Layoffs! The word has reappeared in the headlines as the world economic crisis has deepened. Over a million jobs have disappeared in the United States alone in the first 11 months of 2008; more will follow in 2009, according to an article by David McCann titled “The Double-edged Sword of Head Count Cuts.” The problem is not just numbers in the headlines of a newspaper. My neighbor told me about losing his job last month. If it isn’t us, we probably know someone who has been laid off.
But are layoffs really the best answer, at least in the scale they are now done? And might technology help give us insight on this question? In these days of powerful computer models, I have looked in vain for a model that would help a CFO make a good business decision on layoffs. There are lots of ideas about what might be included in such a model, but perhaps this should be taken up on a more sophisticated scale. Since people’s lives are involved, layoffs involve more than just running the numbers. But I am convinced that even the numbers would not make this as compelling a case as many believe it to be.
When contemplating cost reductions, layoffs are too often the first option. Declining revenues mean that the companies can no longer make enough money to make the payroll, or to make a committed profit number with the current payroll. Selling buildings, mothballing equipment, even selling divisions all take a long time. People represent a large part of the variable costs of a business, so the obvious answer is to reduce the number of employees. The company saves the salary and benefit costs of the people laid off. Equally obvious, if the company does not pay attention to its numbers, it will go out of business and all jobs will be lost.
But there are many things on the cost side when layoffs are undertaken. Things that can hit the bottom line include restructuring charges, loss of institutional knowledge, loss of the ability to respond when the market picks up, and loss of morale in the existing workforce, according to McCann.
In an era of knowledge work, productivity cannot be measured as the number of widgets produced per hour, so the disruption of layoffs in the workforce can lead to very real loss in productivity for the company. This is particularly true when workers perceive the layoffs are handled unfairly, or are done simply to meet artificial profit goals that drive the bonuses of the top executives.
There are many other cost factors that would need to be considered in such a model. When people are laid off there are often very real costs associated with unemployment compensation and severance pay. When a future improvement comes to the market, workers will have to be rehired, requiring recruiting and training costs, not just for the people being hired. These costs extend to the staff that does interviewing, not just the formal recruitment process. Then there is the loss of productivity until the new workers are fully trained and the new teams are working together. There are also IT costs associated with modifying passwords, changing access, and removing people from databases. I am sure there are other costs as well.
According to an article by Carlos Bergfeld, “The Hidden Costs of Layoffs,” at bnet.com, “The direct costs of layoffs negate any financial benefit if new employees are hired within six to twelve months, according to a Bain & Company study.” Bergfeld went on to comment, “This type of ‘binge-and-purge’ tactic, common during recessionary periods, can place an organization in an unfavorable position when the recession comes to a close.”
While these comments are helpful – and not widely heeded – I think we could get a much better picture of the cost/benefits of layoffs. When such a model with its associated data is built, then a CFO could get a much accurate picture of the financial implications of the layoff decision.
I first proposed such a model about 10 years ago when we were going through cutbacks at The Boeing Company. The senior leader with whom I discussed this at the time was not interested in the suggestion. His response was, “I’m glad that I’m running the company and not you. I think we need to get better at getting rid of people.” Losing a job is a painful experience, not a time to gloat, but when he lost his job, it seemed like justice!
There are some other factors that companies should bring into the layoff consideration. McCann notes that laying off employees deepens a recession with fewer people capable of making a purchase, creating a vicious cycle. Many companies have an aging workforce due to the baby boomer retirements that have started. There will be a spike in the recruitment needs in companies over the next five years.
“Companies that lay off employees are taking a long-term risk for a short-term savings. Indeed, companies ‘almost always’ overestimate the number of people who should be laid off, according to Crist Berry, who served as a vice president or director of human resources at four different Fortune 500 companies before retiring in 2005,” according to McCann.
Peter Schwartz and Blair Gibb, in their book When Good Companies Do Bad Things, make the case that negative headlines can impact recruiting. “If the brightest young people choose not to work for a particular company because of its negative reputation, this development can damage company performance for years,” they say.
Alternatives to Layoffs
When the cost problems are real, how does company leadership deal with them? McCann argues for creative alternatives such as pay cuts for all (including the top executives), bonus cuts, and working fewer hours. He also makes the case for moving people to the revenue generation side of the business as a way to increase income. This is admittedly difficult in a deep and broad recession, he says.
In spite of the headlines, there are some companies that are holding to a no-layoff policy. “Southwest Airlines, which employs 32,000 people, has a no-layoff policy. Federal Express, with more than 215,000 employees and contractors, has a similar policy, so when shipping volumes decrease, the company leaves jobs open, takes job requisitions off the books, and cuts hours,” according to Ruth Morse at salary.com.
When Layoffs Come
Sometimes the business climate is so difficult that there are no alternatives. And sometimes after an acquisition, it is discovered that an acquired company has far too many people for its business model. Dennis Bakke, former CEO of AES, said, “One time we found 10 times too many people in a company we acquired. When you put more people in a workplace than are needed, no one has a full job. The more you divide up the work responsibilities, the less anyone gets to use their gifts and skills. It’s very boring and makes the organization a very inefficient operation which probably can’t survive economically. So it’s a miserable place to work and the business isn’t doing what it’s supposed to do,” Ethix 35, Conversation with Dennis Bakke, May/June 2004.
The challenge is to do layoffs right. This is worth a much more lengthy discussion, but here are some important guidelines:
- Communicate openly about what is going on. What people will imagine is generally worse that what is actually happening.
- In any reductions, treat people fairly. This means performance evaluations that are open, constructive, and honest well before the layoffs occur.
- Provide resources such as job-search support, training, and fair severance packages.
- Communicate personally with those affected. It is tempting to assign this task to someone in the human resources department. One company sent layoff notices via email! But these are human beings involved, not business utilities, and each person deserves to be treated with dignity.
Sometimes layoffs are necessary. A business that is not sustainable should not and will not continue. But when a business confronts an economic difficulty and the first action is layoffs, it is difficult to say that “People are our most important resource.”
Management and leadership will never be reduced just to the numbers. But good numbers, especially those that help the company look at its situation over the long term, are needed to aid leaders in cost decision processes, particularly in considering layoffs. Technology enables the gathering and processing of all sorts of data today, and there are many good decision support systems. A model that analyzes the true costs and benefits of layoffs is still needed.
Al Erisman is executive editor of Ethix, which he co-founded in 1998.
He spent 32 years at The Boeing Company, the last 11 as director of technology.
He was selected as a senior technical fellow of The Boeing Company in 1990,
and received his Ph.D. in applied mathematics from Iowa State University.