It’s been a tough year. We’re currently in peak planning season for 2024. With capital scarce and expensive, with companies increasingly trapped in Schrödinger’s startup paradox, and with more startups than ever focused on positive cashflow and The Rule of 40, it’s safe to say that Silicon Valley is still very much in a cost-cutting mood.
I’ve done a lot of cost cutting over the course of my career so I thought I’d share one key rule that sometimes gets overlooked when you’re in the thick of this process. Here’s the rule: no matter what you do, no matter how deep the cuts have to be, keep the company a great place to work for those who still work there (aka, the survivors).
Why do we forget this? As we struggle to hit top-down targets through rounds of cost-cutting, we cut here and squeeze there so much that we can develop a certain myopia. While we eventually congratulate ourselves for building a plan that finally achieves the financial targets, we often forget to sanity check that plan in two ways:
- Achievability. Is the resultant plan even do-able? Or have incoherent cuts across departments left us close to attaining financial targets, but out of balance across functions? Are the revenue (and ergo cash collection) targets realistic? If not, the consequence is missing those targets, triggering another painful round of cuts. Always make a plan that you can beat.
- Quality of life. What will it be like to work at the company we just created? Will the people we hope to retain want to keep working for us? Are there still free drinks in the frig? An annual company kickoff? A bonus program with non-zero expected value? More subtly, have we teed up both failure and internal warfare by overcutting marketing relative to sales? Or product relative to engineering? More simply, do we still have travel budget? Do people feel like they have the resources they need to succeed?
While this may sound basic, lots of companies mess it up. Why? Because it’s so hard to build a budget that hits the new targets in the first place, the last thing the executive team wants to do is sanity check that budget and find more problems.
In addition, the management team is likely still wedged in an incremental rather than absolute mentality — meaning that while a given function had $5M last year and needs to cut to “only” $4.5M this year (and yes, that’s after absorbing some naturally inflating costs), that $4.5M is still a heck of a lot of money and, for that matter, a lot more function budget than we had three years ago when we were in the earlier stages of building the company. To solve the latter problem, the executive team needs to first heal itself (by reframing their own thinking) and then get the rest of the management team on board with absolute rather than incremental, year-over-year thinking.
But back to quality of life. Let’s make this concrete by giving several real examples of what people get wrong:
- No raise policy. You’re better off cutting more people in order to make room for merit increases and promotions — that is, if you really care about keeping the company a great place to work for the survivors.
- No backfill policy. A mindless policy that basically says the C-suite can’t be bothered with headcount resource allocation and will effectively leave it to chance. And create perverse incentives to not terminate weak employees in the process.
- Little or no travel budget. I recently spoke with a product leader with a team of about 8 PMs, none of whom were allowed to travel anymore. They’d be better off with 6 PMs and some travel budget. If you believe PMs need to meet customers to do their jobs, that is. Ditto for product marketers. Double ditto for sellers. It’s not about the travel budget per se. It’s about making the people who stay feel they can be successful.
- Bonus targets in excess of plan targets. This is the old, “well we cut the plan but we didn’t change the bonus targets” trick and it’s simply not credible. In the end, what matters is the expected value of the bonus program to employees, and if that plan has unrealistic targets, that value quickly drops to zero. If that’s 20% of someone’s total compensation, that’s a material pay cut — and that’s certainly not keeping the company a great place for those who stay.
- Workflation. This is the opposite of shrinkflation (e.g., the constant price for an ever-shrinking candy bar). This is where you get the same pay, but for a much bigger job. For example, if you replace managers with player-coach team leads, or if you blow up your success team and ask sellers to take on post-sales account management.
- Killing internal events. Like it or not, wiping out the annual company kickoff or the president’s club reduces the expected value of working at the company to the employees. My advice is to cut these back, but don’t kill them.
- Cutting supporting resources. Whether you’re cutting marketing relative to sales (and thus potentially creating a “baby robin” problem) or cutting SDRs relative to sales (putting more work on sales), or creating an imbalance by cutting product relative to engineering, you must remember that a healthy organization is a dynamic system, with interacting functions and checks and balances. Cut holistically. Instead of reducing SDR and SC support ratios across Europe, cut direct operations in a few smaller countries.
So, when you started reading this post, I’m guessing you were thinking, “oh no, we’d never do that at my company” and by the time you finished the above list you were thinking, “oh no, we did — in like three areas.” That’s why I made the list.
You can use the list to sanity check your plan or you can just derive directly from the core principle. Whenever you are cutting, always, always keep the company a great place to work for those who are going to still work there.
The alternative, frankly, is bleak. Your employees will do the last round of cuts for you — and you may not like what they decide.