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Are Layoffs Worth the Trouble?
While layoffs may be warranted to reduce overhead in challenging times and resolve inefficiencies, they can also lead to lower employee morale, damage to brand reputation, and reduced productivity.
Last week, Sundar Pichai, Google’s CEO, acknowledged that while the layoffs earlier this year of 12,000 employees were necessary “amidst the global shifts we’ve witnessed this year,” it had a significant impact on morale and could have been handled better. According to Business Today, Pichai said at an employee meeting, “Clearly it’s not the right way to do it. I think it’s something we could have done differently for sure.”
Facebook’s parent Meta saw many remaining employees become over-anxious about losing their jobs after a second round of job cuts arrived earlier this year. Erin Sumner, one of the employees Meta let go, told the New York Times in April, “So many of the employees feel like they’re in limbo right now. They’re saying it’s ‘Hunger Games’ meets ‘Lord of the Flies,’ where everyone is trying to prove their worth to management.”
Major workforce reductions at Amazon, Salesforce, Snap, Microsoft, and other tech firms led to several articles exploring the value of layoffs and steps to mitigate any negative fallout. REI, Express, Etsy, JOANN, Hasbro, Petco, and Wayfair have recently announced sizeable layoffs amid weaker sales.
According to a survey conducted in late November by BizReport, 71% of workers who have survived a round of corporate layoffs say their motivation at work has declined, with 65% feeling overworked since the job cuts, Additionally, 61% were less likely to recommend their company as a “great organization to work for,” and a third of respondents believed that things would worsen for their company in the future.
Research and advisory firm Gartner said CFOs tend to underestimate the “organizational drag” that’s created as a result of large-scale workforce reductions.
Beyond the upfront costs of severance, an increased need for costlier contractor hiring and more demands for increased compensation from the remaining overworked employees offset the labor savings. Within three years, the forecasted savings from layoffs tend to become offset by the “unforeseen consequences,” including excessive turnover and customer loss, according to Gartner analysis. Additionally, when businesses eventually need to rehire to fill empty positions, it will likely be at higher rates than the employees who were laid off.
“In the more negative scenarios, the factors detailed here are also going to harm growth in existing and new business, and ultimately a firm will start losing its customers,” Vaughan Archer, senior director of research and advisory in the Gartner Finance practice, said in a statement. “None of this is conducive to long-term shareholder gains.”
Gartner advises firms to seek out alternative ways to reduce personnel costs — including a voluntary reduction in hours, a hiring freeze, remote work, benefit cuts, and organization-wide pay cuts — instead of broad layoffs.
Discussion Questions
Do you think retailers and other firms generally underestimate the hidden costs of layoffs? What advice would you have around maintaining morale and productivity after layoffs?
Poll
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Shep Hyken
Chief Amazement Officer, Shepard Presentations, LLC
Nikki Baird
VP of Strategy, Aptos
In a world of ever-growing bean-counting tunnel vision, this article poses a fascinating insight. My POV is that no retailer or manufacturer I worked for had this degree of long-term insight. I lived through a couple of very painful downsizes and the tears and angst created were felt throughout the entire organization for years.
Altho I’m sure someone in the company underestimates, rest assured that those charged with actually notifying people are all too aware. Much as with the advice given to ship captains about shipwrecks, the best way to avoid the pain of layoffs is to not let your company get in the position that they’re necessary.
When things are good, I’ve seen companies indiscrimational add to headcount at all levels. Then, when things turn, the first place they look is labor. No business, except those going down the tubes, should ever be looking at massive layoffs. Labor should never be looked at as a cost. It is an asset that generates an ROI.
In the end, someone has to pay. I’m not an economist so I’ll gladly accept a more educated position but let’s pretend that the three stakeholders are government (taxes), shareholders (returns) and employees (salaries). If sales are down, who should pay? That’s really the question because someone will have to and this article is saying that the employees shouldn’t because, in the end, it affects profits (which are already under pressure due to decreased sales). And, by the way, shareholders include the employees themselves because some of the biggest pension funds in the country are invested in public companies which, you guessed it, need profits to increase shareholder value. The premise of the article is flawed because it assumes that the costs of layoffs are central to the employees of that company alone. The truth, as always, is far more complicated because someone must pay. Some may argue it should be the “managers” or maybe, as suggested by the article, it’s all of the employees by taking a pay cut which, in inflationary and highly polarized times, should go over like a 100% income tax – plus I’m sure all employees feel all other employees are equally productive. Everyone loves the ideal until they have to pay for it and then it’s about finding someone else to do it! My only advice is to be as human as possible in everything we do as leaders, executives and managers because our actions managing businesses may someday result in someone having to pay, including “us.”
Sadly, sometimes layoffs are necessary. However, they should be a last resort and any company undertaking them should do everything they can to reassign workers. This is just decency, but it also works to a company’s advantage in that it helps to reassure an anxious workforce. I remember reading some time ago how Container Store once got agreement to make small salary cuts so they did not have to make layoffs during a difficult period. That paid dividends for years in terms of the loyalty and good spirit it generated.
Some firms underestimate how layoffs made with cold logic can look good on paper yet extinguish a warm, productive culture. Other firms agonize over layoffs because they see the people behind the numbers.
All companies can recognize how the remaining employees may struggle because they feel anxious, deflated and survivor guilt.
Change management communications help employees understand and align with new corporate direction and priorities. Expressing sincere gratitude for your people can start to restore psychological safety and trust, and it costs nothing.
CEOs have entrusted their CFOs to be financial magicians to deliver the expected performance numbers to Wall Street each quarter. On the revenue side, the CFO can firmly nudge divisions to accept higher targets while demanding lower expenditures and travel restrictions and pushing sourcing and buying to sharpen their pencils and terms. But the biggest bucket they see on their spreadsheets is labor with salaries and benefits. Decades ago, the infamous Chainsaw Al (Albert J. Dunlap) earned Wall Street’s admiration and the loathing of the working class by laying off thousands of workers and shutting down factories.
Decades after Chainsaw Al, technology has invaded every aspect of business, yet the cycle of layoffs continues, but perhaps not as profoundly as before due to the nature of the workforce. But wait, despite Google being the epitome of the modern white-collar corporation, with an envious margin and a market cap that countries wish for, they laid off hoards of employees. Whether or not we like it, layoffs are a key managerial instrument in capitalism to resize the company so it can survive today and compete in the future. However, layoffs do not always occur due to economic downturns; they may be triggered by poor management decisions that must be rectified, a business pivot, or a strategic change in capital allocation.
Companies must take much more responsibility for layoffs and not simply point to exogenous factors. Better decision-making alone can dent the number and magnitude of any layoff. That still leaves us with the inevitable reduction of the labor force. A thoughtful process encourages some to volunteer, realizes that the many remaining will need reaffirmation, and repeatedly communicates the values and principles of the organization to honor those leaving while nurturing remaining employees. Layoffs should never be transactional; that may be the natural language of the classic CFO, but it deflates the work done by the CHRO, the line managers, and any caring executive. Companies are organizations that formulate and execute strategies through people, forming natural bonds and relationships that transcend line items on the balance sheet.
Spreadsheets: That is the tool where you can change a number, and automatically, everything looks good.
I think management underestimates how much they ought to contribute to whatever cuts may be necessary. It was management’s decision to hire. Having to have a layoff reflects management’s miscalculation. I see much more online discussion among front line and middle management (who end up bearing the brunt of layoffs) pointing out that management still manages to retain their bonuses and their salaries, even in the midst of big layoffs of everyone else. The thing that sets low morale in stone is a sense that there is no accountability – I see that when store associates are disaffected because their store manager cuts service to pad the bonus, leaving store associates to take it on the chin with frustrated consumers. I see it in companies when a CEO lays off thousands of people and takes home record pay. So it’s not so surprising that labor unions are on the rise. And yeah, management joining in on taking the hit would go a long way to helping morale.
A few things are important to consider here. The market, generally, over-hired during COVID times. There was naturally going to be some thinning. Some… But, the second point is more to say that some executives and finance folks saw the opportunity to have their rifts when others were as well, to avoid being isolated specifically. This is a reality of any business, and specifically hit harder in technology, but at least I think it’s going to be a thing of just 2023. I don’t imagine many more major rifts past Q1 of next year.
The side effects are totally underestimated. But finance will always hold the trump card-“we have a cash flow/income statement problem that needs to be fixed”…and HR or any other executive arguing against these actions are rarely heard because things like morale and customer experience are hard to measure (okay, there is glassdoor and google reviews).
Of course, layoffs should not be capricious but ths article seems to be searching for counter arguments to the obvious. Turnover is good for a business (jack welsh said you should let go your 10% worst performnig employees every year.) A business needs to be run rationally AND with a heart. It helps no one if the business loses viability.
I don’t the layoff itself is the problem. The post-layoff morale is largely a function of the pre-layoff culture and how the layoff is handled. I was part of a layoff many years ago. It was a downsizing that was positioning the business for an ultimate sell-off. That sell-off was fairly predictable based on the trajectory of the business at the time, so when it finally happened it was not a total shock. (Couldn’t the same be said of many of the current layoff scenarios…???) The pre-layoff culture was totally open and honest. The health and welfare and the dynamics of the business and of the market were totally visible. Anybody with a working brain could guess a couple of different outcomes. I sat down to scribble out a new org chart for the post-layoff scenario and eliminated my own job. OK…it’s been a blast. To this day, my favorite company and series of jobs.
The upside of that whole scenario was that the remaining, post-downsized team was that they knew they had been positioned for the path ahead. It had been thoroughly thought through and well handled. The pre-layoff culture of honesty and integrity had been reinforced, not tarnished.
The short and long term impact on individuals (those who are laid-off as well as those at staff and mid-management positions who remain), customer service, and overall corporate performance is vastly underestimated.
Unfortunate it is sometimes necessary to cut staffing, it’s often because those at the top made poor decisions.
I’ve worked in situations where people started getting laid off. Do you know what the company had to do? It had to give “retention bonuses” for the rest of us (at least those they really wanted) to stay.
Companies get into weird power struggles with their employees. “Be happy you have a job at all.” “You will return to the office.” “We are abandoning 20 years of remote employ and now you have to move to a city where we have an office.”
Best way to have a brain drain in your company. The smart folks just go elsewhere.
So, are layoffs a good move? You’d better have a really good story to go with, otherwise, most definitely NO.
There’s no doubt layoffs negatively impact morale. There was a surge in hiring during peak COVID. Many companies are now having to recalibrate, but approaching layoffs without extremely careful thought will create problems down the road in addition to upsetting the workforce in real time.
Regarding layoffs, one might first say, “Business is business.” No doubt we must run a successful business. If we decide to lay off good employees, there must be a justifiable reason, and that is most likely due to economic conditions. The choice is to let some people go to save the company and jobs for others. The alternative is to keep everyone employed until the company goes under. That said, there is the emotional side of layoffs. This causes fear, changes in motivation, and more negative issues. Transparency from leadership is important. Behaviors from the top can help mitigate concerns and help justify decisions.
In a world where publicly traded companies are tasked to ensure shareholder value and drive profitability, it’s the variable costs that are there for companies to leverage to unlock value and savings. Unfortunately, the most significant variable costs and the most impactful to the workforce are the layoffs or reductions in force, are often used to turn the books from red to black.
Mass layoffs are also the most polarizing, depending on the timing and circumstances. However, they are part of the modern corporate model, resulting in an evolution of the employee and employer operating model. In prior generations, there was a loyalty and bond between hard-working employees and companies, where, in some cases, you never had to look for another job.
The intensity and relentlessness of the recession and inflationary period we are in, along with the threat of mass layoffs, has created an almost transactional relationship between employees and companies. Without loyalty and commitment, along with the uncertainty of our job market, employees have had to take on side gigs and keep up with the cost of living.
Well…here’s a topic I have some experience with…unfortunately.
While layoffs are a tool to improve short-term profitability in a way that seems to satisfy the investment community, the longer-term implications of a short-term action seemingly escape the thought process of those decision-makers who consider this action as a solution to their current business challenges.
To be certain, there are scenarios when layoffs are the only way to save a business that is floundering, and which might prevent a shutdown and even greater job losses in the future. However, this tool seems to be used more often as a quick fix for short-term performance issues. What does not enter the consideration set, I believe, is the impact of lost institutional knowledge, the potential impact of intellectual property entering the public domain and the loyalty of remaining employees who see that the best efforts and business value of those that were laid off sends a signal to them that the company does not respect and value any team member…past or present.
In fairness, layoffs sometimes involve a needed “culling” of underperforming employees from the team and that is understandable and even a positive outcome for morale and performance. However, that is not always the most common scenario.
In short, more careful hiring to begin with, combined with a thoughtful performance review process throughout the year, would make this process more effective in reality and in the perception of all stakeholders.
Finally, if your company uses layoffs as a way to part with older and more “expensive” team members, I wish you all the “karma” you have earned for doing so. I would invite you to use “ROI” rather than “cost” to calculate the value of the older, more effective, and more experienced members of your team you plan to part with. You are also sending a clear message to the younger team members of today; leave your company before you hit a certain age. They will notice, and take the knowledge, expertise, and productivity they gained at your company out the door with them. That is NOT the way to build longer-term success for your firm.
The day before Google’s 12,000 layoffs, were the people being laid off working and contributing or sitting with their feet on the desk? If the former, who will pick up their contribution? If the latter, they should have been layed off long before the massive reduction.
I have been involved in several large restructuring projects and can attest that layoffs are painful. On one assignment our team faced anonymous death threats, not the most pleasant working conditions. So, what have I learned? In boom times companies tend to over hire. Weak players are often held onto too long and should be culled along the way. Total transparency and honesty is always the best policy. Tell people why layoffs are necessary, how many are needed, and never go back to the well.
Retail layoffs always leave a residue of broken trust with the remaining employees and customers, because ultimately leadership failed to properly lead and care for the company.
And so going forward with a natural heightened awareness around the health of the company, leadership must do two things to keep up morale – ratchet up both the quality and quantity of communication, and make everyone on the team feel a greater part of strategy and execution.
Layoffs should be a last resort for anyone. But we have a tendency to over hire when times are good. Then react to negative shareholder sentiment by laying people off in a hurry. We’re good at measuring the value of salaries as line items in a spreadsheet, but not good at measuring the overall impact of staff engagement on sales, productivity, and customer sentiment.
How can we take a more measured approach? Identify shifts in demand early, and scale back hiring quickly so we don’t end up over invested in people?