Layoffs or restructuring - is there any difference?

18th Apr 2016
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Shakespeare rightly said - 'what’s in a name?' It’s a line a lot of startups wish their employees would take to heart, when it comes to the touchy topic called ‘restructuring’.

Startups that have recently been 'restructured', seem to have a strong dislike to the term being equated with ‘layoffs’. Over the past eight months, various startups including, Housing, Commonfloor, Gozoomo, Roadrunnr, TinyOwl, Foodpanda, Quikr and Zomato laid off staff but the majority of them labelled it as 'restructuring'. For older readers, this might seem like the old controversy of the nineties over the term all over again, but for a lot of the younger employees that form the lifeblood of most startups, it's a whole new world, and for many of them, more perplexing than they can handle.

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The term first gained prominence in the nineties, when American firms decided to adopt lean manufacturing and other efficiency tactics from the Japanese, leading to widespread, restructuring, downsizing, rightsizing, or quite simply just layoffs, as their workers soon discovered.

Recently, CarDekho shed about 70 employees, and, according to YourStory’s sources, several hyper-funded startups, including unicorns, are slated to cut much larger numbers from their payrolls, as their agenda has switched to profitability from growth.

Shailesh Vickram Singh, Executive Director, Seedfund advocates not according more attention than due to such developments. “This is a natural evolution of a startup’s lifecycle and one shouldn’t cry about it. Globally, Infosys, Nokia, Dell, Yahoo, Foxconn, all undertook massive layoffs and major restructuring. It’s not a new phenomenon and all stakeholders including employees and media shouldn’t paint it as a negative trend,” he says.

Easier said than done in India, though, thanks to a combination of inadequate retrenchment benefits and communication to the affected employees in most cases.

Currently, layoffs by startups is a global phenomenon. A TechCrunch report cites over 23 companies, including publicly traded ones, which executed layoffs in the first two months of this year. The first half of 2015 was a busy time for homegrown recruiters who have been working day and night to grab the best talent for clients, however in its last six months they have been witnessing a lull in demand. “We see a dip in demand right from management-level positions to mid-level,” says one of the top brass of leading recruitment platforms specialising in startup hiring.

Recommended read: The truth about hiring and firing in the startup world

While for some it’s a natural progression, others see it as a reality check for hyper-funded startups. Haresh Chawla, prominent angel investor and Partner at India Value Fund, says:

Lately, heavily funded startups prioritised growth over unit economics, and investors gave consent to it. However, the table has turned now and investors look for strong unit economics. Since startups have switched focus to basic business fundamentals, mass layoff will be continued across department and functions.

So there you have it. The first sign that your firm could be looking to shed a few bodies is the terminology shift from 'market share' and 'user base' to 'unit economics'.

Analysts point out that the trend of labelling layoffs as restructuring will continue this year as well. Most scale-oriented startups hired recklessly to drive growth, and layoffs seems to be their only option. Radhika Aggarwal, Co-Founder, ShopClues, adds,

Hiring is a crucial aspect that impacts companies in short and long term, both. We never had to engage in restructuring or mass layoff as we only on-board people with long-term vision and defined roles.

According to Radhika, restructuring and layoffs are the need of the hour for startups that aren’t in good financial shape. “I believe this isn’t a long-term trend,” she adds.

Indian startups continue to coin new terms to elude analysts, media and observers. To boast of growth, e-commerce companies used to report numbers in GMV, which has no strong correlation to actual business. Kashyap Deorah, serial entrepreneur and author, points out'

Downsizing, rightsizing, restructuring or layoffs convey the same message. It’s a healthy part of the cycle but startups should need to come clean about their mistakes. Most of them over-hired in a frenzy of hyper-funding, and correction is bound to flourish.
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Every sector takes time to evolve. Sectors like services and outsourcing took decades to scale and establish. New-age startups aspired to achieve fast scale and there is nothing wrong in it. However, ignoring basic fundamentals like unit economics, MVP and sustainable revenue model for the sake of growth/scale usually leads to a mess. Dheeraj Jain of Redcliffe Capital. So far, Dheeraj had placed bets in over 15 startups in the last eight months, says,

Philosophy of scaling up in no time by hiring excessive workforce have been a bit of trend across funded startups last year. Such over-hiring essentially demonstrates poor management skills and raises question on revenue model.

Consolidation across sectors including e-commerce, foodtech and classifieds also picked up in the past eight months. According to experts, consolidation often brings unnecessary baggage. “When two similar nature of businesses consolidate then it bring similar skill set in abundance which may or may not be required by the acquirer,” adds Kashyap. Quikr followed similar strategy after acquiring real-estate portal Commonfloor.

While hiring and firing is part and parcel of any business, it impacts employee life at large. Sakshi Gulati (now 23) got selected for Infosys thorough campus but decided to join a Bengaluru-based funded startup on a comparatively high salary in late 2014. Everything was hunky-dory for over 17 months and she managed to get two quick promotions. “By end of November last year I, along with 35 per cent of the overall workforce, was randomly asked to leave with two months' compensation,” she adds.

Currently, she is working with another startup on a salary that is 20 percent lower when compared to a year ago. She adds,

I am not ranting against startups that taught me nuances of working in small set up but at the same time I highly condemn the dubious promises and dream offered by startups on mere projections and future funding.

A key reason for firms taking on excessive employees at the high growth stage is the aversion in India to contract personnel, especially at managerial level and for white-collar jobs. This is an issue that comes at both employer and employee level, where the employer believes the employee is never quite ‘into’ the role, while the employee is uncomfortable with the uncertainty of the contract. This needs to change by establishing clearer role definitions, and paying a small premium for contract employees.

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