Many startups are thinking about conserving cash. Some are reducing their R&D spend by cutting headcount. That might be because those product and engineering folks were working on projects that were more aspirational, less proven out; because their companies are now focused more on top-down sales than product-led user growth; because the company’s new trajectory didn’t justify senior leadership; or because it didn’t justify the current number of people in management positions. Regardless of the reason, when you let people go, you often have to re-org. And even if you’re not cutting headcount, you might want to re-org in order to help your team run more efficiently.
Aaron Erickson, the CEO and Co-Founder at Orgspace, has studied the art of the re-org. The topic might make your stomach churn, but it’s an essential one for many companies right now, and not enough leaders re-org the right way. Poorly executed re-orgs can be disastrous for the company; thoughtful re-orgs can actually be highly motivational and become the substance of positive stories about company leadership for years to come.
In this conversation, Aaron and I discussed:
What are the signals that indicate you have an opportunity to trim spend on your R&D team?
What factors should influence your re-org decisions: for example, the value of different functional roles, the number of direct reports per manager, the ratio of spend on direct hires vs. contractors?
How can you manage through a re-org well, and what mistakes should you avoid?
You can listen to the podcast or else read the lightly edited transcript of the conversation below. Let's dive in!
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Leadership Roles
As always, I’ll share a few leadership roles at companies I’m excited about:
Readyset: Head of Operations - email CEO Alana Marzoev at alana@readyset.io
Eppo: Founding Marketer
dbt Labs: Sr. Director of Professional Services
Bubble: Director of Partnerships
LaunchNotes: Director of Engineering
Transcript
Allison: Aaron, thank you so much for joining us today. I am psyched to chat with you about the topic at hand, which is managing your engineering organization in these uncertain economic times. A lot of companies are thinking about how to generally manage their cash and sometimes cut expenditures. That often necessitates reorganizations, new types of organizational structures. I know you've developed a lot of expertise on how to manage your engineering organization specifically, so I'm psyched to chat with you today.
Aaron: I think a lot of it is making mistakes along the way. Sometimes these talks are more of a confession than a lecture. So, hopefully we can learn from my experience a little bit as we talk about this today.
Allison: Learning in public, that's what we're all about.
Aaron: Absolutely.
Allison: To start, what are the signals that indicate that a company has an opportunity to trim spend on its engineering team?
Aaron: Generally I like to think of the sun rising in the east and setting in the west as a pretty good signal.
Allison: [Laughs] So…every company.
Aaron: Everybody kind of... We were in very much a, what I would call, “hoardy” talent market since about 2010 or 2011. “We need to get people in and get more things done.”
People tend to have this psychology where they don't necessarily want to let people go. People don't like to confront others when things aren't working, so there's going to be parts in the system where frankly people aren't a great fit. So, being able to help manage people out of the organization when they are not in a good place is something that we pretty much always need to be doing as responsible executives.
Now, granted, you want to do it with empathy, you want to do it with care, but let's be real. Companies should be letting people go pretty much all that time; it shouldn’t just be when we don’t have another choice, which is what’s the case now. Now our investors are demanding that we manage spend.
So how do we manage spend across our engineering organization? I like to start at the portfolio level. I would call it “zombie hunting,” for lack of a better term. Let’s find those projects, products, or initiatives that you know are dead. And everybody on that team knows they're probably not going to do what you intended them to do. So at some point you want to act like an activist investor and say, hey, which of these things are actually going to work, and let’s de-prioritize the things that aren't, and then either reallocate the folks. Those hard decisions might result in layoffs. And sadly, that's something that has to happen. Nobody likes it, but it's just something we have to do, if we're responsible.
Allison: I'm thinking about how you might prioritize across these product initiatives. I know a lot of companies that I work with, and particularly upon the advice of their VCs, are focused on product initiatives that are clearly aligned with revenue. They’re starting to cut other things that are more experimental. I'm curious to know if you think that's the primary framework they should be using to value projects, or if there are other ones you’d recommend, perhaps some that are more engineering-specific as well.
Aaron: At some level you're going to not want to end speculative R&D entirely. It depends on the kind of situation you're in. If you are literally looking at six months of runway, you'll want to cut everything until you’re left with only things that are going to lead to meeting revenue targets and get you to the next funding round.
But if you have meaningful cash runway and you're not a small startup, say you're Series C+, there are going to be some long-term opportunities you want to seize. If you can leverage the opportunity to invest a little bit in those things where others aren't, you should probably do that, but you shouldn't do very many of them. You should probably do one or two and watch those very closely.
There’s the idea of pain pills versus vitamins. Some product features are only “nice to have.” If you are asking for budget to buy a SaaS product right now, it is not going to be for something that isn't immediately critical.
Allison: So we talked about prioritizing initiatives across your org. What about different roles within engineering? Are there some that you would consider to be more valuable during this economic environment, across companies?
Aaron: If we're going to be honest intellectually and think about what we need in certain teams, it is going to depend on the team. If you have a product where user experience is truly a differentiator, you're not going to get rid of your UX people. If you're writing expense report software, then maybe the user experience doesn't matter as much.
If you have a product where your customer set is identified, and where the next three or four steps are obvious in terms of what to do to grow revenue, you’ll still want product managers, but you may not need as many of them.
In some cases, the product is already pretty stable and the goal right now may be to invest more in sales. Maybe you can get by with fewer engineers to maintain the product for a while, to let sales catch up with the engineering.
There's no one answer. It depends on the strengths that you have.
Inevitably everyone has to make hard decisions that you know are going to be unpopular.
Allison: Do you think that as a result of the economic environment, there will be a change in the ratio of spend on direct hires versus on contractors, within engineering organizations?
Aaron: This is my third recession. What I’ve seen in the past is that most CEOs and leaders start to hire more contractors, because they don’t want to hire permanent headcount without the conviction that they’re going to be around for a long time.
In addition, you’ll want to have more generalists around, because you're going to need people who can be flexible across different roles. You might be okay with an engineer that happens to be very good at UX, rather than have a UX expert. When you do need that expert, you might work with an outside agency to bring in some of the specialized skills. You'll obviously pay more for the contractor, but you limit the amount of time they’re working.
Allison: What about the ratio of direct reports per hiring manager? What do you think companies should aim for?
Aaron: I like the ratio of one manager to 12 direct reports. One to 12 means that the manager in question can know enough of the context of the individuals so that they can do effective performance management and effective leadership, but not so few where it's like, “We promised somebody would get a manager promotion. We didn't really know if they're going to be good. So we were really careful, we put two people under them to see how they would do.” That’s wasteful. There are ways you can give people that experience of management without naming the role as such.
I would not be shy about moving folks back into the individual contributor role at that point. You can say, “Hey, leadership is not something that you need a title to do.” It's not always going to be what they want to hear. But I think we should assume that the people we work with are adults. They just need the context behind the decisions.
Allison: Let's say that you're a CTO or your founder and you prioritize your spend across your org or reprioritize it based on some of the factors that we just talked about. And now you have to re-org. What are your suggested tips for managing through reorganizations?
Aaron: There are a lot of them, but I like to start with: as execs we need to be honest why we're doing it and what led to it. Guess whose fault it is that we have to re-org right now? It's the person looking in the mirror. It is your fault. It is not people's fault on the ground. This didn't happen to you. It is your fault that you have to reorg. And I think the first thing we need to do is be humble about the mistakes we made. “I screwed up. It led to this reorg. I have to make these adjustments now. I probably should have been making them along the way, but I didn't make the hard decisions. And so now I am doing that. I am sorry.” That's the first step: apologize and express empathy.
You need to share a metric that indicates whether the re-org was effective. Cost is obviously relevant. I don't know many people who get up in the morning and are excited about cutting costs. It’s not a rallying cry. But you can talk about the opportunities to fix your unit economics. You can talk about your revenue per employee, which creates opportunities for people down the road.
If people don't trust their leadership, it doesn't matter what you say. So you have to gauge what that level of trust is. But if you've done your homework and you have a high level of trust, you should almost certainly be talking about what the good future is.
We all know about what happened at Better.com. And some of these stories of very bad announced reorgs were just very cringeworthy stuff. There are simple ways such as just being a human and being empathetic to avoid that scenario.
Some HR leaders say, “I'm tired of other people at my company making me take the flak, making me be the person that delivers the message and making me the bad person.” They said that Finance made me do the layoffs. But that’s not right. We all did this together. If you outsource responsibility for the re-org to those folks who almost certainly don't have the context about your team that you have, the outcome is almost always going to be worse. Your CEO or CFO will say, “We don't know anything about these teams. So we're just going to cut everybody that makes in the top 10% of income within a band.” They might accidentally cut that person that has institutional knowledge, perhaps the only person that knows how a given critical system works. You need to take responsibility for doing the work yourself to really understand who should be cut. You should do everything you can to take charge of the process.
Allison: I know of some companies that have gone through re-orgs and they've cut some roles as a part of that — sometimes actually a very significant percentage of their people. There's one company in particular that cut two-thirds of their entire company a few years ago. It struck me how, in many of these examples, the people who survived the re-org, who were not laid off and decided to stay, felt so much more conviction about the business than before the layoff actually happened. I'm wondering, what factors do you think contribute to that outcome, where the remaining people are even more excited than they were before the re-org?
Aaron: Was it done respectfully? If you do it badly and in a way that lacks empathy, the people who remain wonder if they’re next and are waiting to be on the chopping block.
Is the plan credible? The re-org plan has to not just be a bunch of hand waving, like, “It's going to be great, because we're going to achieve some wildly unrealistic sales figure, or we're totally going to close another round.” The plan needs to be so strong that you could convince folks to join your company again if they quit.
Don’t use euphemisms for what you’re doing. I’m thinking of the term “rightsizing” that was popular in the eighties. You need to build trust. Be very clear, give people context, give people the business reality. People can handle it. Our job isn't to be shields from reality for our teams. Our job is to help the other grown adults understand context. If they do that and they believe in the mission, you're going to be a lot more successful.
You are a leader. You're a responsible allocator of capital. If you don't meet your metric, you have to be willing to put yourself on the chopping block. And that's scary. It doesn't look right if you're the one making the decisions and you aren't ultimately taking the same kind of hit as people might in ranks below you. Not only is that not fair, it's not effective. You have to say, the buck stops with me, and if this doesn't work out, maybe I'm the one that should go.
Allison: Very provocative point. I love what you're saying in general. It’s an example of how radical candor — I think that’s Kim Scott's term — can really benefit people. It's not just about honesty for the sake of it. It's honesty with the goal of empathy in mind. And I've seen that really work wonders in a lot of companies.
Another technical question: Are compensation reductions ever successful? Have you ever seen examples of cost reductions where the focus isn’t on letting people go but rather asking people to take compensation reductions in order to avoid layoffs?
Aaron: If you just say, “Hey, across the board, we're cutting compensation 20%,” I don't think that's going to go over terribly well. I don't think people enjoy that. I would wonder, are we not willing to make hard choices about products that are failing? And instead we're just going to peanut-butter the reduction across everything. To me, that's just not effective business strategy. I would rather invest in the winners and keep them at their current compensation. When I say winners, I mean the products that they're working on.
There's another version of this. I’ve seen temporary compensation reductions to keep the company moving, and the company says they’ll catch up on the compensation down the road. I've seen that kind of thing work out.
Don't ask people to cut a deal you wouldn't take yourself. People will trust you more if you share the pay cut proportionally or even disproportionately. Take the pain and share the sacrifice.
Allison: How often do you see leaders offer retention grants to the folks that they want to keep as part of an overall cost reduction?
Aaron: It's extraordinarily common. I've seen some version of that almost every single time. You have critical people who you can't run the business without, and you offer them a retention structure that hopefully is long-term-oriented, around real metrics being hit, not just, “Hey, here's some money for the sake of money.”
If you're a small startup and you don't have the cash to do it, you're probably going to do it as stock or option grants.
No matter how well you message the re-org, there's going to be a great deal of anxiety. And for those people that you absolutely critically cannot lose, you should do something to reduce that anxiety.
Allison: What other mistakes do you see CTOs or founders make when they're re-orging their engineering team?
Aaron: I have a whole catalog of mistakes. Let's start with a couple simple ones.
There is what I call the quota re-org, which is: Hey, I'm a VP. I need 70 people, so I'm going to mash together a bunch of unrelated things that add up to 70 people, even though I don't even care about what 20 of these people do. I see this kind of re-org happen a lot.
I've seen reorgs, which were: Hey, I'm missing my number. So I'm going to throw things up in the air and re-org just to reorg. I've seen some company cultures where if you don't re-org every year, they look at you funny. They're like, why didn't you reorg - isn't that what VPs and CTOs do? But no, our job isn't to re-org. It’s something within our control, but that doesn’t mean we should pull that lever.
I've seen reorgs based on wildly irrelevant or bad data.
There's another one that I call the “soft demotion re-org.” We have a VP whom we don’t want to let go yet, but we want to send a message that we're not pleased with them. So I'm going to make all these other people get a new boss, because I don't want to have a hard, radical candor conversation about what's really going on, where you get that VP coaching or else make a termination decision.
Allison: Final question for you. What is the number one takeaway that founders and CTOs should have about how to make sure a re-org goes well?
Aaron: The most important thing is to realize that you are the leader. You are at the apex of your organization. It's your fault. You get the upside, but you also have to own and be responsible for what you do. To really own the re-org, measure your impact: was the re-org effective? You would never run any other initiative without thinking about what is the metric for success.
At the end of the day, when you demonstrate that you are putting yourself at risk by doing this, if you demonstrate some vulnerability as a leader, people are going to follow you.
Allison: Aaron, this has been a super educational conversation. Thank you so much for joining us today and for teaching us about reorgs. This has been a tough topic, but also I think a helpful one for a lot of people right now.
Aaron: Thank you so much, Allison, this is a lot of fun. I always love reading everything you write, and it's a pleasure to be on this show.
