Employee Layoffs - The Corporate Downsizing Initiative

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Employee Layoffs – The Corporate Downsizing Initiative

The primary goal of every business is to generate a profit. When a company’s expenses exceed its revenues (or when the financial projections may result in an operating loss), a common, acceptable leadership strategy is to reduce expenses. In today’s fragile business environment, employee layoffs – also known as “downsizing” – is one of the more prevalent practices used to reduce operating expenses. This week’s blog will address the challenges of downsizing, and highlight the dilemma leaders potentially encounter with this initiative.

Downsizing and Leadership Decision Making

Leaders face three tough challenges once the decision to downsize has been made. First, how much of the workforce must be released. If too many employees are released that daily operations cannot be maintained, leaders may seek to bring back released workers. Another option would be to contract temporary workers to fulfill a specific need. The advantage of using knowledgeable, skilled contractors is that the desired work gets completed and there is only a short-term expense to the operating budget (once the job is complete, the contract can be terminated. In addition, there are no healthcare and medical benefits to be paid for temporary contractors). The disadvantage of using temporary contractors is their lack of knowledge about the company and its culture. There may be a need for new employee orientation which could affect productivity. On the other hand, if too few employees are released, leadership will have the unenviable task of subsequently releasing more people. The impact of multiple downsizing activities is low employee morale of the remaining workforce, and their lack of confidence and trust in their company’s leaders. Employees become more concerned over who will be let go next (particularly themselves), than actually producing the results they were hired to deliver.

The second decision in employee downsizing is determining who to let go. Downsizing the more experienced “knowledge workers” within the organization results in lower productivity and facilitates team inefficiency. Downsizing the “younger” less-experienced workers has the long-term effect of not developing talent and not filling the pipeline with a capable workforce for the future. Yet, daily business operations must be sustained while handling this challenge. Further, the main objective – the primary goal of generating a profit – must drive the process when making the layoff decision(s).

Many companies have identified that downsizing the more experienced, long-term employees reduces payroll expense, healthcare and medical claims, and pension costs. However, this results in only a short-term expense reduction. The expense of training and developing inexperienced (and sometimes unqualified employees who ultimately are let go) offsets the anticipated gains of releasing higher priced workers.

Where feasible, a significant effort has been made to either offshore jobs to other countries, or to hire workers from other countries into domestic operations at a lower labor wage rate. This desired lower labor wage expense also takes into consideration the cost (and employee utilization) of healthcare and medical benefits. One of the most heated debates on American quality of life and U.S. citizens’ rights is access to healthcare and medical help. This societal issue is a tremendous opportunity for leadership in the business community to step up and be a part of the solution (corporate social responsibility and corporate citizenship will be discussed in a future blog).

Open and Honest Leadership Communication

The third leadership decision in the downsizing process is when and how to communicate to employees they are being let go; in addition, how and when to communicate to the remaining employees newly defined roles, responsibilities, and expectations as a result of the layoffs. Whereas many companies are agree with the need to downsize, there are vast differences in their techniques in carrying out this delicate and sometimes difficult task. Fear of negative responses and repercussions such as: verbal abuse; physical abuse; lawsuits; damage to company property; and slander of company reputation have facilitated the use of technology to carry out the communication activity. What should be a personal face-to-face discussion, albeit a tough conversation is now being done by telephone, or by email, or other electronic non-personal means. In my book on Corporate Leadership Selection, I briefly discuss a software package that when implemented, will draft employee an termination letter; calculate employee severance pay; and discontinue employee access to the company’s resources (i.e. computer, building access, and other security related material).

Although downsizing is a “necessary evil”, there are more personal and professional means of conducting this difficult leadership activity. From a personal perspective, I have not experienced or participated in these leadership behaviors. However, more information on others’ experiences with downsizing can be reviewed in Corporate Leadership Selection: Impact on American Business, Employees, and Society (Authorhouse Publishing).

Feedback to the bi-monthly blog entry is always welcome.