Why Pre-Define Cost-Cutting Tiers?
Acknowledge this isn’t a fun process—but if things get worse, doing the “cost-cutting tiers” exercise now may save US from going out of business later.
We want to ensure that we don’t panic and cut only what is necessary for the level of the threat – hence the use of DEFCON – as seen in the many movies out there
Our goal here is to extend your financial “runway” in a phased way—so you don’t suddenly realize you need to shut down on a week’s notice because our team is in the Doldrums and we’re out of cash.
What’s in OUR 3 Cost-Cutting Tiers?
- Tier 1 cuts: These are expenses that were largely invisible to employees and our clients. If we enact them, Tier 1 cuts are mostly annoying to the leadership team.
- Tier 2 cuts: All of our employees will start to see and feel these cuts. Our more astute clients will notice, too. If you enact Tier 2 cuts, now it’s emotional.
- Tier 3 cuts: These are the deepest and hardest cuts. As we lay-off great employees that we can no longer afford, now it’s wrenching. But if it gets to this point, the alternative is shutting down the company.
On that not-so-upbeat note, let’s look at examples of expenses to consider as you pre-populate each of your cost-cutting tiers.
Creating Tier 1: Cutting “invisible” expenses
These are expenses that are largely invisible to your employees and your clients.
This might include reducing your own travel budget (e.g., Holiday Inn instead of Meikles Hotel), not automatically renewing your lowest-converting event sponsorship, and perhaps deferring some of your own expense reimbursement. (But do keep submitting your expenses; the company still owes you, even if you don’t get cash right now.)
Look for unused (or under-used) SaaS subscriptions and pause or downgrade your plans.
When possible, delay buying new computers. And definitely, don’t buy new furniture.
Pause any plans to move to a larger office; if things get worse, expanding your space is likely the wrong direction.
Check your lease to see about subletting and early-exit options. And estimate the severance you’d need to pay for each employee. (You’re not going to use that info ’til Tier 2, but you don’t want to find later that paying severance would clean out your bank account.)
Creating Tier 2: Cutting bigger expenses
These expenses save significantly more money than Tier 1, but they are now visible outside the leadership team. Cuts have now shifted from “annoying” to “emotional.”
It’s time to stop procrastinating on laying-off your weak employees. Initiate a hiring freeze, too, unless you’re confident a new role will be highly profitable almost immediately.
Cut your own salary, at least somewhat. If you have freelancers supporting unprofitable clients, it’s time to terminate the clients—and the freelancers, unless you need them elsewhere.
It’s time to tell your vendors you need to reduce your scope (or potentially increase your scope if it means replacing a so-so overpaid employee). It’s also time to start recruiting tenants to sublet your space (assuming your lease permits that).
Call an all-hands meeting to let people know the company’s facing problems.
Some people will start looking for a new job, but you’ll likely find your best employees rally to help you save the company. (And they can’t rally if they don’t know there’s a problem.)
Now’s the time to find a therapist, if you don’t currently have one—you need support. (If you have a coach, they may be able to help to a point—but we’re not mental health professionals.)
Creating Tier 3: Cutting people… so we don’t go out of business
If you need to enact these, you’re on the verge of going out of business. The cuts are the deepest and hardest. If you get to Tier 3, you’ve shifted from “emotional” to “wrenching.”
Given that even a well-run agency is spending half its revenue on staff, layoffs are unavoidable in Tier 3.
If you’re at this point, your office now seems like a beautiful, but over-priced space… and you probably realize you can’t get out of the lease.
If you have employees supporting unprofitable clients, it’s time to terminate the clients—and potentially the related employees, too. Be sure to cut enough people at once.
Adapted from – sakas and company