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Layoffs in Uncertain Times: Bane or Benefit
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General Business Information
by Wayne Bragg KWB Consulting LLC
Since September 2008, corporate layoffs have reached epidemic proportions with revered companies such as Walt Disney, Starbucks, Home Depot and IBM shedding thousands of positions in a desperate attempt to offset the effect of precipitous declines in revenue with lower operating costs. I would caution, however, that cutting staff is not always a profit panacea.
Layoffs are ubiquitous in these uncertain times, particularly in service industries where labor comprises such a significant portion of a firm’s cost structure. Managers are easily lured by short-term profit increases when flawed analysis reveals that a small percentage reduction of a large workforce yields significant reductions in operating costs.
Misleading labor savings estimates can occur when pre-layoff planning ignores the fact that many new costs (severance, health care, education, outplacement and training) are incurred during execution of the workforce reduction and when the level of work performed by laid-off employees is still essential to ongoing business processes. Not understanding how the layoff effects work can create insidious downstream cost increases and declines in productivity as the company experiences increased turnover, absenteeism and lower morale.
Circuit City’s demise is an excellent example of a myopic management that chased lower labor costs as a strategic objective. In March 2007, CC fired 3400 experienced employees earning about $11 per hour and replaced them with less qualified employees earning $7 per hour. The flawed strategy was based on the hypotheses that the lower labor costs would make CC more competitive in the electronics industry. In actuality, firing the experienced sales staff walked a critical core competency right out the front door, never to be seen again.
In certain situations layoffs may be inevitable, but before we make that leap we must clearly understand how the delivery of goods and services relates to the level of staff needed to deliver them. Otherwise, we may unwittingly impede the very processes that place our products in the customers’ hands and watch the customer leave for the competition. To that end, we must view employees as assets not cost reduction opportunities or we may lose the very talent that can solve the current business problems, innovate and develop new products and deepen customer relationships.
Many smaller companies are finding innovative ways to retain employees as they seem more willing to employ salary freezes, overtime reductions or lowering workers hours and replacing fringes with higher out-of-pocket costs. These steps provide a more surgical approach than the traditional across the board cuts.
Cost control is not a short term corrective action; it must be a visible component of the enterprises strategy and part of the employee’s mindset to improve every task. To achieve this state, management must communicate, train and reward employees for demonstrating superior cost management practices. Without this philosophy we will be forever stuck in downward spiral of chasing lower labor costs and achieving mediocre financial results.
Wayne L. Bragg
KWB Consulting LLC
85 Park AV
Shelton, CT 06484
P: 203.929.9633
F: 203.929.9633
C: 203.913.2689
wbragg@snet.net
Layoffs are ubiquitous in these uncertain times, particularly in service industries where labor comprises such a significant portion of a firm’s cost structure. Managers are easily lured by short-term profit increases when flawed analysis reveals that a small percentage reduction of a large workforce yields significant reductions in operating costs.
Misleading labor savings estimates can occur when pre-layoff planning ignores the fact that many new costs (severance, health care, education, outplacement and training) are incurred during execution of the workforce reduction and when the level of work performed by laid-off employees is still essential to ongoing business processes. Not understanding how the layoff effects work can create insidious downstream cost increases and declines in productivity as the company experiences increased turnover, absenteeism and lower morale.
Circuit City’s demise is an excellent example of a myopic management that chased lower labor costs as a strategic objective. In March 2007, CC fired 3400 experienced employees earning about $11 per hour and replaced them with less qualified employees earning $7 per hour. The flawed strategy was based on the hypotheses that the lower labor costs would make CC more competitive in the electronics industry. In actuality, firing the experienced sales staff walked a critical core competency right out the front door, never to be seen again.
In certain situations layoffs may be inevitable, but before we make that leap we must clearly understand how the delivery of goods and services relates to the level of staff needed to deliver them. Otherwise, we may unwittingly impede the very processes that place our products in the customers’ hands and watch the customer leave for the competition. To that end, we must view employees as assets not cost reduction opportunities or we may lose the very talent that can solve the current business problems, innovate and develop new products and deepen customer relationships.
Many smaller companies are finding innovative ways to retain employees as they seem more willing to employ salary freezes, overtime reductions or lowering workers hours and replacing fringes with higher out-of-pocket costs. These steps provide a more surgical approach than the traditional across the board cuts.
Cost control is not a short term corrective action; it must be a visible component of the enterprises strategy and part of the employee’s mindset to improve every task. To achieve this state, management must communicate, train and reward employees for demonstrating superior cost management practices. Without this philosophy we will be forever stuck in downward spiral of chasing lower labor costs and achieving mediocre financial results.
Wayne L. Bragg
KWB Consulting LLC
85 Park AV
Shelton, CT 06484
P: 203.929.9633
F: 203.929.9633
C: 203.913.2689
wbragg@snet.net