Could The (Startup) Redundancies Have Been Avoided?

June 3, 2020
Paavo Pauklin

Many successful start-ups have had large redundancies. Unfortunately,  they are probably going to experience a sequel in the coming months. Certainly, it will be an emotionally tough decision, but one that is needed by start-up founders trying to keep their companies alive.

The damage of redundancies does not stop there. In addition to the obvious, redundancies cause a second wave of damage to brand image, existing staff motivation, and attractiveness in the labor market when you need to restart the hiring process.

However, implementing a vital HR tactic can significantly reduce these damages. “To maintain agility, we recommend that companies retain 20-50% of their employees as external partners or outsourced workers”, writes Paavo Pauklin – founder and CEO of the software development company Netcorp.

Can funded startups be in crisis?

It could be assumed that the current crisis will not have a significant impact on the world of start-ups, as they have secured funding and are not expected to be profitable in the fast-growing phase. Many of the world’s most valuable technology companies, such as Uber, Spotify, or Snapchat, have never been profitable.

At the same time, start-ups live from one round of funding to another. Therefore in the event of an economic crisis, getting the next financing can be very difficult. In this case, even the best idea can go bankrupt due to poor timing.

Start-ups are always in crisis.

If the economic crisis does not haunt you, then you will be plagued by a growth crisis, a team crisis, a customer shortage crisis, or an identity crisis. All of which may require a pivot in the business model, cost cuts, and/or significant changes in team size or structure.

At the same time, start-ups still keep pace with old school organizations in their recruitment principles, e.g., start-ups recruit people with permanent contracts and with long-term expectations. The number of the company’s employees has become a kind of growth vanity indicator, so there is a tendency to over-recruit people in good times.

However, if there is a need to reshuffle the workforce, it will not be easy. Redundancy is an emotionally charged issue that cannot be taken lightly. In any case, it creates uncertainty for the investors, the remaining workers, and the labor market.

Would you go to work for a company where a large part of the team has been recruited and then laid off in a short time? Or with how much enthusiasm and confidence would you continue to build such a company?

At best, it is thought to be incompetent management, where employees are thrown overboard after the first tremor. In the worst case, it is believed that the company is in such serious difficulties that it is no longer worth considering its survival.

A flexible workforce helps you adapt faster.

Labor costs are often one of the biggest fixed costs for a company. Keeping the workforce flexible is essential for all companies at all times, but it is especially evident during a crisis.

If the entire workforce is permanently employed, it won’t be easy to restructure this cost fast enough. Especially in areas where rapid changes are embedded in the business model. The permanent recruitment of the entire staff is a management error for both the company’s sustainability and its employees.

We recommend that companies keep 20–50% of their employees outsourced, e.g. so-called external. This will allow them to react quickly to changes both in the company and in the economic environment.

Airbnb would probably have avoided such a large-scale redundancy and the consequent damage to its reputation if some of its employees had not been employed directly, but through the temporary staff involved or through external partners.

Unlike a permanent employee, reducing the workload of an external partner does not exceed the media threshold and does not generate thick blood. For ten years, we have been finding software developers for Estonian and Nordic companies from Poland and Ukraine. Our employees have been able to react quickly to the crisis and we have not laid off anyone from the permanent team. At times, it has hurt us, but when the markets retake a positive turn, we are still there to support them as they grow again.

A flexible recruitment model does not mean less commitment.

It is surely not worth fearing that the temporary workforce will do a bad job. Although it is believed that employees have a greater sense of ownership and effort over what is going on in the company when they are permanently employed, commitment does not automatically come in the form of a contract – and vice versa.

Well-set goals and organized work play a bigger role in employee commitment. Combining temporary and permanent labor can result in highly efficient machinery that moves faster than members of the fan army with mediocre skills.

Also, it should not be feared that the temporary workforce would have a somewhat poorer skill set. Rather, one can find more ambitious professionals who work based on the principle of a portfolio career to develop precisely the skills that are of real interest to the company. In a small or medium-sized company, a full-time job often means a broad profile that can result in an out-of-focus generalist.

A flexible workforce model and a combination of permanent and external employees are fundamental parts of a company’s strategic management. On one hand, it gives a sense of security during changes; on the other hand, it allows the company to focus on developing its core strengths.

We have ten years of experience in offering outsourced developers, i.e., temporary staff, from our development bases in Poland and Ukraine. If you want to make your company more flexible and resistant to change, we can also help you find reliable and professional developers. We also consult companies on how to start outsourcing and what tasks it is reasonable to entrust to external specialists.

Feel free to contact, and we will find a suitable solution for you.

Meet the authors

Paavo Pauklin
Executive Board Member
+372 6 555 022
Joseph Carson
Ethical Hacker, Cybersecurity Advisor
+372 6 555 022

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