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Common Myths and Misconceptions About Layoffs

by Kerri Barber

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Any December marks a time of global apprehension as many companies finalize their books and prepare for another year. Corporate leaders look warily toward a bleak and uncertain future in these trying economic times while making adjustments to already modest budgets. Remarkably, all too many are doing what has already been done; preparing to reduce headcount through layoffs and mandatory retirement programs. The results this time will certainly prove to be no better for long-term strategies than in previous years. A Reduction-In-Force (RIF) or layoff is the easiest, fastest way to cut costs as companies trade immediate, short-term gains for long-term growth and performance. The detriment of this approach is wide-spread and lasting, yet management continues in this mode with greater frequency. More and more companies believe this policy just makes good business sense. But year after year, hard data and analysis disprove this notion. So let’s begin by examining some common myths about layoffs.

Myth 1: Layoffs are necessary to cut costs.

There is no dearth of information disputing the notion that RIFs, layoffs, hiring freezes, and restructuring do not help companies achieve their long-term financial goals or help them realize long-term gains. In fact, the short-term gain is largely realized in a single quarter.

A study published in 2006 by Gyu-Chang Yu and Jong-Sung Park in the International Journal of Manpower reviewed financial performances for over 250 Korean companies over a five-year period. The study revealed that companies participating in layoffs showed little improvement in employee productivity. Further, their overall performance declined compared to companies that did not engage in mass employee layoffs.

Graham Stott is the Asia Pacific Manager of Watson & Wyatt Worldwide, a global actuary and business consulting firm that launched a survey targeting U.S. companies and Asian businesses on corporate cost-reduction measures. Their findings included data from hundreds of companies worldwide. This data was compiled into a 2001 summary report, “Recession Measures Taken By Companies Do Not Lead to Improved Performance.” The survey polled companies that had engaged in downsizing initiatives including hiring freezes, restructuring, and layoffs. The findings concluded that these strategies neither work, nor provide significant gains beyond immediate cost savings. Stott’s remarks were clear, “In short, you cannot cut your way to greatness.”

Myth 2: Reducing costs through restructuring and downsizing results in higher stock prices.

Professors Gunther Capelle-Blancard and Nicholas Couderc published their meta-analysis in 2007 titled, “How Do Shareholders Respond to Downsizing?.” This included data from 41 independent research projects relative to shareholder reaction to layoff announcements. They concluded that initial layoff announcements had a negative effect on stock price, regardless of a company’s geographic location. Often, reactionary downsizing was met with an equally strong perception of poor corporate performance, thereby further influencing a negative impact.

Myth 3: Layoffs help streamline the workforce, weeding out the poor performers and creating a more efficient employee base.

Ideally, a layoff process should target low performers. However, all too often, a manager’s layoff criteria focuses on cutting employees whose departure will least affect the organization. The unfortunate truth is that after a layoff, top and middle performers are saddled with more work, bringing overall quality at risk. Most often, layoff survivors experience a degree of mistrust, guilt, disassociation and fear for their own job security. These feelings have been categorized as “Layoff Survivor Sickness.”

John Reh, a business consultant and contributing author of Business: The Ultimate Resource, addresses this issue for About.com by saying, “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.” Further, entrepreneurial performers can become fearful and revert to a self-preservation line of thinking, contributing to stagnant innovation programs. These feelings of stress and insecurity prompt many top performers to seek employment elsewhere.

The Mark of Vanity

We’ve explored only three of the most common myths associated with decisions to layoff and restructure in the face of difficult economic conditions. With so much research pointing to the negative aspects of layoff programs, why does this trend continue?

James Suroweicki contrived a theory in his New York Times article, It’s the Workforce, Stupid!, citing a phenomenon called ‘vividness heuristic’ or the, “…the tendency to give undue weight to particularly vivid or newsworthy examples.” Suroweicki concludes, “In discussions of downsizing, you don’t often hear about all the companies that cut payrolls and then continued to struggle… a C.E.O. is far more likely to see himself as capable of pulling off what Jack Welch did at G.E. than to recognize the probability that layoffs will make only a trivial difference.”

The average tenure of a Fortune 100 company’s CEO is approximately 5.43 years, which is hardly enough time to realize the complete effects of a mass layoff policy let alone lead a strong growth effort after the fact. The latest data illustrating stockholder displeasure at layoff announcements may help curb a habit to trim headcount arbitrarily. More executives may begin to take note as the majority of their compensation is directly tied to stock performance.

The Reality

With a little foresight and planning, there are many alternatives that companies can employ to help with immediate cost-cutting needs while striving to retain valuable employees. Some suggestions follow:

  • Focus on fixing the company through restructuring and fortification programs.
  • Renegotiate contracts with vendors and examine support contracts wherever possible for additional saving opportunities. Restructuring efforts have a place in streamlining business for ease-of-use and efficiency. However, most managers start cutting from the bottom first. This is a mistake. The greatest knowledge share in process management comes from the workers themselves. Start making cuts from the top down to yield the greatest return, preserve expertise and allow those who are on the frontlines to help fix a broken process.
  • Restore system integrity and fortify critical application with the help of ITS professionals. Replace outdated hardware, negotiate discounted pricing for servers and fortify security measures wherever possible.
  • Engage ITS teams to help identify solutions to business problems and have them help direct a strategy to help prepare for growth when economic indicators begin to rebound. Small capital investments within the technology space can yield great returns in cost savings and improved performance over the long term.

John Farren, a technical manager for Custom Application Support at National City Corporation, has seen the benefits of this strategy, “Many organizations are in the process of reducing a number of stand-alone systems into more enterprise applications like ERP. The benefits of system integration are very tangible if business process re-engineering is applied correctly. For instance, integrating an incentive compensation system into a broader payroll and HR component not only reduces the obvious costs to hardware and maintenance, it also allows for centralized management from a data perspective.”

Next to hardware, human capital is the single greatest asset any company has. Aggressively protect and retain one of your most valuable assets — your people. Employees truly are valuable from a strategic viewpoint and reducing attrition helps defray added long-term costs. Those who are entrenched and ready to help the business overcome present economic threats will help reap the rewards and become your best sales force when things begin to rebound. Preserve your best performers through aggressive retention efforts, such as:

  • Move employees to different departments and institute job-sharing to avoid losses.
  • Cut management salaries/bonuses first before delving into lower-grade levels.
  • Cut the standard work week back to 20-32 hours and allow flex hours.
  • Offer sabbatical programs or consulting projects for affected employees.
  • Retrain and move employees based on talent-management principles.

Examples of successful retention programs are found in companies like Southwest Airlines and FedEx. Each instituted a no-layoff policy, offering employees either a 5% pay cut or a four-day work week. Other companies such as Cisco offered affected employees one third of their salaries with benefits for a year if they agreed to work for a non-profit company already associated with Cisco.

Grahame Stott’s summation of the Watson Wyatt Worldwide survey data from 2001 on reducing corporate expenditures urges managers to use additional foresight, “Companies seeking to improve performance should not shy away from this transformation, but instead consider the short-term uncertainty when competitors inevitably slow down as an opportunity to gain competitive advantage.”

Employers looking to maximize employee retention while reducing costs have reliable advocates willing to assist in this effort. The Chamber of Commerce is a localized agency that can assist with job sharing and corporate partnership groups. They can also put employers in touch with nonprofit organizations that are willing to participate in a job-sharing program. Human Resource consulting firms that offer talent-management consulting and job-placement agencies are also great resources to enlist for methods that help promote employee retention while working with your own Human Resources team. The goal to preserve expertise will also foster a stronger commitment from employees who recognize the effort as a testament to their value and your commitment to their career.

Times of uncertainty are a natural part of the business cycle. The current economic downturn is nothing new and will likely be repeated in years to come – especially as the global marketplace undergoes additional gyrations from the influences of burgeoning economies. Successful companies will be those that can harness opportunities brought on by these milestones to fortify and protect infrastructure while refining outdated processes. Successful leadership will be defined by those decisions made for the benefit of the company to preserve short- and long-term goals, not jeopardize them for the benefit of a few individuals at the top.

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Additional Resources:

The Ultimate Layoff Survival Guide

About the Author

Kerri Barber (formerly Kerri Harris) is an Interactive Communications Specialist and key member of the Public Relations department at NCR Corporation in Dayton, Ohio. In that role, she is responsible for delivering corporate communications across various electronic and digital media, project management, and customer service. Kerri also coordinates and conducts training programs to improve client services, conflict resolution, and process-improvement techniques. Kerri has completed studies in Phi Theta Kappa’s Leadership Development with Ohio Senator Tom Roberts, and has served as Communication Chair of the Professional Resource Council. Currently, she also serves as Chair for NCR’s Intranet Council.