RIFs are a Reflection of Capital Allocation
Reduction in Force (RIF) - Call it before the company does.
When the shift in financial sentiment happens, hold on because the swirl gets ugly for those in the water. The currents swiftly start to churn, spin and change directions. We began to hear about the changing currents in November and December 2021. By June 2022, a sea change was happening in the economy and financial markets that were undeniable. The questions to ask if we were operators or investors: How long and deep is this correction going to go? What are we willing to do to protect the company and the broader teams of employees?
This article isn’t about the number of layoffs or how they have changed over the past couple of years. You can look at www.layoff.fyi for tech jobs or The Challenger Report for more details if you are interested in the numbers.
How do companies get to a place where RIFs occur?
Let’s start from Macro to Micro:
M&A deals were done with a good deal of debt on the acquisition. Cheap debt and overpaying for a company make it easy to have a significant debt position. It’s hard to sell your way out of liabilities. The top line can grow but typically not at the rate needed to manage the debt load. RIFs are inevitable.
Companies focus on growth at any cost because the scale, first-mover advantage, and dominance is the objective. This strategy is sometimes associated with Jean Marie Eveillard’s “capacity to suffer,” which Tom Russo popularized. In other words, upfront losses gain customers and scale. Companies that come to mind include Amazon, Starbucks in China, Nestle, etc. Having attended a private conference where Tom spoke. One common theme and part of his investment strategy: these are products users believe they can do without. In other words, these products have pricing power. Certainly, this strategy was popularized by the companies mentioned above. However, they also had a booming economy, patient capital/shareholders, low-interest rate environments, and founder-led or family-controlled companies where they could endure the pain and suffer losses. They had material skin in the game, and both the shareholders and founder/family had alignment. They also had products the market wanted.
When there is no stakeholder alignment, or companies are half in, half out, or they are unable to execute fully, or they only have an idea --not a product, or the cost of capital rises materially, the strategy becomes too expensive. RIFs are inevitable.
Leaders create new positions to meet the demand. When new roles are created, managers need to look at the true long-term horizon of a job position. I recall reading years ago about Warren Buffett’s thoughts on new positions. In essence, he suggested considering a 30 to 40 years time horizon for the position. The cost of the job is not one year’s salary but rather salary x 40 years. Then the question becomes, is the value the position creates more than the actual costs of the role over 30 to 40 years? Why such a long time horizon, you may ask? Because existing jobs are not reviewed often enough to determine if the work is the same as when the position was first created and if the work is still needed, etc. Another reason we should think of jobs in 30-to-40-year increments because we have a relationship and connection with our employees and team members. When the work goes away, we find new work for them to do. When another colleague’s job goes away, we see if there is a place in our organization. We are caring people; we all help from time to time. At some point, a new leader reviews the organization’s size, or existing leaders are pushed to reduce staff by X% to close a financial gap. If the team is too large, a RIF is inevitable.
Individual employees identify themselves with their job instead of the view that they only hold the position for a period while the work is relevant, understanding at some time, the role will no longer be needed.
It may sound scary, but the best way to keep yourself marketable is to help eliminate your job for a greater job over time. I practiced this on small and larger scales over my career. You can do this through portfolio rebalancing and or outright eliminating your job and growing into a new one.
It may be time for an employee to move on to a new role as they have outgrown the one they are in. Consider a personal power vs. positional power assessment to see if it’s time to move into a new position. And by the way, just because the economy is softening and companies are laying off, it doesn’t mean you should sit still if you are incredibly talented. Suppose you have a unique talent, stacked capabilities, relationships, and influence. Your skills are in even higher demand from companies in strong positions to take advantage of these market dislocations.
RIFs happen when we, as leaders and capital allocators, lose the emotional discipline of managing returns on invested capital. It’s easy to do when money is flowing freely with extremely low-interest rates, and there are patient investors, investors who don’t speak up, or our excitement and emotions get the better of us. In times of growth, everything is new, exciting, fun, and frankly exhilarating. It’s easy to see how discipline is put aside. It’s not nearly as fun. Unfortunately, with too much growth and not enough revenue to cover all the expenses and Capex, RIFs are inevitable.
And it’s unfortunate for the company, the teams, the investors, and society, but most importantly, it’s devasting for the employee who is personally and directly impacted. The stress, emotional strain, and family impacts are real and significant. We cannot underestimate this fact.
My advice: Hang on; the RIFs may be far from over. Why?
Technology Evolution - We continue to have technology shifts (e.g., automation and migration, GPT-3.5, and other LLM applications) that are getting closer to the work we, as humans, can uniquely do.
Investor Activism is on the rise - There are calls for more significant reform in companies. For example, listen to Nelson Peltz’s concerns regarding Disney and his criticism of its capital allocation decisions and the last few M&A deals. Another example from last fall is Altimeter’s Brad Gerstner’s open appeal to Zuckerberg and Meta’s Board of Directors to focus on the company’s teams and investments.
Tech Companies Got the Message - High Growth/High Multiple Companies, who lost a tremendous amount of market value in 2022, are beginning to signal they see the economic and investor sentiment shifts. They are responding accordingly with a stated force reduction. SalesForce is one example, but there are many others.
Companies are Reviewing their Competitive Advantage - M&A deals may rise in 2023 to take advantage of depressed market value companies by companies looking to strengthen their competitive position. This could result in more significant reductions for G&A roles. And who knows, some companies may take a page out of Twitter’s playbook and cut headcount materially. If Twitter results can turn around meaningful, others will consider following their lead and cutting a material number of employees.
What can employees do?
Review all work through the economic valuation creation lens. I’d suggest getting rid of work that doesn’t add massive value and replacing it with work that is future-focused and does add immense economic value --which can be quantified.
If you determine your role has outlived its useful life, start looking for another position. Start first within your company and then externally if necessary. Employees should have control of when a job goes away. If they pay close enough attention, they will see the role as having a limited life and move to a higher value/higher paying position. Then the employee is leading the effort vs. being forced to move.
Whether we are in solid markets or corrections, these two action steps can keep you moving forward and staying ahead of the RIF wave.
If you found value in these perspectives, please share them with others. I appreciate your support.