Why Layoffs Don't Work

"I did one mass corporate layoff in fiscal year 98-99 and it really harmed the corporate culture" ~ Robert Murray

"I know there's been a lot of noise lately about the merging of the brands; about who is now going to stay and who is not.  And I'm here right now to tell you all to put that behind you.  No one here is going to lose their jobs because of this.  So you can all go ahead and call your wives and husbands and tell them not to worry."

~ Divisional President's actual speech given minutes before approving a layoff list comprised of those very same employees he was addressing.

"Why are CEO's who slash jobs so proud of themselves? Instead of bragging about "cutting fat," they ought to be getting up before their employees and saying, "We did such a lousy job of planning and hiring that we have more people than work. And we are so lazy and so dim-witted that we can't come up with any other ways to get more work. So our only solution is to send a lot of good people home. I am ashamed and I am sorry." ~ Dale Dauten

Companies have called it "downsizing" or "rightsizing." My own informal "Name the Layoff" contest once  produced some other euphemisms: Retroactive Hiring Freeze, Resume Revision Days, Amway Opportunity Time, and Corporation Lite. 

Layoffs are done to save money. Unfortunately, they are usually a short term fix, detrimental to the company. So why do so many companies persist in using layoffs as a first choice for cutting costs, and what are some of the alternatives?

We missed our numbers

Sometimes things don't work out as forecast. Clients delay purchases. Suppliers raise prices. Competitors steal market share. Quarterly, at least in the West, companies have to face the forecasts they made. Public companies have to face the Stock Market too, and investors don't like surprises. They don't value executives who miss their numbers either. And they expect quick and strong action to addresses the issues.

Unfortunately, the very pressure to take action quickly ultimately works against their own best interest.

Pressing for immediate action forces executives to cut costs, as opposed to raising income. Foolishly therefore, reducing the workforce has become an automatic response for companies who need to cut costs to look good for the Market. It's wrong. It's counter-productive. It should be a last resort, not a first choice for a skilled executive. Let's look at the two most often cited reasons for layoffs:

Job cuts save money

In "Organizational downsizing: Constraining, Cloning, Learning" (McKinley, William, Schick, Allen G., Sanchez), the authors point out that while downsizing has been viewed primarily as a cost reduction strategy, there is considerable evidence that downsizing does not reduce expenses as much as desired, and that sometimes expenses may actually increase. In other words, if one analyzes the data available since the 1980s, it would point out that the costs of layoffs generally outweigh the payroll savings to be gained from them. 

Job cuts will not affect performance

John Dorfman, a Boston-based money manager, analyzed the post-layoff performance of a sampling of companies. The review included 11 to 34 months of data for the companies sampled. His article Job Cuts Often Fail to Bolster Stocks reports an average performance gain by the companies that had announced job cuts at 0.4% while the performance for the S&P 500 during the comparable time period was a gain was 29.3%.  

One might infer from this that cutting back on your already trained and producing labor force actually harms your productivity; both directly (once the skilled worker is let go) and indirectly (from having to recruit, train, develop and filter out a pool of new workers)

Protecting your investments

Many companies fail to realize that they have a tremendous long-term capital investment in their employees.

While wages and benefits clearly are an expense item on the budget, they should be thought of more as payments on the capital of employees skill and dedication. The same care, thought, and rigorous analysis should be given to decisions on the capital invested in employees as would be to a factory or a production line. A factory can be reopened, or a production line restarted, much more easily than employees trust in their management or faith in the company's vision can be restored after a layoff.

Layoff announcements speak of jobs eliminated or percentage reduction of the workforce, but behind those pretty words are are the company's people. Whether the company is able to continue to compete effectively, is able to fulfil the promise the layoffs make to the investors, will continue to generate the innovation required to survive in the marketplace depends on those people. It depends on those who are left after the layoffs, those of them that choose to remain after the layoffs are completed. It depends on how they feel about how others were treated and how they themselves might be treated in the next round of layoffs, which may come.

A company may lay off employees it considers the low end producers, but in doing so it creates a climate of personnel uncertainty. That uncertainty causes others to leave. The first people to leave due to uncertainty in the company are the best people, because they can always get another job somewhere else. The climate of uncertainty that follows a layoff, therefore, always guarantees a reduction in the quality of the staff, not just the quantity.

Companies contemplating layoffs need to consider more than just the hoped for cost savings from a layoff. They need to consider, and plan for, the less obvious effects. They need to consider the reduced morale and the reduced performance and innovation it will bring. They need to consider the reduced quality of the company's overall workforce that will result.

Restructuring does work

There are alternatives to across the board layoffs that do work to reduce costs. One of the most effective and most immediate of these is restructuring.

Often, when job cuts are undertaken in order to pacify the investors, the announcements talk about the cuts as part of a "streamlining" or "restructuring", but they refer only to the people involved. There are other aspects of the company's business that need to be restructured as well. These often include things such as closing of obsolete plants or branches, administrative overhauls, selling of non-core operations, or improving internal processes.

Dorfman believes that when a stock shows a gain over the year or two following cuts, it is often the non-layoff elements in the restructuring package that deserve the credit.

Arguably, these kinds of things take longer to effect the bottom line than cutting out the salaries of the laid off employees. However, when one considers the costs of severance payments to those employees, continued health care payments for some (if applicable), reduced productivity following the layoffs, etc., that may not be valid.

Typically companies will take a "one-time charge" against earnings to cover the layoff, which clears these costs from the books quickly. In reality the change won't make any difference until at least the next quarterly report. In that same period, other, slower changes could have been implemented and have shown similar cost reductions. The difference then is mainly cosmetic. Making the numbers look good quickly (layoffs) so the Market is happy versus slower method of restructuring the business that preserve the company's significant investment in its employee capital.

Managing the Issue

It's our job to find and fix the problem. Don't just cut jobs to look good to the investors. Make the changes that will make the company better instead of damaging the very thing that made the company successful in the first place, its employees.

Restructure the business to make it better. If a function is not contributing to the company's success get rid of it, but cut from the head down, not from the bottom up. Make sure remaining employees clearly understand the selection process that was used to cut under-performing units or functions no longer sufficiently valuable to the company.
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 If you have any suggestions or topics you'd like to see covered, or if you'd like help with an issue you're currently experiencing, please drop me a line at gbossinakis@live.com


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