses will not feel better off for some time, as energy bills and borrowing costs remain high.

Considerations for Small Businesses

  1. Thorough Assessment: Before taking steps towards any downsizing measures, you should conduct a thorough health assessment of your business. This includes a comprehensive review of financial health, market positioning, and operational efficiency. What is your wage percentage currently running at? (To calculate this, use the following formula: total payroll costs / gross revenue x 100). Healthy businesses should be aiming to get this figure to around 40% and this can be achieved in a number of ways, including reviewing current wage costs and identifying areas where reductions might be possible without compromising productivity or quality. For example, consider cross-training your employees to perform multiple roles, as this can enhance flexibility and efficiency, allowing you to manage workloads with a smaller workforce. Explore opportunities to automate certain tasks and processes to improve efficiency and reduce manual processes. And finally, look at whether certain tasks or functions can be outsourced to external vendors or contractors. This can sometimes be more cost-effective than maintaining a full in-house team. Identifying areas of wastage and non-essential spend can also help make informed decisions. For instance, how much cash do you have tied up in stock – and do you really need it all at any given time? Could it be the right time to negotiate better shipping and delivery terms with your couriers?
  2. Communication is Key: Whatever decisions you find yourself taking with regards to people, my #1 mantra for managing them is to treat them how you’d like to be treated. Don’t keep them in the dark. Open and transparent communication is crucial throughout any downsizing process, whether it affects their roles or not. As much as you can, keep employees informed about the decisions you’re taking and the reasons for them. This will help to alleviate anxiety more than you realise and maintain morale among those who will stay with the company beyond any restructure.
  3. Legal Compliance: Small businesses must adhere to employment laws and regulations when downsizing and that’s usually where most businesses without in-house HR fall down. The maximum basic award for unfair dismissal and the maximum amount of statutory redundancy pay (taking into account an employee’s age, years of service and weekly pay) is currently £17,130. But did you know that the maximum compensatory award can be as high as £93,878 (or one year’s gross pay if lower)? Reaching out to a HR Consultant to understand your legal obligations can help mitigate potential legal risks and save your business from huge costs for getting things wrong.
  4. Retaining Key Talent: Instead of outright layoffs, businesses can explore options for redeploying employees within the organization. This may involve cross-training employees for different roles or departments, ensuring a more efficient and flexible workforce. At any rate, identifying and retaining key talent is essential for the long-term success of the business. Consider offering incentives, additional training, or flexible work arrangements to retain valuable employees who can contribute significantly to the company’s future success.
  5. Investing in Technology: Embracing technology can enhance efficiency and reduce the need for excessive manual labour. HR software systems and tools are quickly revolutionising the way businesses operate, optimising processes and enabling businesses to do more with fewer resources.

Conclusion

While downsizing can be a difficult choice, it’s often a necessary step for survival and future growth. By conducting a thorough assessment, communicating openly, complying with legal requirements, retaining your best talent, strategically redeploying resources, and investing in technology, business leaders can navigate the downsizing process with resilience and emerge stronger on the other side.

As an independent HR Consultant with 25 years’ experience of working in corporate SMEs, my recommendation is for business leaders to approach downsizing as an opportunity for transformation and growth, rather than simply a reaction to current challenges. By doing so, you can build a more agile and resilient foundation for the future.




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