Venture Capitalist at Theory

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1 minute read / Jun 8, 2022 /

Is a 10% Reduction in Staff a Layoff?

Should a 10% reduction in staff be considered a layoff? In one sense, yes, because on a particular day, a collection of employees no longer work at a startup. But a 10% layoff shouldn’t confer messages of a financially strapped business.

Consider the average annual employee attrition in a startup ranges between 13% and 25%. A 10% reduction-in-force (RIF) is less than the quantum of employees the business would have expected to lose throughout the year.

Many established businesses force rank staff, a human resources discipline which recommends an annual 10% reduction in their staff as a matter of course.

Jack Welch, former CEO at GE, dubbed it the Vitality System or Vitality Curve. He hypothesized 20% of the employees were the most productive, 70% formed the base, and 10% weren’t accretive to the business and should be released. There are clear costs to the Vitality System, but I won’t debate them here.

When I read about a 10% reduction in staff in the press, I don’t consider it an indicator of a startup’s health. Instead, it’s an acceleration of an end-of-the-year human resources practice to maximize cash. Layoffs that are materially larger than average attrition benchmarks are a different matter.

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