When you strip away the fancy jargon, a successful business fundamentally makes more money than it spends. While managers can pull any number of levers to accomplish this, the one they most often choose reads: "Reduce costs!" And perhaps the most common way they cut costs is to eliminate jobs.
This is why we are so familiar with this PR-fueled refrain in business news: "[Company X] today announced that it will be [reorganizing/consolidating/streamlining] in order to better serve its customers. And oh, by the way, these changes will also save the company [Y million] dollars and result in the elimination of [Z number] of jobs."
In recent months we've heard variations on this theme from companies ranging from HP to GE to Peugeot; as well as from local schools and government agencies. And even though the overall number of job losses is actually decreasing on a year-by-year basis, they are still significant with over 37,000 U.S. cuts announced in June.
What they don't say is that the process of cutting jobs entails a number of hidden costs. In some cases these costs may be so significant that they reduce or even outweigh the benefits of job elimination. For example, depending on the employee, companies may need to provide severance, extended benefits, and out-placement counseling.
But that's just the tip of the iceberg. In addition to these measurable costs, layoffs cause firms to lose institutional knowledge about how to get things done, disrupt work relationships and patterns, and increase burdens on those who remain. These factors alone can reduce productivity for weeks or months, and can impact product quality, customer-service, and company image. One study of 4000 workers at 318 companies, for example, found that 77% see more errors and mistakes after layoffs than before. Layer on to that the time that managers, HR people, and others spend thinking, planning, and obsessing about layoffs, and the cost goes up even further.
None of this is to suggest that companies should never lay people off. Market forces can change quickly or strategic bets may not pay off, which will force managers to shift strategies or redeploy resources. At the same time, some employees may not perform up to the standards required, and companies need to be able to move them out.
However, given the costs involved, perhaps it's time to think about layoffs as a last resort rather than a prime strategy. As a manager, here are some actions that you can take to reduce the likelihood of layoffs in your organization:
First and foremost, watch out for creeping structural complexity. Just like any living organism, organizations have a tendency to grow, adding unnecessary layers, positions, and locations. As such we end up with headquarter staffs, divisional staffs, regional staffs, and local staffs all creating work that justifies their existence. Maintaining structural simplicity to begin with, with limited layers and as few extra locations as possible, is one way of avoiding layoffs.
Phase out products and services. Although we are always looking for new ways to benefit customers, often we don't eliminate the ones that have outlived their value. Without sunset laws for outdated products and services, we allow costs and infrastructure to build up that will eventually have to be taken down.
Manage the balance between today's revenues and tomorrow's opportunities. Managers always have a choice between investing in current operations and innovating for the future. When the balance is overly skewed towards short-term revenues, it's easy to build up costs (and people) that provide results today but cannot be sustained in the long-term.
In today's business environment, layoffs have become an accepted fact-of-life and a common tool for managers to maintain profitability. But we might be better off if we spend more time preventing layoffs rather than managing them.
Cross-posted from Harvard Business Online.