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Are staff layoffs a symptom of poor leadership ?

A well-known pharmaceutical company has recently announced serious job cuts in Ireland and worldwide. Quite a few more companies will most probably follow the suit.

With the recession looming in the background, raising interest rates, and increased pressure on financial performance, downsizing a workforce seems like an obvious choice to many organizations.

On paper, the math seems pretty simple – cut 100 staff and you save €5 million or so per year. But this kind of thinking is quite short-sighted. To quote Dr. Adam Cobb of The Wharton School – “Layoffs may look good on paper because they have an immediate effect on costs. Yet in reality, there are a lot of hidden costs of layoffs that might not show up on an income statement quite as clearly.”

According to the research published in Harvard Business Review, companies that laid off employees reported a 20% decline in productivity from the remaining employees, a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a 31% increase in voluntary staff turnover.

Harvard research also quotes an interesting case study – In 2008, as a result of falling profits, Nokia decided to close a manufacturing plant in Bochum and lay off 2300 employees. The layoffs sparked widespread protests and lots of bad press. The newspapers were filled with pictures of protesters crushing Nokia phones. German government launched an investigation and demanded that Nokia pay back subsidies it had received for the plant. In the long run, the layoffs have ultimately cost Nokia over €900 million in redundancy payouts, lost productivity, lost subsidies, and lost sales. I reckon the cost of this decision was many times higher than the savings achieved by the layoffs.

When employees are let go, morale drops as people lose trust in management. They begin doubting if their loyalty to the company really matters. Layoffs destroy company culture and its reputation in the marketplace. They also send a host of negative messages to the market:

·         That human beings are at the bottom of your list of priorities and yes, that includes your customers.

·         That you don’t care about relationships and you are not to be trusted

·         That you are a poor leader and a poor money manager

The negative impact frequently ripples well into the future, when the company later wants to grow and re-hire staff. Now the organization has to incur all the costs of finding, hiring, onboarding and training new workers.  It may also be impossible to attract top talent as the message is out that the company does not offer stability, so the best talent may go to your competitors instead.

Can digital transformation be blamed for the staff layoffs?

Some companies justify the layoffs with digital transformation. Of course, with digital transformation, certain processes and certain roles within the organization may become redundant and some jobs may become obsolete altogether.

But using bots to handle your calls does not necessarily have to result in redundancies. Your staff may have a wealth of knowledge and experience that goes well beyond the knowledge of a call management process. They obviously have a lot of soft skills and they may be willing and capable of re-training.

So what is the alternative to layoffs?

The saying goes that there are many ways to skin the cat. CEOs need to become more creative in finding solutions to their sinking profits. They should focus on finding innovative business models, better planning, a better understanding of the knowledge and talent of their staff, better leadership, and better communication.

And there is also a wide array of other options that can result in immediate costs savings without the negative ripple effect of the layoffs – enforce furloughs, sublet excess office space and encourage remote work, stop outsourcing, renegotiate vendor contracts, become better at measuring value added.

If you need a specific example of a creative solution, watch a Golden Globe-nominated British comedy-drama “Kinky boots” on Netflix. The film is based on a true story of a struggling British shoe factory owner, who in a desperate effort to save the staff and save the business, forms an unlikely partnership with Lola, a drag queen and starts producing custom footwear for drag queens rather than men’s dress shoes.

It may be a bit extreme example, but it illustrates the point that company leaders should dig a bit deeper to find a solution, rather than kick the proverbial can further down the road.

It is amazing how many creative options emerge when you re-phrase the problem to a now-famous Lean Management question – “How might we achieve A without screwing up B…”