The Better Way to Handle Headcount Reduction

There are a number of reasons that companies resort to headcount reduction, including cutting costs and unavoidable staff reduction. Navigating a reduction in workforce is a tricky and sensitive process. The use of people analytics in reducing headcount can provide HR managers with the data necessary to make the most informed and beneficial decision for the organization.

In 2018, major corporations like GM, Reuters, and IKEA announced a round of layoffs, signaling a willingness to stay one step ahead of a changing market.

For one particular financial service provider (FSP), having an analytics-driven strategy has proven incredibly successful. The FSP found that a certain area of their business wasn’t seeing as much revenue as it had in the past and they didn’t expect it to ever bounce back to previous revenue levels.

Their Finance department said they needed to reduce headcount to make up for the loss in revenue. After exploring the data with people analytics, HR came back with evidence and projections showing layoffs weren’t necessary after all, as voluntary turnover (including retirement and resignations) would get them to Finance’s headcount target without having to let anybody go; they just needed to wait for the data projections to run their natural course.

The data proved true—natural turnover brought them to their target only one month over the Finance department’s goal. The FSP’s HR team demonstrated through analytics that natural turnover would achieve the same goal with a lot less risk, loss of talent, less reputational damage, and less cost.

Re-Examining the Headcount Reduction Process

Typically, Finance departments make the call for cost reduction and relay the message to HR leaders to cut costs across the organization. Without the use of data, leaders often go with “gut feel” after considering who will be least critical in achieving departmental goals in the coming year.

Other organizations go with the expected “last in, first out” methodology, in which those with the shortest tenure are the first to be let go. Another strategy is to let go of the most expensive people, thereby saving the most money while letting go of the fewest staff.

In all these cases, an evidence-based process is missing.

PwC’s 21st CEO Survey calls for the use of analytics in transforming and restructuring how organizations work. In the case of layoffs, HR leaders benefit from using people analytics to inform their decision-making.

Below are four data-driven steps to determining the right headcount reduction strategy for your organization.

Step 1: Gather Information for Strategy Planning

While Finance may have a number they expect HR to hit by a certain date, it is ultimately up to HR to determine the strategy of who, when, and how. HR leaders should ask several questions of their Finance team, and then use people analytics to drill deeper and determine the best solution, such as:

  • Is the reduction across the organization, within a specific geography, or within a specific work type?
  • Are we trying to reduce overall costs or reduce costs in a particular area due to a shortage of work?
  • Why do we need to cut costs? Is there less work to do or do we need to do the work at lower costs?

Understanding the “why” behind Finance targets allows you to find the right solution—and it isn’t always reducing headcount! By knowing the prospective future state of the business, HR can produce solutions that match and work towards business goals.

Step 2: Run Potential Scenarios

Once you understand why Finance targets have been set and what future state they’re working towards, it’s possible to start running different scenarios on how best to reduce employee counts.

In looking to reduce headcount, perform “what-if” analyses to explore different layoff scenarios, as well as alternatives to letting people go. For example, you could test how implementing early retirement could deliver Finance’s targets over time.

With analytics, you’re better able to see the possible outcomes of your decisions before you have to make them.

Step 3: Determine the Mitigation Plan

After looking at the planning and what-if data, HR leaders must determine mitigation steps to ensure that reducing headcount is controlled. Keep in mind that turnover contagion can occur as a result of layoffs. Refer to Curbing Employee Turnover Contagion to learn how to use people analytics to ward against this phenomenon.

Consider the following steps in creating your headcount reduction strategy:

  • Identify high performers that need to be kept and implement targeted retention strategies.
  • Determine if there is a need to ramp up in one department before ramping down in another.

Step 4: Monitor the Impacts

People analytics is essential in monitoring the effects of your organization reduction. The goal of reducing employee counts is often to save costs or help the business perform better, so it is imperative that you monitor the aftermath of a reduction in workforce.

Harvard Business Review reports that downsizing can result in decreased loyalty of employees who remain in the organization and found that layoff survivors experienced a 20% decrease in productivity.

Check metrics like the retention of high performers, maintenance of labor costs against delivery of revenue or productivity targets, and the number of new applicants to indicate any possible issues or opportunities as a result of the headcount reduction.

Make Informed Headcount Reductions

While data supports decision-making, data is not the decision. In the end, HR must make downsizing decisions, and analytics simply provide insight into the most beneficial reductions for the organization. Don’t let finance drive the decision. Though finance owns the budget number, they don’t own the who, when, and how when it comes to formulating the people behind the numbers.

Use your strategic plan to achieve business targets. There are creative and informed decisions that HR can make using people analytics. By taking control of the strategy to reach finance’s budget targets, HR managers are able to utilize background research and data in support of future business goals.

Author Photo
Ian Cook |
Curious about the differences between gaussian and pareto distribution? Ask Ian. Want to know what it’s like to kite ski North of the Arctic Circle? Ask Ian. Not only is he an expert in statistical analysis and HR metrics, he’s also an avid cyclist, skier and runner. At Visier, Ian helps customers drive organizational change through linking workforce analysis to business outcomes. He is responsible for the workforce domain expertise within the Visier solutions.