Here's what I learned from the 2017 [~500 employee] restructuring at Zenefits: despite weeks of careful analysis and planning, nothing could have prepared us for the magnitude of the RIF and uncertainty regarding what would come next.
After a grueling board meeting, we agreed on high-level financial targets that required a significant cut to our cash burn. I was simply told: "you have 3 weeks, get it done." Given the COVID-19 crisis has turned days into weeks and weeks into months, the 3 weeks I had is an eternity compared to what finance leaders are going through at the moment.
In the end, we survived and almost 3 years later, the business is alive and fighting. Whether you're heading into a major restructuring or making small adjustments, I hope my lessons will serve as a useful guide.
During the planning phase, ideally, the only ones involved are the CEO, the Board Directors, and CFO. The more people involved, the greater the chance of it leaking. Even the best intentions go bad when your trusted confidant tells their trusted confidant and so on. A private offsite is ideal, but since most people are remote due to COVID-19, it’ll be easier to keep things confidential. Be sure to set calendar invites to private. A leak can mean undesired departures, press coverage, and a lot of stress and anxiety, in addition to the turmoil the business is already experiencing.
The planning phase is roiled with uncertainty and cognitive dissonance. You may feel like a traitor, a liar, and a force for good all at once. Maintaining a positive attitude is critical to getting support from your team and ensuring things are handled smoothly and effectively. As Churchill said, "Attitude is a little thing that makes a big difference." Stay focused on the process and trust that the results will follow.
In its simplest form, you’re trying to go from point A to point B. First, make sure you have clarity on where you stand right now by assessing the following:
If you have a good finance team you should arrive at a quick assessment. The more difficult part is figuring out where you want to go (point B). This may be navigating to an extended runway, profitability, certain milestones for fundraising, etc. More on this below.
Creating simple financial frameworks will make it easier to bring along your board, executive team, and the rest of the business. Keep your assumptions to a minimum and be explicit about what business drivers you chose to exclude and why.
Re-forecasting during the health crisis is going to be a major challenge for everyone. Here are simple frameworks from two leading VCs:
Similarly, keep your modeling and analysis minimal. You’ll need to iterate rapidly and make adjustments on the fly. There are two primary approaches to re-forecasts in a crisis:
Market-Driven: When cash is comfortable and a rebalance of capital allocation is needed to weather the storm.
Cash-Driven: When cash is tight and restructuring is needed to extend the runway or hit profitability.
Note: you only want to cut once, so ensure you are not overly optimistic with forecasts. Two rounds of layoffs in close succession is a death sentence. You need to execute your plan with confidence, precision and transparency. Trust is the only thing that will keep things going.
When you bring people into the process, expect information to leak and rumors to circulate. The best mitigation strategy is to continuously reinforce secrecy and move fast. Setting tight deadlines will force action and help you avoid paralysis.
Everyone’s concerns will be valid and emotions will run high. As Warren Buffett says, “business problems are easy, people problems are hard.” Stay grounded in your business principles, act fast, and move on.
Having a single person in charge is key to moving fast and achieving the desired results. An appointed Restructuring Lead should work with the CEO to define a purpose (i.e. Achieve 18 months of runway). With a clearly defined mandate for the Lead, the CEO should remove themselves from decision-making except for issues brought to them by the Lead. You want to avoid the dysfunction of people going directly to the CEO. It puts execution at risk and can hurt morale.
This Restructuring Lead is likely your CFO or VP Finance, but you should also consider their ability to be a war-time leader and manage a complex cross-functional project. In some cases, a finance-savvy Chief of Staff or VP Business Operations might be a better choice. You need someone who’s a great listener, but also someone who’s not afraid to have tough conversations. They can assess competing perspectives and garner buy-in in from tense gridlocks. It’s not just a financial exercise and decisions will have to be reviewed and carried out by HR, Legal, and Security.
One of the most important steps is to clearly lay out the desired goals and objectives. Here’s what you need to share:
You also want to be extremely clear about your expectations for behavior. Make sure your CEO and Board Directors support the guidelines. When decision-making gets tough people will seek exceptions. You won’t be able to anticipate everything, but stating what's on or off the table will save a ton of conflict during the execution phase. Some examples:
Listen carefully to objections and look for solutions. Don’t let the meeting end with open disagreements. Ask dissenters to disagree and commit. Everyone has to be fully committed or the entire plan is at risk.
Once targets are shared, let your budget-owners run. You have to hold firm on targets, but it’s critical to be collaborative in problem-solving. Strategic Finance business partners are best to play the role of the good cop looking for agreeable solutions. The most important thing is the budget-owner comes up with their plan, a plan they’ll be accountable for.
It’s best to focus on Sales or the area with the deepest cuts first. You’ll iron out a lot of the issues and it’s the most critical team to get on board. It will then be easier to go to other groups once you have buy-in from the largest team. Also, if for whatever reason you need to reduce the cuts in sales, you have room to increase the other teams, without creating conflict.
As decisions are made or tabled, keep an open log of what’s closed and open. Track what decisions were agreed to, when, and who was involved. Transparency will reduce any he-said-she-said down the road and, more importantly, it reinforces accountability.
Your culture champions and true missionaries are needed now more than ever. The business will be fragile and trust will be broken. These people will have an outsized impact on your morale and will be key to rebuilding trust with the broader organization. These are the people who stand up for your mission in the break room and at happy hours.
Restructuring will inevitably lead to additional attrition. People will move on to more stable jobs and well-performing companies. You will need to replace them. Whether it's keeping some people in recruiting or an alternative, make sure you have capacity to backfill.
Classic thinking is to not cut sales too deep because it can risk future growth. I’ve already heard investors tell their portfolio not to “mortgage the future.” At Zenefits, this was the greatest area of friction between Finance, the CEO and VP Sales. Both times we kept too much sales capacity and it hurt us dearly.
If demand is higher than expected, then you’re running lean and the sales team is overloaded. That’s a good problem to have. They're being fed, getting paid and winning. This is big for culture. Worst case, you’re hiring again. If you carry too much capacity, then the sales team isn't being fed and already weak morale is crushed. Your burn and unit economics are worse than expected. Having to cut again or performance management people out will erode trust further.
Do a deep analysis of your customers to understand risk and estimate churn. Use a pessimistic approach to forecast upsells and renewals. You don’t want to overestimate your cash inflows. For headcount planning, assume an optimistic customer retention rate and don’t go too aggressive on productivity assumptions.
Your customers need to be well informed about what changes the business is going through and how it will impact them. The less change the better. The more communication the better. It’s a fragile period in the relationship and trust needs to be preserved. Customers will understand you have to restructure, but they won't understand lapses in support.
We’re entering a period where businesses will be more disciplined with their spending. Expect customers to negotiate at renewal and with increased scrutiny. You want people who understand their businesses. Someone who continually reinforces the value prop for their particular objectives. Existing relationships matter a lot under these circumstances.
I got this wrong at Zenefits. I focused too much on the data which suggested the cost of high-touch Customer Success wasn’t creating enough value with customers. Any analysis here should weigh the net impact to LTV given changes to margin and retention. The restructuring was disruptive enough as is, but shifting our threshold on service-levels and productivity put more burden on our customers. More on this below.
For human-capital intensive businesses, your people will be 60-70% of your spending, but non-payroll spend can be a significant source of cost-cutting and in some cases save jobs or free up cash to invest in growth. During our restructuring, our FP&A team focused on headcount and department spend. Our Accounting team focused on general and administrative spending.
Some areas to explore include:
Not all savings are worth the risk. Salary cuts are frequently tossed around as a solution, but the savings generated may not outweigh the impact on morale and productivity. Studies suggest productivity may slip 10-20%. It will be harder to rebuild trust and employees will be reminded every two weeks.
Outsourcing or offshoring is another initiative that gets tossed around during these types of situations. I’m not opposed, but don’t try to land a big operations project in the periods before and after the restructuring. Wait a few weeks minimum when things begin to settle back down. You may have to keep key people another 1-3 months. This will be tough on them and can be detrimental to morale. Use performance bonuses to keep them committed and set guidelines for behavior. You’ll also want to avoid offshoring customer-facing operations until you’re confident trust has been restored with your customer base and you can execute without a hitch.
For more information read on: Restructuring or not, keep your house in order.
Many decisions will be tough, but you're not alone. You have to do this for the sustainability of the company you belong to and believe in. Time will pass and whether your business flourishes again or not, you'll always be able to look back on this period and remember the effort you gave, how constructive your attitude was, and how you led others.
Special thanks to Matt Gonzalez, J Zac Stein, Amanda Kattan, Scott Clark, and Yevgenia Fink for reviewing drafts of this and making contributions.
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