It’s not all rosy and pink when a startup is established with investors allocating so much capital into the business. Promoters are constantly under pressure by most of the investors to initiate their thinking in the direction of more profitability rather than just a forceful growth of business or its lateral expansion. As a result, startup companies are laying off employees at a fast rate especially at rapidly growing internet startups.
The primary reason for this widespread downsizing in tech companies is employee cost, which undoubtedly has been measured as the largest component of expenses. Downsizing is happening in most of the startups, including the unicorns. Startup companies usually look for highly skilled persons who could manage important functional positions with their experience and background.
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Why are companies laying off employees?
Company downsizing happens in any organization when they decide to terminate a big chunk of employees at one time. This happens most often to curb company expenses. This is unlike termination for cause, downsizing happens typically not because of any conduct on the employee’s end.
Corporate downsizing is characteristically done in conditions where the organizations are making considerable changes, either in case of increasing company value or reduce surplus costs.
Downsizing can occur as a result of many possible reasons some of which are listed below:
- Corporate downsizing usually happens due to poor economic circumstances. Especially in cases where the organizations have to reduce the jobs for lowering the size of costs or maintain profitability.
- When two companies merge or in case of one company taking acquisition of another. In the process of mergers and acquisitions a company usually downsizes to make its image as a more feasible candidate.
- Downsizing can also happen when there is a discontinuation of any product or service or even in the case of a faltered economy.
- Downsizing also takes place when employers intend to “streamline” a company – which means corporate restructuring for increasing profitability and maximizing efficiency.
Companies like OYO, Ola, Quikr, Paytm, Zomato and Rivigo have reportedly sacked a chunk of employees. These companies are supposed to be the established startups with some years of experience in the business. Looking at these, even the early stage startups are beginning to rework on the salary and compensation packages of their employees. It is very much expected that even they may bring down the scale of packages for the newly hired.
Mr. S. Mahadevan has stated in ‘The News Minute’, a company as established as Swiggy spends 40% of its expenses on its human resources, on the other hand Dream 11, a gaming platform has claimed to spend just 9%. The point is, we cannot make any universal rule about which part of the business expense should comprise personnel expenses.
A clear sustainable vision, a well-planned roadmap with company HR policies intake are the answers to combat situations such as laying off employees to save companies from business losses.
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References:
- As investors demand profitability, startups in India are cutting employee costs, by S.Mahadevan
- What is Downsizing?, By Alison Doyle, Updated June 25, 2019
- Causes of Employee Downsizing by Jared Lewis
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