Why this culture of layoffs hurts good business

“Companies have always cut back on workers during economic downturns, but over the last two decades layoffs have become an increasingly common part of corporate life – in good times as well as bad. Companies now routinely cut workers even when profits are rising. Some troubled industries seem to be in perpetual downsizing mode…
…But even if downsizing, right-sizing, or restructuring (choose your euphemism) is an accepted weapon in the modern management arsenal, it’s often a big mistake. In fact, there is a growing body of academic research suggesting that firms incur big costs when they cut workers.”

JEFFREY PFEFFER, Newsweek (15 February 2010)

The excellent Professor Pfeffer (don’t try saying that after a few drinks) has made it a crusade to debunk management myths and hokum, and to force us all to look at the evidence before we come to crucial decisions.

In his recent Newsweek cover story, the professor took aim at the culture of layoffs that is infecting every industry. And he is right to do so. My experience as a management advisor over two decades suggests that this culture has taken root everywhere. We have rightly moved away from the notion of protected employment, but we have moved too far: these days the ability to be ruthless when it comes to downsizing is a badge of honour, a sign of macho credentials in a CEO. And we are paying a price.

What is so wrong with having the right number of employees in your organisation at a given time, you ask? Nothing at all. The problem is that we get carried away when times are good, and recruit too many; and then we get carried away at times of trouble, and sack too many. “Right-sizing” is a fluid and dishonest term, because we never know what the right size is.

“People are our biggest asset, our greatest competitive advantage, the source of our success.” Yes, tell it to the birds. The minute there is a downturn in demand and the CEO feels the heat from the board, you can rest assured that many of those biggest-asset people are going to get a kick in the backside. They will have to go so that the CEO doesn’t have to go.

I have observed organisations in all sectors , here and elsewhere, for the better part of my life, and I can confirm that layoffs are never pretty. Suddenly cutting people adrift does many bad things in a company. It shatters morale; it creates uncertainty in those who stay; it impairs corporate spirit; it breaks the emotional bond between employer and employee. All those things are very damaging, and we should not invite them on ourselves.

But surely we improve the bottom line when we downsize? Consider the costs, tangible and intangible: severance pay; accrued leave; outplacement costs; rehiring costs; morale costs; potential sabotage or lawsuits or violent behaviour; loss of institutional memory and knowledge; diminished trust; reduced productivity. Still looking obviously attractive? In fact, you may not even just get rid of those you wanted to leave; your best performers may lose faith in the company, and they are the most likely to find alternatives quickly.

It remains true: people ARE the greatest source of competitive advantage. But we have to be true to that truth, and manage our organisations accordingly. We must neither hire nor fire lightly. Downsizing is often just a cover-up for recruitment mistakes. If we were more diligent in getting the right people on board in the right quantities, we would not have to prove our machismo during downturns.

What separates great from good organisations? The feeling that people have in working there. People who feel honoured and trusted give their best work. Those who feel they are on a temporary economic contract do not. That simple insight should inform all our hiring and firing.

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