BusinessProductivity

Why layoff is ineffective business decision

The secret to keeping your business moving is how you make and execute massive decisions every day. As the coronavirus pandemic continues to evolve, the damage to the job market looks likely to be deep and long lasting.

Even if laying off employees is the only way to keep the organization running, how do you handle your feelings of guilt and sadness? How should you deliver the news when you can’t meet face-to-face? What should you say to your employees who remain? And what can you do to manage fear about your own future?

Employees who are downsized pay a price beyond the immediate loss of their jobs. Some governments, recognizing the massive damage layoffs create, have written laws protecting employees against them.

For example, a number of European countries require companies to provide a social or economic justification before they can conduct layoffs.

France, however, recently eliminated the requirement to provide an economic justification, and in the United States companies can conduct layoffs at will. Regardless of how easy it might be to cut personnel, executives should remember that doing so will have negative consequences on people’s lives.

 

Why Forced Layoffs Don’t Work

Forced layoffs have become an often‐used strategy for companies wanting to keep moving in business during crisis time. First used during the recessions of the 1980s and 1990s, the approach has become a common method for companies to make sharp cost reductions, at least for a short period of time.

The financial logic of the process is to incur a one‐ time cost to gain subsequent annual recurring savings. However, in several studies conducted since the practice became mainstream, and cited in the articles by Gandolfi and Cascio , companies often experience higher costs as the result of their forced layoffs. In order to fill in knowledge gaps left by staff reductions, many companies hire consultants at higher rates than their former employees’ salaries.

After a layoff, survivors experienced a 20% decline in job performance.

And those companies resort to contracting the same employees who were recently let go, but at much higher hourly rates.

When companies look only at the balance sheet, they ignore the organizational costs of cutting so many staff. Without certain key long term employees, some companies are simply unable to replace lost understanding about the organization, its customers, and processes. This leads to lost revenue, poor productivity and sub par results.

Find Alternatives Solutions

A few companies have been experimenting with better ways to handle their changing workforce needs. Take AT&T. In 2013 the company’s leaders concluded that 100,000 of its 240,000 employees were working in jobs that would no longer be relevant in a decade.

Instead of letting these employees go and hiring new talent, AT&T decided to retrain all 100,000 workers by 2020. That way, the company wouldn’t lose the knowledge the employees had developed and wouldn’t undermine the trust in senior management that was necessary to engagement, innovation, and performance.

So far, the results seem very positive. In a 2016 HBR article, AT&T’s chief strategy officer, John Donovan (now CEO of AT&T Communications), noted that 18 months after the program’s inception, the company had decreased its product development cycle time by 40% and accelerated its time to revenue by 32%. Since 2013, its revenue has increased by 27%, and in 2017 AT&T even made Fortune’s 100 Best Companies to Work For list for the first time.

An effective workforce change strategy has three main components: a philosophy, a method, and options for a variety of economic conditions.

 

Nokia 2011 Case Study

Let’s look at what happened at Nokia in 2011, when its senior leaders realized the company needed another restructuring. A small team of senior leaders developed Nokia’s Bridge program, which aimed to see that as many employees as possible had a new opportunity lined up the day their current job ended. Nokia opened Bridge centers in the 13 countries where the layoffs would take place. The program outlined five paths employees could choose from:

1. Find another job at Nokia.

In order to avoid favoritism, selection committees were formed to determine which employees to retain, instead of having local managers choose.

2. Find another job outside Nokia.

The centers offered outplacement services, including career coaching, résumé workshops, career fairs, and networking events.

3. Start a new business.

Individual employees or teams could present business proposals to win grants of up to €25,000. Employees were given two months to develop their plans, as well as support such as coaching and mentoring, networking introductions, and training. Nokia took no stake in any of the funded businesses.

4. Learn something new.

Nokia offered training grants for business-management and trade-school courses in many areas, including restaurant management, cosmetology, construction, and firefighting.

5. Build a new path.

The company offered financial support to employees who had personal goals they wanted to accomplish, such as volunteering.

Nokia spent €50 million on Bridge, or about €2,800 per employee. That accounted for just 4% of the €1.35 billion it spent on restructuring from 2011 to 2013.

As a result of the program, 60% of the 18,000 affected workers knew their next step the day their jobs ended. Overall, 85% of the Finnish Bridge participants said they were satisfied with the program, while 67% of global employees said they were.

Employees at the sites that were targeted for downsizing achieved €3.4 billion in new-product revenues, 1/3 of new-product sales—the same proportion they had brought in before.

By all accounts Nokia had indeed found a better approach to workforce change.

 

Despite Coronavirus, Layoff decisions are not new:

Today layoffs have become a default response to an uncertain future markets and the rapid advances in technology and intense competition made the decision is even more easy to take.

Layoffs have been increasing globally since the 1970s. In 1979 fewer than 5% of Fortune 100 companies announced layoffs.

Also from 2008 to 2011, around 2,000 companies in U.S (during the recession and its aftermath), 65% resorted to layoffs.

 

Making Decisions: How to create the right layoff formula?

Forced layoffs and restructuring have become common strategies for companies struggling to compete in crisis times to adjust efficiency, productivity, profitability, and competitiveness.

Layoffs transform all founders and confirm some as leaders. 

This flow chart by Berkeley University of California provides general guidelines for a department faced with budget reductions and programmatic changes. Refer to union contracts and personnel policies for specific notice requirements and key time frames.

 

Explore non-layoff solutions

Contact Employee Relations Consultant to discuss possible departmental changes

Consult with staff on creative ways to handle the budget

Layoff Planning 90-120 days ahead of effective date of layoff

Meet with Central Human Resources team to consult on:

Notice requirements
Impact on employees
Resources available

Discuss proposed changes with department management. Decide layoffs are necessary

Calculate seniority points and determine who will be laid off. Review with Employee Relations before proceeding

Consider voluntary layoffs – some union contracts allow for voluntary layoffs

Initiating Layoff Process

Send required information on the layoff to Employee Relations for union notice (at least 75 days before layoff date)

Make appointment with Employment Unit on employee’s behalf

Formal Written Notice

Meet with each employee to inform him of layoff decision and describe assistance being offered

Hold group and/or individual information sessions with Central HR experts to answer laid off employee’s questions

Issue written layoff notice to employee according to contract and policy requirements (30-60 days prior to effective layoff date)

After the Layoff Action

Meet with remaining employees to address issues and concerns about the layoff and how work will get distributed.

 

Having a clear methodology will allow companies to explore alternatives to layoffs, and if they cannot be avoided, minimize the harm they cause. To establish one, firms need to address three questions:

  • How will we plan for workforce change on an ongoing basis?
  • Who will be accountable for managing and supervising it?
  • What metrics should we use to determine whether our actions are effective?

How to establish the right criteria for layoff decisions:

Once you have a clear understanding of the kind of skills your company will need going forward, you can decide how to select workers for layoff.

The safest course, legally, is to use objective criteria like seniority, productivity, or revenue numbers. If you will consider subjective qualities like quality of work, willingness to learn new tasks, or communication skills, make sure everyone applies these criteria consistently.

 

After you establish the criteria for layoff, check it twice.

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