Layoffs Can Be Costly

Over 20 years ago, after having worked for a multi-national corporation for four years, I was laid off.  It was a major reduction in force in which hundreds of shop floor jobs and hundreds of salaried jobs were eliminated.  The focus was on reducing costs by headcount reduction.

Those of us who were laid off from salaried positions were aware that at least a couple of dozen new employees had been hired recently, within a few months.  None of them were caught in the cutbacks.  This company felt it was essential to continually get “new blood,” while also “cutting headcount.”

I had run into my boss in a hallway during this period of major layoffs.  I asked him if I should be worried.  No, he said.  I was doing really important work, helping move a major machining line to Mexico.  I was assisting several Mexican engineers during that very time to become familiar with all the machines on the line and to study and copy all the engineering drawings.

The very next day, I received an email from my boss.  He needed to talk to me. How soon could I see him?  When I went to his office at the time I had suggested, he had a Human Resources person with him. He looked awful.  He thought he had seen the final list of layoffs, he told me. He was wrong.  There was another list.  I was on it.



They needed the “headcount,” but still needed my work.  I was fired and was offered a contract to continue my work as a contractor at the same time.  I negotiated somewhat more favorable terms, and continue to do my work on a part-time basis, as I began to build a consulting business that lasted over twenty-five years.

Most of the laid off employees were separated more completely and definitely than I was.  The company provided us with an outplacement center to help us find new work.  The majority of employees did find jobs; many of them better paying than before.  Still, it felt like a kick in the gut to most of us, when we were told the news.

Since I was laid off, I had access to the outplacement center, but I also spent several days a week in the main factory of the company, as a contractor.  I have a very clear memory of the way it felt to be in each location.  The outplacement center seemed filled with light, even sunshine, a place of optimism and hope.  The factory and the offices at the factory felt dark and gloomy, a place of depression and a kind of survivor’s guilt.

This is one of the consequences of layoffs.  Those who remain behind suffer. Morale goes down in a way that affects productivity.  There was a myth going around in the factory that the founder returned from a trip abroad and said to the CEO, “What have you done with my company?”  The CEO replied, “lt’s not your company anymore,” to which the founder said, “Give me a week!” Of course, none of this every happened.  It was a coping mechanism of the survivors who did not loose their jobs.

I accept that there are times when there is no alternative to layoffs for a company to survive. There is also compelling evidence that lay offs do a great deal of harm. 

Jeffrey Pfeffer, a professor of organizational behavior at Stanford University's Graduate School of Business, writing in Newsweek (February 15, 2010), points out many of negative effects of layoffs that run against conventional wisdom.  Even the idea that Wall Street likes to see reductions in headcounts, boosting stock value is a fallacy. This holds up both short term and long term.

The greater the reduction in force, the greater the negative impacts on stock value tend to be.  Pfeffer cites some of the most recognizable costs:

University of Colorado professor Wayne Cascio lists the direct and indirect costs of layoffs: 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, sabotage, or even workplace violence from aggrieved employees or former employees; loss of institutional memory and knowledge; diminished trust in management; and reduced productivity.

While the lay off in which I was caught ultimately led to improved employment for the majority who lost their jobs, it did not do so for all. I witnessed the stress and repercussions on the family that layoffs had on even some of the those who eventually landed better jobs.  The company deserves credit for conducting a very effective outplacement service.  It did not come cheap.

In the consulting work that I did with the Kaizen Institute of America, we insisted that productivity gains not be immediately taken through headcount reductions.  First, we urged our clients to used the freed up “headcount” to do some of the things that there never seemed to be resources to do, particularly around efforts to continue improving the processes.  We took this so seriously that we put it in the contract. More than once I was involved in stopping a workshop, when we found that the company was planning to lay people off in short order. In these cases we were usually already having trouble getting cooperation in the workshops, before we discovered the plans. We suggested that if headcount reductions were necessary they be taken through attrition.

Pfeffer cites the example of Southwest Airlines, the only airline that did not reduce their labor force after September 11, 2001.  All the other airlines laid workers off in the thousands.  Southwest has never had a layoff in its 40 years of existence.  It has been consistently profitable and is now the largest domestic airline.  It acts as if its people are its most important assets.

To repeat: There are times when there is no getting around reducing cost by reducing labor. I would urge leaders of companies who are considering downsizing to read Pfeffer’s article and evaluate carefully whether the benefits outweigh the costs.

The online version of Newsweek has the article "Layoffs Are Bad for Business."  The information about Southwest is from that article. I do not mention the name of the company that laid me off due to the terms of my severance package.