Are Layoffs Necessary?

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.

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Who stays, who goes, who decides.

The news is full of financial woes, failing companies and bailouts. Many of the company recovery plans include layoffs, in the thousands – and representing 5-10% of many companies.

So far the focus has been on the “big picture”, and as the decisions are being made we’re starting to see the effects – on our colleagues. For most it sucks, for a few – a very few – it’s a welcome relief and they can fund a big change.

But how is the decision made?

  1. First in, first out
    It has the advantage of being easy to decide, but may be expensive;
    – long service people will receive higher redundancy packages
    – your company loses valuable experience
    – you may put the company at risk of an age discrimination case
  2. Last in, first out
    Again this is relatively easy to decide, but also has some costs;
    – some of those new people are talents, and you spent time and money hiring them into key positions, presumably because the skills did not exist within the company.
  3. Bottom 10%
    Using the lowest performers based on their recent performance review, it’s seductively simple; but
    – good managers will retrain, change roles or remove the worst performers every year so by removing 10% across the board you may punish efficient (and money making) business units more than inefficient ones.
  4. Who wants to go
    Making those redundant who do want to go has the advantage of removing a lot of personal anguish for both managers and employees however
    – it’s unlikely to be in large enough numbers to meet cost cutting goals (and if it is you may have other, unconsidered problems.
    – if the “volunteers” are in key positions you may struggle to find a replacement internally, or make a case for external recruitment
  5. Anyone the boss doesn’t like
    While I suspect that this is a factor on occasion – perhaps when distinguishing between two otherwise equal candidates for a layoff- it’s not a useful, fair or legal strategy.
  6. Structural
    By analysing the work done in the department/business unit or company, including prioritising tasks you can assess which roles are less critical and make a decision on that. This has the added advantage of removing the analysis of performance or personalities for at least the first steps.

So what is the best answer?

I think a combination; the structual approach to make the high level decisions, possibly inline with any strategy changes that are also required. This will generate a list of positions that need to be removed. Then within each position chose the person who must leave based on a combination of “who wants to go?” and performance analysis.

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