Reduce The Workforce To Increase Profitability

It is a natural occurrence – over time you determine, or are convinced by others, that to increase output you need additional employees so you hire one here, one there and the payroll creeps up slowly and continuously. Withholding taxes increase, workman’s compensation increases, vacation costs increase, health insurance support increases and soon you’re fighting to stay afloat, wondering what went wrong. Rather than attempt to increase productivity by leading your workforce to produce more, you allow low productivity to remain the rule, and try to increase productivity by increasing your number of employees adding more people to increase the output. It’s a losing strategy.

I have frequently reviewed business operations and noted that the ratio between payroll and gross revenue is way out of proportion and  requires a huge reduction in payroll to bring the business back to profitability. I am typically confronted with the owner’s belief that every person he has is necessary for the operation, that he could not lose one without losing a lot of productivity. But it’s an amazing thing that occurs if I win the debate and reduce the payroll by removing unnecessary employees – the output remains the same or even increases.

The number of people working frequently has little to do with the actual output, it’s the productivity of the people that count. As you remove less productive workers the remainder naturally pick up the slack and increase their productivity just enough to achieve the same output with fewer people. If you continue to remove more and more, the productivity of the remaining ones will continue to improve and profitability returns. This happens because overall productivity is low enough that the remaining employees can easily fill in the additional productivity required to make up for the lost employees.

It is also possible that overall production may decrease but if profitability and productivity increase, what difference does gross output make? Wouldn’t you rather be profitable on less revenue than unprofitable on more? Yes, I would hope so!

I might add that additional strategies to increase productivity, such as incentive-based reward systems, are also a hugely effective way to improve productivity for the remaining employees and should be considered along with reducing the number of employees. The strategy remains the same – fewer employees doing the job of more. Give them an incentive rather than a raise and attach the incentive to productivity and the numbers will show you the results. Greater productivity, fewer employees, more profit.

This works everywhere you look. Keep cutting and see how the remainder satisfies the needs. Add incentives and the output gets better.

The reality is that despite the belief that every employee is critical to your requirements, it just is not so. In fact, I suggest that anyone is dispensable, so simply start removing the ones who are the least effective and if you cannot tell, remove anyone from any department and the remainder will fill in and compensate.

When you hear about big business announcing a 10% cut in employees, something we hear all the time, it is not necessarily because the demand for their product is down. They may simply be recognizing that over time the payroll has increased unnecessarily and must be reduced to maintain profitability.

This is not mean-spirited or unfair, it is how to run a business profitably. Call me if you need help.