The real costs of layoffs

Layoffs

Corporate layoffs, often referred to as "downsizing", are very common nowadays. In the past, layoffs were a last measure for companies that were truly struggling. Or, downsizing was used only at times when the economy was exceptionally bleak.

So, why do companies now frequently use layoffs as an easy cost-cutting measure? And, what are the real costs of doing so? 

Corporate downsizing is often tied to short-term cost cutting measures. Unfortunately, this has become a more common practice, especially with publicly-traded companies, where there is extreme pressure for organizations to focus on quarterly profitability and share-holder value. Although layoffs may achieve these short-term financial objectives, the true costs down the road are often higher.

For example, when an employee is laid off from a company, a lot of knowledge leaves the organization. Morale amongst remaining employees is often lower, and the existing workforce is likely encumbered with having to fill the void and take on additional responsibilities. And what happens when that same company needs to augment their workforce again? There are costs to recruit, train, and retain the new employees. 

Let's look at retail. According to research from MIT Sloan's Zeynep Ton, retailers spent more than 10% of their overall revenue on employee wages. So, it can be very tempting for management to cut staff wherever possible to help boost the bottom line. What is important to note is that the customer experience needs to be accounted for. If retail stores are insufficiently staffed, and the customer experience is poor, how does that impact sales and ultimately the profitability of the organization? Ton takes a look at this scenario and notes that, "too much corporate emphasis on payroll management may motivate managers to operate with insufficient labor levels, which, in turn, degrades profitability."

Other companies, like Apple and Southwest Airlines have used a downturn in the economy to re-deploy their workforce into other areas of the business--in Apple's case, to focus on R&D. Although not the norm, these businesses took a more long-term approach with regards to their human capital, which in turn, had positive results on their businesses.

Overall, companies need to ask: Are layoffs truly necessary? What is driving that decision? And, will the layoffs be the right decision for the short- and the long-term health of the organization?

Zeynep Ton is an Adjunct Associate Professor of Operations Management at MIT. She is currently examining how organizations can design and manage their operations in a way that satisfies employees, customers, and investors simultaneously. You can learn more about her research in the Executive Education program, Strategies for Sustainable Business.

This entry was posted in Work and Employment on Thu May 12, 2016 by MIT Sloan Executive Education

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