Time was, layoffs were seen as an emergency strategy, the last resort in a downturn or crisis. Today, however, layoffs are a standard tool for doing business. When executives announce layoffs, they usually do so under the guise of financial discipline and the need to cut costs but it’s more likely for their own pockets.
It’s about the triumph of short-termism, says Wharton management professor Adam Cobb. “For most firms, labor represents a fairly significant cost. So, if you think profit is not where you want it to be, you say, ‘I can pull this lever, and the costs will go down.’ There was a time when social norms around laying off workers when the firm was performing relatively well would have made it harder. Now it’s a fairly normal activity.”
Several decades’ worth of research shows layoffs to be a poor way to boost profits, while other strategies may, in fact, work, perhaps there are ways of changing the dynamic between what’s happening on Wall Street and decisions that get made in the board room and on the office staff.
Contrary to popular belief, there’s not much evidence that layoffs are a cure for weak profits or, to use the current euphemism, that they reposition a firm for growth going forward. “It’s challenging to sort out the relationship because firms that are laying off are almost by definition in trouble,” says Peter Cappelli, Wharton management professor and director of the school’s Center for Human Resources. “The research evidence has not supported the idea that layoffs help firm performance. There is more support for the idea that where there is overcapacity, such as a market downturn, layoffs help firms. No evidence cutting to improve profitability helps beyond the immediate, short-term accounting bump.”
Then there is the lost productivity of anxious employees, wondering if they will be next. Data shows that productivity can fall anywhere from 30-70% when mass layoffs are executed. When employees live in fear for their jobs, they focus more on keeping their jobs than doing what’s best for the customer.
What about ramping up sales?
Rather than focusing on keeping Wall Street happy with layoffs, why don’t executives think about ways to maintain or increase sales? Because that would mean more money, but the real reason is that Wall Street wants instant gratification, not strategic brand investments, to win back customers.
Facebook is preparing to lay off thousands again because the “metaverse” was a colossal failure that cost over $13 billion. Rather than taking this action, has anyone at Facebook suggested that they form a team to develop new products that can make money? Marketers are dying for new ways to use social media and measure the results. Surely there are people smart enough at Meta to develop new methods for brands to leverage the platform?
Then some brands are “preparing” for a recession because the media says there’s one coming. They need to read that consumers are still spending money and buying more private labels because your branding needs to talk to them as people.
Layoffs have several adverse effects: they can spook investors, the company needs more valuable skills, and surviving employees feel uncertain. It often takes a year or two for a company to “recover” from a layoff, and some companies never return to new growth.
Research has long shown that layoffs have a detrimental effect on individuals and corporate performance. The short-term cost savings a layoff provides are often overshadowed by bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation — all of which hurt profits in the long run. To make intelligent and humane staffing decisions in the current economic turmoil, leaders must understand what’s different about today’s larger social landscape and that consumers are still spending money and buying more private-label products.
Layoffs often do not cut costs, as laid-off employees are often hired back as contractors, with companies paying the contracting firm. Layoffs often do not increase stock prices, in part because layoffs can signal that a company is having difficulty. Layoffs do not increase productivity. Layoffs do not solve the underlying problem, which is often an ineffective strategy, a loss of market share, or too little revenue. Layoffs are a terrible decision.