Sun Death Spiral: How Not to Do a Layoff


I'm a firm believer that layoffs should be the last resort of competent management and that doing them early or badly is one of the signs of incompetent management. In the case of Sun, I don't think, given its recent $1.7 billion loss, management had much choice, but the execution of this layoff will likely do more damage than good. Sun won't be alone, though; this economy will drive deep layoffs and few firms know how to do them properly.


The problem goes back to decisions made in the '70s by the U.S. government, which was trying to put a Band-Aid on a discrimination problem. As a result, human resources, initially designed to assure employee availability and productivity, became a compliance function. This massive focus on equal opportunity, which should have centered on skills, wiped out the emerging science of expert employee management by trying to force people into jobs they weren't yet qualified to do. Collateral damage was the loss of the skills and knowledge of how to do layoffs. As a result, this knowlege exists in few companies in any segment. This will be a problem, and a significant one, as company after company has to lay off staff as a result of the economic meltdown.


The fundamental mistake that Sun is making is to spread the layoff out over a year. This should have a negative effect on productivity because people don't function well if their livelihoods are at high risk. The layoff, executed this way, should do more damage to the company than good.


How to Do a Good Layoff


The best layoff is one you don't have to do and the goal of any layoff is to assure it is the last. It must be deep and it must be fast, to put the company back into stable growth mode as quickly as possible. Guy Kawasaki, one of the most capable people in tech, has some rare good insight into how to do this.


Think of it as a life-threatening operation on the body of a company. Just as it would be if you were receiving a heart transplant, the longer the operation goes on the higher the probability it will result in the death of the patient. In addition, collateral damage increases, reducing the survival of other organs in the body -- or other parts of the company. And because hiring is curtailed significantly while a layoff is in progress, corrective action for voluntary departures (which tend to go up significantly during a long layoff) through hiring is nearly impossible to accomplish.


These are the rules:


Rule one: Always know institutionally who your most valuable people are and what your most critical projects are. By critical, I mean the projects that have the greatest number of organizational dependencies. If you don't have those two pieces of information, you can't do a large layoff without putting the company at high risk. Think of this like locating the critical arteries before making the first incision; if you cut in the wrong place, the patient, or in this case the company, dies. Any layoff should protect and reassure the critical people and not break a critical process or project. In short, there should always be clear knowledge of where cuts cannot be made, so that if you have to do a layoff, it doesn't do more damage than good.


Rule two: Over-cut the workforce, which I realize isn't intuitive. Even if you do it perfectly, a 20 percent layoff should have an impact of 20 percent on productivity, so your projections for cost reduction at optimum will be 20 percent too low. And no one does layoffs perfectly. If Sun did the analysis conventionally, it is undercutting by between 5 percent and 10 percent of the total, which will create additional problems at the back end.


Rule three: Get it done fast. From the time people are aware that a layoff is coming to the time it is executed, days, not months or years, should have passed. The company is crippled as long as the layoff is in progress. The sooner you get to a point where you can hire again, the sooner the employees are focused on the business of the company and not their own jobs or the perceived incompetence of management.


Layoff Contingency Plan


There should always be a layoff contingency plan that highlights both the process and the critical people and areas to protect. Layoffs are always a possibility; using the good times to plan for the bad is one way to assure that the bad times will hurt your competitors more than they do you. War gaming is excellent for this, but few companies take the time to create disaster plans, let alone layoff contingency plans. This time should be a reminder that that isn't wise.


Wrapping Up: How Not to Do a Layoff


As you watch companies announce layoffs, the only real external indication of whether the company has a clue how to proceed is the length of time it will take to complete the process. If it is short, chances are they know what they are doing. If it is more than a couple of months, or in this case a year, they don't, and the market will judge the firm harshly.


In any case, vendors undergoing layoffs should generally be avoided until the layoffs are complete and an assessment can be made of the viability of what remains. Bad layoffs are a company killer. You don't want their problems to become yours. Given the circumstances, avoiding companies doing layoffs may be impossible, but you can certainly avoid those doing it badly.


Finally, take the time to identify the people in the vendors that support you who are critical to your success -- and ensure that they aren't on a layoff list. If there was ever a time to make the management aware of vendor employees who are important to you, this is it. If you don't you may suddenly discover they are gone and you have no ability to bring them back.