Building a successful business means constantly reevaluating what does and doesn’t work. Weighing the effectiveness of your business structure, staffing, and marketing efforts, to name a few, helps you determine when changes are necessary to maintain profitability. Sometimes, these evaluations show the need for significant changes, including downsizing.
Downsizing your business is an opportunity to focus on the most important and most basic part of what makes your business successful. It keeps the business on a positive path but only when planned and implemented with legal implications in mind. Consulting a knowledgeable business lawyer throughout the process is essential to keeping your business on the right track and avoiding legal complications.
How Downsizing Your Business Can Open New Doors
Larger business ventures can be a paradox. While their size may allow greater opportunities and revenues, it can also saddle them in a way that hinders swift response to changing conditions. When the weight of the hindrances outweighs the benefits of productivity a larger operation allows, it could be time to consider how downsizing—getting back to the essence of what makes the business successful—is the next logical step forward and what common legal ramifications to anticipate.
Reasons for Downsizing Your Business
The essence of your business, often called core competencies, is the foundation of its success. Owners often mistake expansion and growth for success. But growth through insourcing and expanding products, services, or markets can have negative effects, too. Shifting strategies in larger operations in response to changing conditions, such as an economic downturn, is more difficult. Downsizing your business can make it more agile and able to focus on what the business does best.
Businesses turn to downsizing for a variety of reasons:
- Mergers and acquisitions;
- New management;
- New products or technologies create staffing redundancies;
- Changes in organizational strategies or business plan; or
- Response to an economic downturn or ongoing change in customer habits.
The reason for downsizing impacts the method for achieving a trimmer organization, so identifying and narrowly defining the reason for this strategic shift is necessary before creating and implementing a downsizing plan.
Determining Your Business’s Core Competencies
Core competencies are what your business does well and in a way that distinguishes it from the competition. They can be skills or processes, institutional or individual knowledge, or particular qualities of your product or service, but they must reflect the business as a whole and must be something a competitor could not easily or quickly duplicate.
Successful brands often have multiple core competencies. Following are some examples of core competency categories:
- The unique, high-level quality of your product or service;
- Excellent customer service;
- A singular, successful marketing strategy; or
- The ability to shift quickly to meet consumer trends or customer needs.
Determining your core competencies requires introspection and evaluation of your current business plan, how your business operates, and its competitive edge. Review your business plan, including your mission statement and vision statement. Core competencies should be broad enough to encompass all of what your business does well but narrow enough to exclude easy duplication.
After identifying your business’s core competencies, review them at regular intervals to determine whether shifts in processes, operations, technology, or demand have caused a shift in the business’s core competencies. Because core competencies can drive organizational decision-making, assigning a core competency in error or retaining one that no longer applies can have a negative impact.
The Connection between Core Competencies and Downsizing
Your business’s strategic shift and contraction requires thoughtful planning to make it a positive move for the company’s future. The natural consequence of well-planned downsizing is a focus on core competencies, the operations that the company does best and achieves the most by performing.
Don’t confuse a focus on core competencies as a step backward. A business’s core competencies at the time of downsizing may not be the same as when the business started. When businesses adapt to changing times, technologies, and demand, their core competencies can change. Thus, any change in business strategy, including a move to downsize, must include reidentifying and -evaluating the business’s core competencies.
In the simplest of terms, downsizing means reducing your business’s labor force. Done right, with your core competencies in mind, it entails more than merely slashing numbers.
Legal Implications from Downsizing Your Business
Refocusing on your business’s core competencies should be the destination, but it is not the only consideration in downsizing your business. Downsizing is the result—owners and managers must also consider the reason for downsizing and the consequences.
Downsizing often impacts a business’s legal obligations and relationships. For that reason, businesses benefit from counsel by an experienced business lawyer in the planning phases of downsizing—preferably early in the process. An attorney adept in guiding businesses through changes like downsizing can help identify areas of concern that could impact the company’s finances, brand identity, and reputation. Following are some examples of areas often overlooked in downsizing plans:
- Employment contracts or labor laws triggered by a reduction in force;
- Benefits packages;
- Lease obligations;
- Vendor supply agreements;
- Legal ramifications of insourcing or outsourcing overall;
- Insurance coverage changes necessitated by an increase or decrease in personnel and/or equipment; and
- Changes to overall expenses and legal consequences of shifting from employees to contractors.
Downsizing can also involve restructuring the business. Because business structures have a legal existence independent of the people working for them, a formal change in business structure requires attention to compliance matters, a formal exit strategy, and legal steps to create a new business entity. Working with a knowledgeable business lawyer is best way to ensure the related legal matters are adequately considered and addressed.
Why Working with an Experienced Business Lawyer is Key When Downsizing Your Business
Refocusing your business’s efforts on core competencies can give it new life, but only if planned and executed carefully. Such a major change in direction is likely to directly existing contracts, insurance issues, and financial obligations toward business personnel. A business lawyer can help you make sure you have all of the necessary pieces to the puzzle before crafting a plan that includes downsizing. Xavier W. Staggs of Jenkins Fenstermaker, PLLC is just that with a dash of entrepreneur on the side. As a small business owner and attorney, Xavier has the inside track on factors you should consider when considering downsizing your business. For a consultation, call Xavier at (304) 523-2100 or complete this online contact form.