Do you know what is the easiest, most common decision that executives and the upper management usually makes whenever their company is facing tough time in the market? You guessed right: Laying off some staff!
Cost-cutting decisions are becoming fashionable in the local markets. It rarely results in direct layoffs but mostly in outsourcing and similar practices. Outsourcing has been reshaped in the local market to mean one thing, and one thing only; cutting cost, while scrutinizing the approach carefully it reveals it is far from it but let’s leave this to another article.
Among the toughest decisions any management makes, strangely, layoff is the first one that comes to minds. It is not only high on emotion when entire families’ income is put on the line, it could lead to long, tiring legal proceedings. Just note that I am not talking about “firing” which is terminating a staff’s contract due to performance setbacks or disciplinary reasons, I am talking about “laying off,” which is a decision taken for “strategic” reasons; commonly for cutting costs, organization restructuring, mergers and acquisitions, relocation, or changing course in the market (e.g. shutting a production line).
The funny thing is that companies, which think about downsizing as the ultimate solution to their problems might end up losing more than they wished to gain. Researchers at Bain & Company analyzed the layoffs at S&P 500 companies in the United States during the early stages of the economic downturn that took place at the beginning of 2000.
They found that “even as layoff numbers reached record levels, most companies weren’t downsizing. Rather, a small group of poorly performing companies accounted for the vast majority of firings and their experience shows that reactive downsizing can backfire.”
Most of the times, the real reasons behind losing markets and bleeding profits are purely strategic; the executive team taking the layoff decision is most probably the same team that started the downturn spiral by making the wrong strategic decisions. Adding insult to injury, a lot of executives and board members truly think that shareholders like to hear about layoffs; it is signaling that the company is serious about getting back on its feet, a notion that the company is actually doing something to rectify the situation.
They could not be more wrong. During the study of Bain & Company, “companies with few or no layoffs performed significantly better than those with large numbers of layoffs. Businesses that laid off 3 percent or less of their workforce did just as well as companies with no layoffs at all: Both groups posted 9 percent share price increases, on average.
By contrast, share prices remained flat in companies that let go 3 percent to 10 percent of their employees, and prices plunged 38 percent among those fired more than 10 percent of their workforce,” as published in Harvard Business Review back in April 2002.
The point is that laying off staff is not the magical solution a lot of executives think it is. It might be inevitable sometimes, especially when it is linked to strategy, but it is not the ultimate cost-saving answer (there are a lot of alternatives; temporarily cutting back raises and bonuses, freezing hiring and promotions, expanding job descriptions, etc.).
In addition to the fact that laying off staff comes with its own costs; compensations, end of service payments, etc. According to the above-mentioned study, “unless the eliminated jobs remain unreplaced for at least six to 12 months — and sometimes for longer than 18 months in knowledge-based businesses — a company will fail to earn a financial payback. That’s because severance packages, temporary declines in productivity or quality, and rehiring and retraining costs more than offset the short-term wage savings.”
For all the decision makers enjoying the ride of cost cutting, using it as a charade to show their shareholders that they are making progress and refining their market position, you may need to stop, think, revise your calculations, and take the right decision. You may find yourself worsening your company’s position rather than saving it.
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@smaldosari
