Lay-offs that don’t break your company

All too frequently companies do bad lay-offs, do lay-offs for the wrong reason, or both. There’s a better way.

Two great forces are transforming the nature of work: automation and global competition. To keep up, many organisations have had to rethink their workforce strategies, often making changes that are disruptive and painful. Typically, they have turned to episodic restructuring and routine lay-offs.

One of us, Sandra, has spent eight years researching best practices for workforce change. She has seen that all too frequently companies do bad lay-offs, do lay-offs for the wrong reason, or both.

By “bad”, we mean lay-offs that aren’t fair or perceived as fair by employees and that have lasting negative effects. When we say “wrong reasons”, we mean done to achieve short-term cost cuts instead of strategic change.

Lay-offs have been increasing since the 1970s. A McKinsey survey of 2000 US companies found that from 2008 to 2011, 65 per cent resorted to lay-offs. Yet in a 2012 review of 20 studies of companies that had gone through lay-offs, Deepak Datta at the University of Texas found that lay-offs had a neutral to negative effect on stock prices in the days following their announcement. Data also discovered that after lay-offs a majority of companies suffered declines in profitability.

Companies that shed workers lose the time invested in training as well as networks of relationships and knowledge. More significant are the blighting effects on survivors. Charlie Trevor of the University of Wisconsin-Madison and Anthony Nyberg of the University of South Carolina found that downsizing a workforce by 1 per cent leads to a 31 per cent increase in voluntary turnover the next year.

Lay-offs can cause employees to feel they’ve lost control — the fate of their peers sends a message that hard work does not guarantee jobs.

A few companies have been experimenting with better ways to handle change.

Take AT&T. In 2013, the company 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, 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 management that was necessary to engagement, innovation and performance.

So far, the results seem positive.

In her work, Sandra has studied seven companies that have successfully pursued alternatives to traditional lay-offs. An analysis reveals that an effective strategy has three main components: a philosophy, a method and options for a variety of conditions.

Philosophy: A workforce change philosophy serves as a compass for senior leaders. It builds on a company’s values and spells out the commitments and priorities it will abide by as it implements change. A philosophy helps leaders answer the following questions:

What value do we believe employees contribute to our business and its success?

What expectations do we have for employees’ engagement, loyalty, flexibility and ability to adapt and grow?

What do we owe employees as a fair exchange for what they have given us?

How can employees help us develop and implement workforce change?

A method: Having a clear methodology will allow companies to explore alternatives to lay-offs or minimise the harm they cause. To establish one, firms need to address three questions:

How will we plan for change on an ongoing basis?

Who will be accountable for managing and supervising that change?

What metrics should we use to determine whether our actions are effective?

A workforce change strategy should anticipate three different scenarios:

A healthy present: In the immediate term, leaders should practice disciplined hiring and use performance metrics to build a strong organisation that can weather change. A lean approach to staffing will help companies avoid yo-yoing between overhiring during growth and damaging staff reductions when demand falls.

Short-term volatility: Managers develop a range of ways to reduce costs without resorting to destructive lay-offs. During the great recession, Honeywell furloughed employees for one to five weeks, providing unpaid or partially compensated leaves, depending on local regulations. The company estimated that furloughs saved Honeywell the equivalent of 20,000 jobs.

Meanwhile, Lincoln Electric, an arc-welding products and consumables manufacturer in Cleveland, can avoid lay-offs because it requires employees to accept flexible assignments. Employees are expected to work extra hours when demand ramps up, and shorter hours when it ramps down. In addition, they can be reassigned to any other job, including one with a lower salary, during a downturn.

An uncertain future: Market shifts, new technologies and competition can require companies to conduct major restructuring.

Before considering a lay-off, they should see if they can take a cue from AT&T.

While companies tend to prioritise short-term financial results over the long-term wellbeing of their employees, employees are the lifeblood that enables a company to keep delivering the products and services that ultimately generate shareholder benefits. For all companies, planning thoughtful workforce change instead of automatically resorting to lay-offs is a better way to address the vicissitudes of technological transformation and intensifying competition.

Copyright 2018 Harvard Business School Publishing Corp. Distributed by the New York Times Syndicate.