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How startups should handle mass layoffs to stay alive

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How startups should handle mass layoffs to stay alive.

India | Red Newswire | By ET Bureau | Nov 27, 2015 11:40 AM IST.

Two years ago when Mohit Gundecha was vacillating between following his conscience and pink-slipping his employees, it was left to a company board member to play Krishna to his Arjuna.

“You will have to be clinical about this,” Gundecha recalled the board member advising him, a cofounder and chief executive of talent assessment firm Jombay. “This is business. When employees resign, they do what they think is right for them. And you need to do what is right for the company. Love can’t be one-sided.”

Jombay was on the verge of launching its psychometric products and fast running out of money. Its best bet at survival was to lay off about 40 per cent of its employees.

“We decided to execute this with utmost sincerity,” Gundecha said in a post on LinkedIn in September, his recollection of the events triggered by the layoffs at TinyOwl, which has dismissed at least 300 employees in the past three months. “We told the truth, no bullshit!”

Emerging companies proselytized the startup dream to hire by the hundreds, compelled to ramp up as investors pumped in millions of dollars into them until recently. But as investors tightened purses and became more watchful about how their money is spent, companies are being forced to make their operations leaner and more efficient.

Startups including TinyOwl, Zomato, Housing, Ola and Spoonjoy have dismissed at least 2,000 employees since September. Industry observers say more sackings are likely in the next six months. For first-time entrepreneurs, many still in their twenties, the emotional toll is huge.

“This happens to more companies than we talk about,” said Ashish Gupta, managing director at Helion Venture Partners and cofounder of Junglee that he sold to Amazon. “There is hardly any company that doesn’t make a mistake.”

TinyOwl, after its fiasco in early November, is working with its investors to help laid-off employees find new jobs. “We are working day and night with our internal teams and investors to ensure that each and every employee of ours finds another job,” said Tanuj Khandelwal, cofounder at the online food-ordering startup. Real estate startup Housing, which laid off about 700 people in recent months, has a similar arrangement, employees familiar with the developments said.

Such outplacement assistance programmes, where a company assists laid-off employees to reorient themselves in the job market and transition into new jobs, can be a very useful tool, say human resource experts. “Ex-employees will be open to re-joining a firm if an opening arises again due to the care taken during the layoff process,” said Harish Kumar, chief executive at consulting firm Wenger and Watson, which works with companies such as Flipkart and Amazon.

Helion’s Gupta said downsizing of staff should be done quickly and deeply. “The first desire of any CEO is to save as many people (as possible), but ultimately one needs to let go of even more than thought,” said Gupta. “Do zerobase planning, which means ask whom to keep not whom to let go. This makes the (job cuts) business-centric and not person-centric.”

Essentially, that means to do what is right for the business – the corporate version of swadharma that Lord Krishna preached to Arjuna during the Mahabharat, the epic Hindu war that pit cousins against cousins, nephews against uncles and disciples against gurus. Jombay, having survived past its layoffs, now counts companies including Infosys, Yes Bank, WNS and Sun Pharma among clients.

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Communications on layoffs should be handled sensitively, and not through town-halls, said independent human resource adviser Hema Ravichandar. “Indian culture doesn’t accept layoffs,” she said. “Remember, there is no state social security in India and with an ever increasing equated monthly instalment or EMI culture an unplanned layoff can be really hard on employees.” Which is why Khandelwal still believes the TinyOwl founders were right in deciding to travel and personally convey the bad news to employees being laid off.

“That’s the culture we are building,” he said. But it was the week before Diwali. And it was TinyOwl’s second mass layoff in about three months. In the Pune and Gurgaon offices, employees restricted the cofounders from leaving until their concerns were addressed.
“We could have timed it better,” Khandelwal said. “One should expect anything that can go wrong to go wrong.”

How startups should handle mass layoffs to stay alive
Image: ET Bureau

Investors, too, have a primary role in handling such situations, which according to Mohan Kumar, partner at Norwest Venture Partners, is to “ensure good communication plans are in place for employees and press preemptively. Currently, it is on an ad-hoc basis and causes a lot of pain.” Employment contracts should specify the circumstances for termination, the process, as well as post-termination obligations for an employee, such as hand-over of material and intellectual property, confidentiality, and non-compete restrictions, said lawyers.

Negotiating a severance package, though, is purely contractual in nature and not governed by law, said Neela Badami, partner at law firm Samvad Partners. “However, since terminating a significant number of employees without any pertinent cause can give rise to a potential industrial dispute, action for illegal termination and negative publicity, it may be commercially more viable for the company to agree to a higher negotiated severance package and a one-time payout to such employees.”

Zomato case study

Present in over 23 countries, Zomato laid off about 10 per cent of its global workforce in the last three months largely in the content space. Replying to an email questionnaire from ET, a Zomato spokesperson said the firm sets the expectation right from the time of hiring on ‘uncertainty’ of a startup job.

“Restructuring is fairly common at fast-growing startups. As with any other tech startup, things are fairly dynamic at Zomato as well. While we educate potential hires on this (aspect), we also assume that they are aware of the pace at which things change at startups,” the spokesperson said. The company has made about nine acquisitions in the past year. However it was the Urbanspoon acquisition that led to restructuring of the company.

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About 40 per cent of the 1.4 million restaurants on Zomato account for over 90 per cent of its traffic, which led to a change in its focus. “The restructuring largely affected our content operations and community management teams. The US has been impacted the most because there are more restaurants there,” the spokesperson said. The company has about 2,700 people as of now, compared to 3,000 it had earlier.

The US accounted for almost half of its global content team. The company is not planning to replace those positions now. Learnings Zomato wants to impart other startups? “Try to focus on identifying talent with the raw enthusiasm to work in a startup – someone who can deal with the uncertainty that comes with a rapidly growing company, and has the willingness to take on and execute any role,” said the Zomato spokesperson.

Tanuj Khandelwal, Cofounder of TinyOwl

When we decided to restructure our team, all the founding members made up their minds that we would individually go and break the news. Yes, we could have sent managers to do it on our behalf but we took a more humanitarian approach to the problem. In retrospect, I think we could have timed the announcement better.

The festive time got people more upset than we expected. My personal experience says one only needs to be patient, that’s the key. Yes, the reactions of a few employees were more emotional than what we expected. We are doing the best in our capacity to help them pursue further opportunities. We are working day and night with our internal teams and investors to ensure that each and every employee of ours finds another job.

Manish Jethani, CEO of Spoonjoy

At Spoonjoy, we build our culture ground up. Our first three delivery boys worked with us till the end. Despite better offers from competitors they didn’t leave. When we decided that we had to lay off 250 people, we did it in one go in a span of 2-3 days. There were various decisions we had to take at various stages.

One way our founding team prioritised whom not to lay off was based on the amount of risk an employee took to join Spoonjoy. For example, if someone relocated to Bengaluru from Mumbai, he or she was put on priority. Saying that, as we shut down, we placed all 250 employees, which included 200 delivery boys. What helped us do this seamlessly was the fact that our investors completely supported us through this.

We had a full buy-in from them for whatever decision we made on settlements. In fact, in lots of cases we paid more severance than in the offer letter promised. One fundamental thing I learnt was, have a lot of empathy for people. All these people trusted you and you have to honour that. That’s how large companies get created.

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