Layoffs, a short term fix, detrimental to the
company, should be the last resort
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 US, companies
have to face the forecasts they made. Public companies have to
face Wall Street too. Investor don't like surprises. They don't
value executives who miss their numbers. 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 Wall Street.
It's wrong. It's counter-productive. It should be a last resort,
not a first choice for a skilled executive.
Job cuts don't save money
McKinley, et al point out in "Organizational
downsizing: Constraining, cloning, learning" 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. More than thirty years ago,
James Lincoln warned that the costs of layoffs generally
outweigh the payroll savings to be gained from them."
Job cuts reduce 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%.
Prize-winning photographer Gary Green, was
laid off by the Akron Beacon, but remained a shareholder in
Knight Rider, the company that owned the paper. He addressed the
annual stockholder meeting saying "As a victim of the layoffs, I
am the one suffering today. However, the shareholders are the
ones who will suffer in the long run. The talent will leave.
Circulation and revenue will continue to drop. The shareholders
will be left with a worthless product. Is this the future we
want for our company?"
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.