Greg Ford

In the recruitment industry, we are constantly talking to senior executives, and lately there is no hotter topic than the economy – and the resulting layoffs. According to Stats Canada, layoff figures for January 2009 reached an overwhelming 129,000, increasing the national unemployment rate to 7.2%.

Several senior HR officials shake their heads at the layoff strategy, yet tell us they have no choice but to execute the plans forced upon them. One person even said to me, “It’s about bottom-line financials. How do I argue against that? I need ammo to fight the numbers.”

Through some strategic planning, HR professionals can help lead organizations through tough economic times. Prepare your ammunition to stand strong before CEOs and CFOs and argue that layoffs should only be an absolute last resort, not a knee-jerk first step.

Start out by reading the book The Disposable American by the New York Times economic reporter Louis Uchitelle. Business Week magazine profiled Uchitelle, who says that the typical CEO’s layoff tactic is like a business school “tic”, and that “corporate America’s addiction to the layoff has gone past the point of economic rationality.”

Uchitelle draws upon mounds of research to show that slashing staff in the name of growth is folly and does not save a company money or lead to better stock performance in the long run. Even in the short term, there are financial repercussions that, paradoxically, run against the financial benefit of layoffs. For instance, companies that announced layoffs in late January – including Sprint, Caterpillar, and Corning – will incur financial charges of $100-300 million dollars in redundancy costs such as severance and benefits package, accrued vacation, outplacement-services fees, etc.

Aside from severances, Uchitelle says that hidden costs include “potential lawsuits from aggrieved workers, loss of institutional memory and trust in management, a shortage of staff when the economy rebounds, rehiring expenses, and a culture of survivors who are risk-averse, paranoid, and alienated.” In the recruitment business, we network with dozens of still-employed workers whose words, body language and demeanour suggest they’re just waiting for the axe to fall on their heads next. Do companies expect these “gainfully employed” people to be as productive as they once were, never mind cheerfully cover off the workload of the recently downsized?

When worker productivity suffers, this can impact the quality of the very products and services a company relies on to drive revenue, and clients do take notice. “There are instances where you see staffing get cut to levels where consumer satisfaction deteriorates and you could start losing business,” said Robert Korajczyk, professor of finance at the Kellogg School of Management at Northwestern University.

Contrast all of this with the evidence that Uchitelle marshals to argue for a no-layoff payoff: fierce loyalty, higher productivity, and superior innovation, as evidenced at such companies as Southwest Airlines, TDIndustries, and Harley-Davidson.

Researchers Ann McGee-Cooper, Ed.D. and Gary Looper also sing the praises of these companies, saying that these organizations have several things in common: transparency, a shared trust, and a “servant-led” culture rather than a “boss-led” culture. In times of turmoil, loyalty to employees is paid back with fierce loyalty and high productivity. The results, they say, speak for themselves: following 9-11, Southwest was the only airline not to lay off any workers, not to reduce their flight schedule and the only major airline to make a profit in 2001. Looper and McGee-Cooper’s study looked at 18 years of downsizing data and found that large layoffs did not lead to greater profits. While expenses dropped, revenue also dropped and the remaining workers’ low morale significantly affected productivity.

This finding is supported by Jim Collins who in his book, Good to Great, articulates the results of his research on what he calls “great” companies (Fortune 500 companies, 1969-1995, with, at, or below stock market average returns for 15 years, followed by cumulative returns three times higher than the market for the next 15 years). One of their key traits was “getting the right people on the bus (and the wrong people off the bus).” Great companies “did not rely on layoffs as a primary strategy for improving performance.” They applied a rigorous, but not ruthless standard when approaching layoffs.

Make no mistake: these analysts are not suggesting that layoffs should never take place. Rather, they are advocating extreme caution when considering layoffs and not immediately employing the layoff strategy as soon as the bottom line goes south.

So why, then, do we still see so many executives immediately employing this strategy? Why do they keep burning the furniture in order to warm the house?

In a January 2009 article, CNN Money editor Paul LaMonica stated that companies are “taking the easy way out. Layoffs are a short-sighted fix – a way for panicky CEOs to justify their big salaries and bonuses and to satisfy investors clamoring for higher profit margins.”

Those same panicky CEOs, however, may be overestimating the “clamoring” investors’ expectations. In one of the few studies to examine the impact of layoff announcements on stockholders, Worrell, Davidson, and Sharma (1991) studied layoff announcements made by U.S. firms over the period 1979-1987. These researchers found that investors reacted negatively to layoff announcements. They claimed that layoffs attributed to financial distress elicited stronger negative responses than those due to restructuring or consolidation, and that large layoffs caused stronger negative responses than small layoffs.

And what happens when the eventual economic recovery comes? If companies cut too deeply and try and do more with less, it will be that much tougher to meet customer demand once the party starts rolling again. Companies may be left with a habitable home but little furniture and few guests.

Of course the counterargument to all of this is that if the house isn’t kept warm, it won’t be habitable in future. Fair enough. But ask your CEOs and CFOs how long the chill will last, and what will happen afterward.

“Every recession gives way to the next expansion, despite the myopia that grips markets. Companies have to be in a position to respond. They have to balance between what’s good for the here and now and managing strategically for the future,” said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida in Orlando.

This cold snap will end, probably sometime in the next 6-24 months, and the party will get rolling again. Until then, let’s bundle up and stay as hospitable as we possibly can.

About the Author:

Greg Ford is a partner at The Caldwell Partners International and author of the book Catch Them if You Can! How Any Manager Can Win the War for Talent in the Labor Shortage. He can be reached at gford@caldwell.ca.