How layoffs can backfire

Layoffs are not really a strategy, but an option resorted to when a company is not doing well or in other words, when an organisation is not making profits. Layoffs work as first aid administered to an injured person — something that is applied when companies are bleeding. But do they really help the companies to recover or revive?

Several researches and analyses have taken place to prove that layoffs do not help organisations in any way to boost their profits. Many myths are attached to layoffs.

1. Increase in productivity: People think layoffs help increase the productivity of the company, as they help cut flab and make the company leaner. But a study conducted by Wharton professor, Peter Cappelli, found that while labour cost decreases during downsizing, sales per employee also goes down.

2. Reduction in cost: Another myth is that layoffs help cut costs. However, there is no logical reason to support this. A research conducted by professor Wayne Cascio of the University of Colorado lists some direct and indirect costs associated with layoffs. These include severance pay; paying out accrued vacation and sick pay; outplacement costs; higher unemployment-insurance taxes; the cost of rehiring employees when business improves; low morale and risk-averse survivors’ potential lawsuits and sabotage.

The research by Cascio also mentions that IBM had to spend 700 million dollars on employee restructuring in 2007 and Microsoft spent around 1.6 billion dollars during a mass downsizing activity in 2014 when they laid off 18000 employees.

3. Increase in profitability: Yet another myth that exists is that by cutting costs through downsizing, there will be an increase in the profitability of a company. This is also not true. A study of 122 companies found that downsizing further reduces the profitability of a company and the most affected are the organisations in the R&D intensive sectors. Cascio’s study of firms in the S&P 500 also established that companies which downsized remained less profitable than the ones that did not.

“Nowadays companies tend to measure profits on a short-term basis rather than focusing on the long-term impacts. Whenever they witness losses in back to back quarters, the shareholders and investors pressurise the management to take some major steps. Hence, they resort to laying off people as a short-term remedy rather than thinking about the long-term impact. I think it is foolish to do so. Layoffs should be the last option”

Another survey by the American Management Association on the companies’ own perceptions of layoffs reported that half the companies did not see any increase in operating profits and one third did not see any positive impact on the productivity of the workers.

“We cannot say that layoffs can increase the profitability of a company. It only helps to reduce the losses by cutting costs,” says Ramesh Shankar S, former EVP and head, HR, Siemens.

Amit Das, director and CHRO, Bennet & Coleman, adds, “It certainly reduces the fixed cost in the short term but the implications arising out of the negative internal and external environment, impact on reputation and goodwill, low morale and productivity, make the objective of ensuring profitability in a sustained manner extremely difficult.”

At the end of it all, we are still left with one question — Are layoffs necessary? Isn’t there another way to come out of bad times?

Let us take a classic example of an airline company which has never laid off a single employee in 40 to 45 years, that is, since its inception. Southwest Airlines, a US based company did not lay off a single employee even during the great recession period when many of its competitors were ‘forced’ to do so.

Experts say that no company wants a layoff to happen and it is a last option. But how did Southwest manage to avoid it?

“Layoffs certainly reduces the fixed cost in the short term but the implications arising out of the negative internal and external environment, impact on reputation and goodwill, low morale and productivity, make the objective of ensuring profitability in a sustained manner extremely difficult”

According to Shankar, in a manufacturing industry, material cost sums up to around 60-70 per cent of the total cost, and the cost of human resource is only 5 to 10 per cent.

“Nowadays companies tend to measure profits on a short-term basis rather than focusing on the long-term impacts. Whenever they witness losses in back to back quarters, the shareholders and investors pressurise the management to take some major steps. Hence, they resort to laying off people as a short-term remedy rather than thinking about the long-term impact. I think it is foolish to do so. Layoffs should be the last option,” opines Shankar.

Shankar suggests that rather than laying off people companies should look to minimise the major costs, which can differ from sector to sector. And if not fulltime employees, organisations can hire part-time, third-party or contractual employees to reduce the impact of unemployment.

Some may still argue that during layoffs mostly underperformers and disgruntled employees are targeted, which allows the organisations to increase productivity while claiming to have a positive effect on the corporate culture. But the fact remains that you cannot expect productivity from the remaining employees as their morale is already down and some may also be deeply affected by the thought of losing their friends and co-workers.

“Companies can and should use these opportunities to clean up and take the tough calls. Good times often lead to bad management practices because they tend to get hidden, and bad times force companies to review their bad practices and clean up”

“Such actions taken only during the layoff time will have no positive impact on corporate culture if not the reverse. We cannot expect to go for interior decoration when the house is on fire”. Nevertheless, a well-structured identification process backed by robust communication and adequate support during exit process helps to reduce the pain and the inevitable negative impact on the organisation’s reputation, besides low internal employee morale,” advises Das.

Hari T.N, head-HR, BigBasket, adds, “Companies can and should use these opportunities to clean up and take the tough calls. Good times often lead to bad management practices because they tend to get hidden, and bad times force companies to review their bad practices and clean up.”