Instead of a Layoff

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Those who have read my book, articles, or blog posts know that I do not believe in laying off employees to cut costs.  The long-term damage to the organization resulting from a layoff often outweighs the short term savings in payroll costs (see exhibit 1)

I will admit, though, the last few years has shown that the complete collapse of a company's products or services can dictate drastic cuts as a means for survival.  The questions that need to be asked before implementing something as destructive as layoffs include:  (1) how long do you expect the downturn to last; and (2) has everything possible been done to prevent a layoff.  In other words, a layoff should never be among the first cost-cutting steps.


Even during the last few years, the worst economic period since the Great Depression, there were several well-known companies that did not layoff employees.  Scottrade, AFLAC, Devon Energy, and The Container Store are among the organizations that have never implemented a layoff.  Imagine the loyalty and trust created within these companies by resisting headcount reductions during such a severe downturn in business.

Everyone has a stake in the company.  When a company has a history of layoffs, though, people feel powerless, disconnected, and expendable.  The organization's leaders send a very clear message that employees are not important when jobs are cut in response to a crisis.

Some of the steps every company should take before considering a layoff include:

1. Shortened Work Week:  Although akin to a pay cut, a shortened workweek forces everyone to participate without the loss of jobs.  Also, receiving time off helps compensate for the reduction in pay;
    
2. Unpaid Holidays:  Similar to the shortened workweek, implementing unpaid holidays allow more flexibility in choosing the extent and timing of the cut back;
    
3. Hiring Freeze/Attrition:  Although an obvious step, I have worked with companies that laid off in one part of the company while hiring in another.  Any positions that are critical to fill should be done by transferring and training existing employees;
    
4. Elimination of Bonuses:  Nobody should receive a bonus during a period that people were laid off.  I was in a meeting several years ago with a large division of a Fortune 100 company where managers decided to implement a layoff in order to protect their bonus accruals - a totally unacceptable action;
    
5. Elimination of Dividends:  In spite of what many people believe, the resulting damage to the organization caused by a layoff does not protect shareholders.  By protecting its workforce, companies are actually actually protecting future returns for shareholders.  Studies have shown that companies that resist deep cuts during downturns recover much more quickly than competitors (in terms of earnings and share price);
    
6. Focused Kaizen Activity:  Improvement activities should be focused entirely on reducing costs (while improving or maintaining existing quality levels).  Kaizen activities focused on cost reductions will prevent employees from being idle during downturns and assure that the savings achieved will be sustained once business returns;
    
7. Pay Cuts:  As a last resort, pay cuts should be implemented to save jobs from being eliminated.  I believe in implementing across-the-board percentage cuts with executives being asked to volunteer a larger percentage.

When people see that company leaders are doing everything possible to navigate a crisis without layoffs, they will become much more motivated and engaged in the organization.  The espirit de corps that results will make the company stronger and ready to take advantage of the recovery much more quickly than others that opted to cut workers as an initial step.

The True Cost of a Layoff

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The world of business has become increasingly dependent on layoffs as a response to a downturn in business. There are layoff announcements virtually every day by companies, along with statements about the expected benefits of a reduced headcount.

Does a layoff really result in the savings to an organization that we think it does?

There are hidden costs that are often not considered (or are ignored) when making the decision to institute a reduction in force. These costs are difficult, if not impossible, to measure, but exist whether they are recognized or not.

Besides the severance and social charges associated with a layoff, the hidden costs show up in areas like productivity, customer service, and absenteeism. Since they are not measurable, however, they are easy to debate and not considered relevant in the number-obsessed world of business.

The hidden costs of layoffs include the following:

Increased Fear: Nothing can increase the level of fear within an organization like a layoff. Fear leads to a host of problems including reduced creativity, safe goal-setting, increased health problems/absenteeism, and a lack of willingness to take risks.

Loss of Teamwork: A layoff forces a person to worry more about his or her own situations than that of a co-worker. The atmosphere becomes more competitive as people do as much as possible to demonstrate their personal value to the company.

Loss of Customer Focus: When a layoff occurs, people turn their focus toward pleasing the boss instead of the customer. After all, it is the boss, not the customer, who makes the decisions regarding who will be released.

Drop in Morale: Layoffs make people feel expendable which, along with the loss of friends and coworkers in the organization, leads to a drop in morale. As a result, dedication is lost, and people will be less likely to contribute ideas for improvement or go the extra mile to help the company succeed.

Increased Employee Turnover: Because remaining employees will begin to worry about their own jobs, those who can find other work elsewhere will do so.

Loss of Trained/Experienced Employees: Losing employees means the loss of trained and experienced people to handle the increase in work when business returns. New employees lack experience with the process, systems and customers, and result in increased hiring and training costs (in addition to a higher incidence of quality problems).

What to Do Instead of Layoffs

Many business leaders have come to the conclusion that layoffs are necessary during a downturn in business. There are steps that companies can take to reduce the need for layoffs - even during a recession as deep as the one we've experienced over the last two years. These actions, which equate to cost management as compared to cost cutting, include the following:

1. Shorten the workweek and adjust pay accordingly;
2. Offer unpaid vacations/holidays;
3. Eliminate overtime;
4. Freeze all hiring;
5. Eliminate all bonuses and associated accruals;
6. Cut dividends;
   
7. Focus continual improvement activities on cost reductions.

In addition to the potential savings from the above actions, imagine the loyalty and dedication a company would earn from its employees if it manages to survive the recession without reducing headcount.