Company layoffs are typically done to save money. Unfortunately, they are often a short-term fix that winds up being detrimental to the company. Many companies persist in using layoffs as a first choice for cutting costs, but there are better alternatives.
Companies contemplating layoffs must consider more than just the hoped-for cost savings from a layoff. They need to consider and plan for the less obvious effects, such as reduced morale, reduced performance and innovation, and the reduced quality of the company's overall workforce that will result.
When Companies Miss Their Earnings Forecast
Sometimes things don't work out as projected. Clients delay purchases, suppliers raise prices, and competitors steal market share. Quarterly, at least in the U.S., companies have to face the forecasts they created. Public companies have to face Wall Street too, and investors don't like surprises. They don't value executives who miss their numbers, and they expect quick and strong action to address the issues.
Unfortunately, applying pressure to take action quickly ultimately works against the investors' best interests, and forces executives to cut costs, as opposed to raising income. Reducing the workforce has become an automatic response for companies who need to cut costs to appeal to Wall Street.
The Fallout From Job Cuts
When companies have layoffs, they actually cost money and reduce employee performance. In the published paper "Organizational Downsizing: Constraining, Cloning, Learning," 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."
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 and reported 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 of 29.3%.
The Value of Employees
Many companies fail to realize that they have a tremendous long-term capital investment in their employees:
- 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.
- A company may lay off employees it considers the low-end producers, but in doing so it creates uncertainty that 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.
Managing the Issue
In tough financial times, company management is tasked with finding and fixing the problem. Instead of just cutting jobs to look good to investors, management must make changes to improve the company instead of damaging the very thing that made the company successful in the first place, its employees.
Alternatives to layoffs involve restructuring the business to make it better. If a function is not contributing to the company's success, it makes sense to get rid of it. It's important to cut from the head down, not from the bottom up, and to make sure remaining employees clearly understand the selection process that was used to cut underperforming units or functions.
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 investors, the company's announcements talk about the cuts as part of a streamlining or restructuring, but they refer only to the people involved.
Minimizing personnel layoffs involves giving attention to other aspects of the company's business that should be restructured as well, such as closing obsolete plants or branches, performing administrative overhauls, selling non-core operations, or improving internal processes.
Dorfman believes that when a stock shows a price 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 actions take longer to affect the bottom line than cutting out the salaries of laid-off employees. However, when considering the costs of severance payments to those employees, continued health care payments for some, increased unemployment charges as a result of the layoffs, reduced productivity following the layoffs, the cost savings may no longer be present.
Typically companies will take a one-time accounting charge against their 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 with the result of similar cost reductions. The difference then becomes mainly cosmetic. Companies can either make the numbers look good quickly with layoffs to keep Wall Street happy in the short run or choose the slower method of restructuring the business in other ways to preserve the company's significant and valuable investment in its employee capital.
McKinley, William; Schick, Allen G.; Sanchez, Carol M. Organizational Downsizing: Constraining, Cloning, Learning. (1995) ISSN: 0896-3789.