On Layoffs
Tim Sanders has a great post from the other day called Layoffs: Unless Required for Survival, a Horrible Act.
I chickened out in titling my post here, opting for the ultra-safe “On Layoffs” because I have some more thinking to finalize in my mind on this subject. But Sander’s post is excellent. Here is the bulk of it:
I think it’s socially irresponsible to hire too many people during good times, only to lay them off when the business cycle goes South. It happens all the time, I’ve seen it firsthand. Today, many firms use layoffs as a way of telling Wall Street that they are being responsible – and frequently they get a short lived bounce in the stock price. Note the phrase ‘short lived’.
In my view, socially responsible companies don’t need layoffs when they are still viable or making money. It is not an expense reduction strategy with an upside. It should be a strategy of last resort, recognizing the pain and suffering that layoffs bring to its victims.
I would only want to add that lay-offs may also be necessary if a business legitimately needs to “prune” because of an intentional, well-conceived change in strategy and the way they are doing business.
But the fundamental point remains: It is really, really bad practice to hire too many people simply because “times are good.” You shouldn’t let your hiring — or spending — be dictated simply by the fact that resources are abundant.
This point is worth emphasizing in relation to expenditures especially: If something is a wasteful expenditure in bad times, it is probably also a wasteful expenditure in good times. Good times do not make wasteful expenditures less wasteful. There are no times for wasteful expenditures. This is not only right in itself, but if this were implemented more, there would be less need to cut expenses and lay people off when times get rough.
But the corollary of this is just as important to me (more important): If an expense or program is strategic, it is worth continuing in lean times just as much as in abundant times. Some things that are often viewed as “nice but not necessary if times get tough” are often in fact critical to long-term growth and success. Lean times should not be a justification for short-sighted cost-cutting. The book Profitable Growth Is Everyone’s Business: 10 Tools You Can Use Monday Morning does an excellent job making this point, especially in relation to marketing and promotion.
But there is a nuance here to my above comments. There are many more good and important things to do than there are resources. So sometimes good ideas cannot implemented because of real financial constraints. But then when the economy is doing well, the opportunity is created to do some of those things that could not have been afforded in leaner times. If those things can’t gain sustainable traction before a recession hits, sometimes there is no choice but to scale them back (unfortunately).
So I do believe that there are expenses that should be undertaken in good times that wouldn’t have been undertaken in leaner times. But the ultimate principle remains: Wasteful spending, or unnecessary hiring, is not justified simply because times are good. Likewise, don’t cut strategic, effective spending and strategic positions because times are tough.
The initiatives that are right to do are usually right in lean times as well as good times (see above paragraph for the nuances), and the initiatives and expenses that are ineffective to do are the wrong thing to do whether times are lean or abundant.
In good times, make decisions that can withstand the bad times; in bad times, don’t make decisions that you will regret when things recover — they will, in fact, likely delay your recovery and position you poorly when things do turn.
Update: Also see my post “Employees Are Not Overhead.”
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About Matt Perman
Follower of Christ. Husband of one, father of three. Former director of strategy at Desiring God. This blog exists to help equip Christians in good works, because that's what productivity is really about.
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My father-in-law works in a Volvo plant. He’s explained some of the reasons they do layoffs. They’ve been working them overtime for the last several months. Every Saturday, even much of the Christmas holiday will be spent working long hours. They will be laid off after the first of the year. The reason? Government regulation of emissions. The laws are changing on January 1 going to tighter regulations which will result in lower fuel economy and more expensive vehicles. So companies who use the Volvo trucks they build at this plant have ordered everything they think they’ll need for the next year or two, now, before the new regulations go into effect.
So the company is trying to fulfill those orders before the end of the year. After the 1st though, they’ll experience a real slow down. Hence the layoffs.
I don’t think that is irresponsible behavior on the company’s part. It’s just the way their business is happening.
The employees are getting a lot of extra income right now because of the over time. If they are wise they can prepare for the slow time that’s coming. My father-in-law is. Sadly most of his co-workers will not be so wise…
Couldn’t a useful purpose of layoffs be to allow new, often young, workers into the market with a chance to compete? They are added during good times and the company is able to keep the “best of the best” when times get tough. It is almost the same principal that the Creator instituted into nature “survival of the fittest.” Layoffs would serve, in this case, as a reminder that you are constantly evaluated on your contribution to the company strategy. The principle that less productive workers are naturally pruned from the organization–leaving a much more healthy productive organization behind–would permeate the culture. When the good times return–certainly, this company will have a competitive advantage.
If layoffs are deemed immoral, wouldn’t we create another moral hazard of workers who feel entitled to employment?
Also, think of how many creative entrepreneurs got their start by being laid off, taking the adversity as a challenge and ended up being job (and wealth) creators in their new venture.
Brance: Good comment. That shows the unintended consequences government interference in the marketplace often has.
Matt: Good to bring some more clarity here. I don’t want to imply that layoffs are necessarily immoral. Layoffs based on performance are fully legitimate when the person has had a chance to address the issues.
For example, if a person is not performing up to standard and, after a chance to change, does not, the organization has a responsibility to make a change. Sometimes that could mean there is another role that does fit. Sometimes not.
To widen this out to the case of mass layoffs now: If the mass layoffs happen because the company needs to do them to remain profitable, or if they have decided to change directions (focusing less on this or that, and so staff reductions must follow), I’m not addressing that. And in those cases, hopefully the most effective employees, in general, will be able to stay.
The problem, in my opinion, is when companies cut too deep, and when lay-offs are viewed as the primary tool to navigate a downturn. I think that too often we focus on cost-cutting as opposed to sustainable revenue growth, as Ram Charan points out in _Profitable Growth is Everyone’s Business_. And when focusing on cost-cutting, people are often looked at as “overhead” rather than productive assets who are part of the solution, not the problem.
Here is the main thing, from Caran’s book: “Sporadic, deep cost-cutting — downsizing, closing plants, across-the-board budget cuts — are one-shot reductions (often without attention to the consequences for revenue growth) that do not result in doing things in a better way. Cost-reduction campaigns are largely a result of the lack of discipline of productivity improvement on a long-term consistent basis” (p 24).
I am not for enabling employees that are not meeting standards to drag down a business. No way. But when employees are effective and meeting their goals, I believe that the welfare of the company and the welfare of the employees are tied together. Drucker makes this point very well at the end of _The Effective Executive_ as well. “We will have to satisfy both the objective needs of society for performance by the organization, and the needs of the person for achievement and fulfillment.”
Lay-offs sometimes are necessary, but do the companies have this perspective of Drucker’s and Charan’s when doing it?