Many corporate leaders are already rethinking their overall strategy with respect to target customers, capital sources, product portfolios, pricing, investments and cost structures. But to implement these changes, they will need to have the right talent in the right roles. Workforce reductions must not only deliver sustainable cost savings right now, they must also leave skilled and motivated people in critical positions to maximise the enterprise's present and future success.

How does a company achieve these seemingly conflicting objectives? It cannot be done with the same approach that many companies fall back on: across-the-board cuts that seek "fairness" at the expense of competence. Instead, it requires institutionalising a set of processes that we call "talent fitness", systematically matching employees' capabilities to the strategic needs of the enterprise: the right people in the right jobs at the right price in the right geography, and with the right critical capabilities the business needs to sustain itself and grow.

Taking these five key steps will go a long way towards building a more effective workforce reduction process, while increasing confidence in a company's leadership – and helping to ensure that the company has the right talent in place as it emerges from the recession.

Step one: Stanch the bleeding by making smart cuts quickly

First, make selective cuts that can be easily identified. Set criteria for "smart cuts", and then ask leaders throughout the organisation to identify individuals who meet these criteria. Some examples of obvious targets:

Volume- and production-driven jobs: Positions that provide coverage for demand or growth that has evaporated in the downturn and will not come back.

Chronically poor performers based not on a "rank-and-yank" percentage-based system that boots out the bottom 10 per cent, but on either established long-term competency appraisals or a survey of supervisors.

People whose competencies no longer fit the company's future direction. Beyond these cuts, do not lay off more people even if further cost cutting is necessary. Instead, pursue creative alternatives to further reduce labour costs, such as offering voluntary leave of absence without pay, using contractors or part-time staff to reduce benefits costs and reducing hours or establishing furloughs.

Before implementing any of these changes, conduct an analysis to estimate the potential cost savings and benefits of each alternative, including indirect costs, such as damage to customer experience, reduced work force productivity and increased turnover.

Step two: Assess capability gaps

Whether or not the company is explicitly revising its strategy, identify those businesses and product lines that are most profitable, or potentially profitable, for the long term. Then identify the key capabilities people will need most to keep these businesses going. Finally, assess the capability gap that exists between the talent the company needs and the talent it has available. Focus first on finding or developing needed skills and knowledge sets. Assess these skills in light of any process and technology improvements that are also being considered.

Answers to the following questions are instrumental in developing a deeper understanding of the kind of people the company will need to recruit or train going forward and how best to deploy them: Which segments of the workforce are most critical in delivering value?

Is our value proposition effective in attracting, motivating and retaining this critical talent?

In what parts of the company does more or higher-calibre talent make the most difference in business performance?

In assessing their workforces, organisations often assume they need top-notch talent ("A" players) in all roles, yet this is neither cost effective nor necessary. For positions that are ancillary to delivering core competitive advantage, "B"- or "C"-level players may be adequate.

Step three: Assess people

Identify high performers who are a good fit with the company's future and core capabilities (from step two), and place a higher priority on developing and deploying them. Doing this requires a companywide selection process, starting with assessments.

An assessment should consist of two steps. First, look at the workforce overall by answering these questions:

How aligned is the current workforce with the organisation's new requirements?

Which parts of the workforce most need to develop new skills?

Are there portions of the current workforce that could be redeployed and retrained to fill roles in growing parts of the business?

Second, translate those workforce needs into staffing criteria for different parts of the organisation. Avoid the typical selection criteria used to make cuts: Seniority (last hired, first fired) and political standing. Instead, assemble a team to rapidly develop explicit criteria based on skills and relevance to the company's strategy. With those criteria in place, managers throughout the organisation can select employees for separation fairly and quickly based on an assessment of their fit relative to the key competencies and attributes required by the revised business strategy.

Step four: Conceive and execute an effective exit process

An effective exit process requires a programme owner with a keen understanding of both future requirements and the best ways to separate employees while doing the least damage to the remaining organisation. Managers must be trained and held accountable for making the right decisions about who goes and who stays.

Step five: Ensure high engagement and productivity during the change

During layoffs, generously share information – both good and bad news – as soon as it is available. During this time employees want to hear about the sacrifices being made at the senior ranks. Assurances that laid-off staff are being treated fairly and with the utmost respect go a long way toward relieving the guilt and anxiety survivors may feel.

The pain of layoffs is probably unavoidable. But if the company uses this episode to address its long-standing talent challenges and solidify its strategic direction, people will know that the company took the most viable path for the long run, and that they did not suffer this pain for a capricious or self-defeating outcome. Integrating people strategy with the business strategy will most likely translate to competitive advantage.