Mid-crisis the pressure to cut costs was huge, and in a lot of companies (including mine), the result was a round of layoffs.

There are a lot of costs associated with a round of layoffs that go well beyond the costs of the actual redundancy payout. BNET lists 5.

  1. Significant indirect costs often wipe out the direct savings of layoffs.
    The short term effect is positive, a reduction of costs. But if necessary work is not being done you’ll be rehiring within 6 months with hiring and training costs that wipe out your savings.
  2. Your best employees might bolt after a round of cuts.
    Research shows that in an environment of repeat downsizing your best employees will jump. That’s a loss of talent and expertise you can’t afford in a crisis but are more or less powerless to stop.
  3. The best types of workplaces often suffer the most.
    If you’ve built a workplace that prioritises personal development any shock to the personnel systems will be more unsettling than in a more cynical workplace.
  4. Layoffs decrease organisational performance.
    As you lose expertise, and the psychological effects ripple through the organisation performance will suffer.
  5. Employee retention is linked with customer retention.
    Customers may become disillusioned as their service levels drop.

I would add a sixth one; when the recessions passes (and they do) it will take you longer and cost you more to ramp up to new market demands.

So with all that in mind I wondered if anyone had steered their way through a crisis avoiding the layoff decision. I found one case; Alexander Kjerulf reports on a small company (2800 employees) called Xilinx. Rather than cut jobs the then-CEO Wim Roelandt cut salaries, starting with taking a 20% cut himself. He devised a series of strategies under the umbrella of “share the pain” and he communicated with employees – including using employee focus groups in developing the recovery strategies.

Although it was never promised Xilinx, a software company, survived the dot.com crash of 2001 without making anyone redundant.

Recent research shows that 94% of employees would consider a different pay/work structure rather than go through layoffs. So employees can see alternatives even if companies aren’t there yet.

It’s clear cost cutting needs to be done in a downturn, but given the costs of building a great team and the benefits to the company, layoffs should not be the automatic solution.

Image money via pixabay

2 thoughts on “Are Layoffs Necessary?

  1. Very interesting analysis.

    I also would add that layoffs make the economic situation worse by creating fewer consumers from both the individuals laid off and those who fear they are next in line to be laid off.

    By the way I know of which I speak. I was laid off in January 2009 and now I buy groceries, gas and very little else. I once was a moderate consumer bit I now am contributing more to the problem than the solution through no fault of my own.

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