Do Mass Layoffs Help Companies Cut Costs or Are They Costly Mistakes?

We live in an era where reading news about layoffs has become commonplace every morning. It’s almost starting to feel like there isn’t a major league company that hasn’t announced mass layoffs.

Following years of aggressive hiring, giants like Google have reduced their workforce by 12000 employees, Amazon by 18000, Microsoft by 10000, Salesforce by 8000, and IBM by 4000. A couple of months ago, other bigger firms also announced layoffs.

Morgan Stanley announced it will reduce its workforce by 2%, Buzzfeed said it would cut headcount by 12%, and PepsiCo said it plans to cut “hundreds” of jobs. The same is true at Redfin (13%), Lyft (13%), Stripe (14%), Snap (20%), Opendoor (18%), Meta (13%), and Twitter (50%).

Mass Layoffs- Is there a right way to do it?

Typically, mass layoffs happen during a recession, as they seem like the quickest and the most effective short-term solution to cut down costs in an economic downturn.

Yes, layoffs are an obvious first course of action, that many companies resort to, regarding cutting costs, and there’s no denying that sometimes they are necessary. But is that the most effective solution?

While this may work as a short-term solution, in the long run, it doesn’t seem to work, as-

• Overall profits take a bad hit due to bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation.
• You could lose on valued institutional and role-related knowledge when an employee exits the company.
• It can cause emotional and managerial difficulties that hurt individuals and corporate performance.
• It can cost a significant amount of time and money to recruit, on-board and train new employees before they become productive.
• It can throw a wrench in succession planning, diminishing the talent pipeline.

Pause before you pull the layoff lever  

In case of a global pandemic and severe economic shock, layoffs might be inevitable. But even under extreme circumstances, as a business leader, it is wise to consider if it is the need of the hour. Some major companies have steered clear of mass layoffs for over 70 years and are still thriving. One prominent example to be acknowledged is Toyota, avoiding layoffs during the mass recession time 2008-2009. The most recent motion made by the TATA group, announcing that there would be no layoffs, on the contrary, suggested salary hikes, was noteworthy and left every employee spellbound.

The negative impact of layoffs

Things have changed over the past few years, and some things are different about layoffs compared to how they were happening then to now. To weigh the difference between the short-term cost savings of companies and their long-term effects, we need to understand the impact layoffs have on companies.

Destroys faith of employees

Understand that it’s more of a psychological contract between the employee and the company rather than a legal one in most cases. An employee enters into a relationship with an employer or the company with a vulnerability to the power the company has as an employer and trusts that the company will keep up their faith in them. Regardless of the economic situation, an employee believes that their position in the company stays if they perform well and hold their end of the deal 100%. But violation of this trust under any circumstance is the hardest to recover.

Long-term effects on the employee’s mental health and finances 

A study found that being laid off was rated as one of the most stressful life experiences- showing that it had a similar effect to a divorce, an impairment of vision or hearing, or the death of a close friend. Experts also revealed that it took an average of two years to recover from the trauma of a layoff. The study showed that the psychological and financial pressure of being laid off increased the risk of suicide by 1.3 to 3 times. Displaced workers were prone to twice the risk of developing depression, four times the risk of substance abuse, and six times the risk of committing violent acts including partner and child abuse.

Negative impact on the company’s finances

The majority of firms that conduct layoffs do not see improved profitability, whether measured by return on assets, return on equity, or return on sales. Layoffs, sometimes have a catastrophic effect on the performance of companies with a high reliance on R&D, low capital intensity, and higher growth.

How to reduce layoffs and build a better workforce?

1. Take a long, hard look at your options before you decide on a layoff

Assess the situation and determine if a layoff is truly necessary. Try to be mindful of it and enforce it only if you have plans to restructure or make permanent changes. If there is an economic downturn, try options like furloughs and in-company re-assignments, while focusing on effective performance management.

A good example that proved the success of this option was when Dave Cote engineered the turnaround of Honeywell in the 2000s by using furloughs rather than layoffs to reduce costs during the Great Recession.

2. Make fair decisions  

If there has to be a layoff, remember that employees will judge the fairness of who you are letting go and on what basis you are letting go. You may think stating seniority criteria may be easier to explain the layoffs, but, in reality, it’s not that simple. The most common reason for a let-go is employee performance, but you must admit that it isn’t easy to rank employees based on their performance fairly.

After a diligent survey, experts found no support for performance playing a part in layoff decisions. Instead, they found that “employers often use personal characteristics of the employees in making layoff decisions, despite the target employee’s experience, performance, and skill sets.”

So, how do you make a fair decision regarding a layoff?

 First, make sure that you have budgeted enough time for deliberation, second- consider using teams of managers, along with representatives of HR, to review layoff candidate lists for fairness, and third- develop a real-time tracker of the profiles of candidates proposed to lose jobs.

3. Providing them with a suitable alternate solution

In staff reductions, actions that are perceived as most fair by employees are the ones that give them choices, like voluntary buyouts with severance before layoffs, and support for multiple paths to re-employment.

One noteworthy mention goes to Nokia. Nokia got employees to stay for more than a year (some for as long as two years) after announcing a restructuring, and layoffs in 2011 by offering both paths to employment inside Nokia and support for finding jobs outside the firm. They also provided funding for individuals and small teams with credible plans to start their businesses — 1,000 were developed — and provided a path to new skills by funding education.

4. Consider giving a public apology

Times have changed. While in the past corporate leadership refrained from making an apology for layoffs, the trend today is for CEOs to apologize for eliminating jobs

Having said that, how you apologize for matters. When making a company apology, to restore lost trust: Acknowledge harm and say you are sorry for it, explain why you acted as you did and make an offer of repair that genuinely helps the person you harmed.

In conclusion

Remember, though, that it’s all a matter of perception, and it all starts with the attitudes of senior managers toward employees. Employers that see their people as assets tend to treat them well. Do you see employees as costs to be cut, or assets to be trained and retained? Let us tell you that employees who believe they are assets, tend to see themselves as sources of innovation, creativity and renewal. As an executive, you have the opportunity to make your views known every day. The choice is up to you.