In economic downturns, as things start to bite deeply, layoffs are often a first resort public companies turn to. The markets are watching. Tough leadership is expected. In the frenzy to figure out how to cut quickly, CEOs can rush to blinkered thinking and overlook a thorough search for alternatives. As a result, long-lasting damage can be set in motion.
Research into the recessions of 1980, 1990, and 2000 by academics Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen found that although layoffs may reduce costs quickly, they make recovery more difficult. Companies run the risk of scaling up too late, especially if hiring is more difficult than anticipated.
Prospective employees can be reluctant to work for organizations with a history of layoffs, concluding that leadership doesn’t care about its employees. In those cases, costs can shoot up as new hires expect higher compensation to make up for an employer’s bad reputation.
“In contrast, companies that respond to a slowdown by re-examining every aspect of their business models – from how they have configured supply chains to how they are organized and structured – reduce their operating costs on a permanent basis. When demand returns, costs will stay low, allowing their profits to grow faster than those of competitors,” the three academics wrote in a 2010 analysis.
If you’re facing the need to tighten your belt, consultants Ron Carucci and Mindy Millward urge you to stay focused on strategy, not cost goals. “Leaders who jump into cost-cutting without first reaffirming (and adjusting if necessary) the organization’s strategy are likely to send their companies into whiplash. If your long-term strategy is still sound in contrast to current performance and results, it’s time to lean into that strategy and figure out how to make short-term reductions that affirm long-term goals, rather than abandon them,” they write in Harvard Business Review.
You need to be clear on your competitive advantage and the related capabilities to succeed. It can also help to view costs in terms of how much they are wedded to the past rather than the future, if such a distinction can be made.
Mr. Carucci and Ms. Millward warn against trying to make cost-cutting fair through blanket reductions across the organization. They call this naive because it assumes all work and resulting costs are equal. You must deliberate over the actual value of the activities you are considering cutting.
They suggest those fall into three categories:
- Competitive work: Usually around 15 to 20 per cent of all activities, this is the most strategically important work. Investing $1 in this work could yield a $5 return or more.
- Enabling work: This directly supports competitive work. For example, if you view customer service as a differentiator from the competition, customer analytics might be considered enabling work. This category is also around 15 to 20 per cent of all activities.
- Necessary work: The remaining 50 to 70 per cent activities keep the lights on and the organization compliant with regulations.
In general, you should be organizing competitive and enabling work for maximum effectiveness and necessary work for maximum efficiency, or lowest possible cost. “It’s in this last category where you should target your largest efforts to cut costs. When leaders mistakenly cut work from competitive and enabling categories, they unwittingly weaken the organization’s ability to grow when things turn around,” Mr. Carucci and Ms. Millward write.
They urge you to protect your future culture. You need to be as transparent as possible with how cuts will be made, what criteria are being used, who gets to be involved and why, and the timing of the decisions. The more mysterious the process, the more employees will construct negative narratives about it.
Claiming you will do more with less afterward won’t cut it. Recognize the productivity loss that will occur and trim work to match the loss in resources. “If you find yourself rationalizing that you can maintain current levels of performance with less budget or fewer bodies, know that you are mortgaging the culture to protect unsustainable results,” they stress.
Also, abandon any “woe is me” protestations as you implement layoffs. If you are suffering emotionally, Mr. Carucci and Ms. Millward advise you to talk to peers facing the same trauma or deal with your feelings in a journal. Don’t pass on your guilt to employees. “Countless viral videos of executives feigning tears and anguish have backfired as employees feel great resentment for the aloofness those leaders displayed previously,” they say. Humility, genuine empathy and care for others are what is needed.
Fred Reichheld, the creator of the widely used Net Promoter System for customer service, goes further: “When leaders can’t avoid layoffs, they can signal their commitment to caring for their teams by forgoing personal bonuses until the displaced employees have found good jobs elsewhere.” He also urges those who compile “best places to work” lists to make firms who announce layoffs ineligible for the ranking for three years.
Layoffs should be a last, not first, resort.
- Sign of the times? Ottawa productivity consultant Chris Bailey has added an AI policy statement to his website, indicating how he uses it and how he doesn’t. He says AI won’t be used for: Writing, including drafting articles and his newsletter; preparing speaking engagements; and connecting ideas in new or innovative ways. “On this website, the humanness stays,” he says.
- Innovation can be hard. Consultant Robyn Bolton suggests revival instead: Go back to old things you explored, tried or even abandoned and see if you can rejig them for tomorrow.
- IQ and EQ are important, but consultant and former New York Times writer Adam Bryant advises figuring out your crisis quotient. It starts with the ability to simplify complexity, prioritize, make decisions (even when you don’t have all the facts) and change your mind as more information comes in. It also includes the ability to lead with compassion and understanding, and the ability to balance intense listening with knowing how and when to make tough decisions.
Harvey Schachter is a Kingston-based writer specializing in management issues. He, along with Sheelagh Whittaker, former CEO of both EDS Canada and Cancom, are the authors of When Harvey Didn’t Meet Sheelagh: Emails on Leadership.