Layoffs Not Long Term Solution For Firm’s Tough Times

Layoffs are not a long-term answer for firms when they face tough times. Nine-eleven and the Great Recession tested firms with no-layoff policies. Southwest Airlines, Marriott, FedEx, Honeywell, Toyota, to name a few, passed the test.  I should add that I am talking about permanent employees in non seasonal businesses. Here is a comment from a Southwest Airlines’ employee: 

“I have never in my 13 years [at the company] felt that my job is in jeopardy due to the economy,” said Jill Kronman, a flight attendant for Southwest Airlines.

Layoffs Versus Furloughs

Do furloughs give a better result than layoffs? The May-June 2018 Harvard Business Review article, Layoffs That Don’t Break Your Company, gives some insight. It shows that layoffs destroy value in the long-run. Not only do they destroy value, but they shatter lives. Honeywell’s experience  in the Great Recession supports this view. Here are comments from its CEO:

As my leadership team began looking at options, we kept coming back to the idea of furloughs: Workers take unpaid leaves but remain employed. The conventional wisdom is that because furloughs spread the pain across the entire workforce, they hurt everyone’s morale, loyalty, and retention, so you’d do better to layoff a smaller number, focusing on weak performers.… The process didn’t go perfectly [but] on the whole, our decision to use furloughs rather than layoffs was a success.

Furloughs Show Care For Employees

Layoffs Destroy Long Term Value
Layoffs Destroy Long Term Value

Layoffs deplete the firms’ talents. And rebuilding takes time and money. When a leader says her firm has a “financial crisis,” what does that mean? It’s a euphemism for problems with operations, demand, the economy, and so on, because finances are never the problem. So, if the CEO looks at finances for the solution instead of what’s behind the numbers, the CEO will make a poor long-term decision that will harm the firm. One of the dumbest responses is to layoff a fixed percentage of staff in each department. It’s a simplistic, misguided, lazy way to destroy long-term value. Some departments might need more people to seize post recession opportunities!

Faced with falling revenues, depleted cash, and rising costs, what should a firm do? During the Great Recession, Bob Chapman, Barry-Wehmiller’s CEO, opted for furloughs, not layoffs. In his book Everybody Matters, The Extraordinary Power of Caring for Your People Like Family, Chapman and Raj Sisodia state: In a family, when times get tough you don’t layoff anyone but seek solutions to solve the crisis. After the furloughs, Chapman noted that furloughs shared the sacrifice but, in the end, it didn’t seem like a huge sacrifice. In fact, the three years following the furloughs, were record years. To recognize what their team members gave up, the company reinstated the 401K match and then “paid them back” funds lost had the firm not suspended the match.

Furloughs help to keep talent, build a caring culture, hike morale, and is more profitable in the long run. But this approach needs a long term view. Further, the firm must value and invest in its workers. When a firm keeps its employees and treats them well, it will benefit. That is one reason family-owned businesses do better than non-family owed businesses.  A 2018 study alluded to the long-run view that family companies adopt in their decision-making. For instance, these companies reinvest a higher percentage of funds instead of buying back shares like short-term focussed firms. 

Manage Cost Drivers Not Costs

When a firm believes its costs are too high, the first approach should be to look at its mission and strategy, and compare with its activities. Are we doing what we should do? Firms must understand where they are—what they are doing—before deciding to adjust their activities. The firm should not opt for a fire sale of assets to cover cash shortfalls. That would be a clear sign that the firm is on its way out! Costs are never problems but symptoms. They show the score! 

Many managers and leaders manage the wrong things. They try to manage costs; but nobody can manage costs. I repeat: costs represent the score as in a hockey or football game. We must isolate cost drivers and manage those, such as energy contract and energy consumption, not total energy costs. “Cost cutting” and “people cutting” are foolhardy and wasteful exercises as the Harvard article shows.

People work on activities. Removing people don’t remove their jobs. That removes skills, talents, and experience, but projects and other stuff needed to carry out the mission remain. When the firm faces challenges, it must assess projects and activities necessary for the mission and define their resource needs in people and money. This reassessment should lead to a better understanding of whether the firm moved away from its mission and how it needs to return. To deal with excess people, the firm can combine furloughs, a hiring freeze, retraining, and refocusing.

Before a leader decides to layoff her staff, she should ask: Why do I have too many people? Often the answer lies in poor (or no) formal decision-making process, short term focus, bad growth, over-investments, veering from mission, and, or a lack of focus. Leaders must look long term and know the economy cycles between peaks and troughs. In good times, they must match growth with long-term resource capacity—people and financial. That’s Jim Collins’ 20-mile march. Further, the leader needs to ask whether the firm has the right people in the right places. Are they cooperating and working on the mission? This analysis will identify the problem which layoffs won’t solve.

Will firms continue their no layoffs policy during this pandemic? That’s the million dollar question. No one knows how long present concerns will continue. Still, we must stay alert to reforms in society and look for opportunities. I expect many firms will apply furloughs, take government benefits, and stick to no layoffs. That’s the better approach for the long-term viability of the firm. And that’s how to manage for the long run to create value for the firm!

© 2020 Michel A Bell

Additional Resources:

Chapman, Bob, Sisodia, Raj: Everybody Matters: The Extraordinary Power of Caring for Your People Like Family, New York, N.Y, Portfolio, Penguin, 2015.

Collins, Jim and Hansen, Morten T. Great by Choice: Uncertainty, Chaos, and Luck– Why Some Thrive Despite Them All, New York, NY: HarperCollins Publishers, 2011.

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The Family Business Premium

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Michel A. Bell

Michel A. Bell is a former senior business executive, author of six books (including Business Simplified released in 2018), speaker, and adjunct professor of business administration at Briercrest College and Seminary. Michel is a Fellow of the Chartered Certified Accountants (UK), holds a Masters of Science in management degree from Massachusetts Institute of Technology and a Doctor of Business Administration honoris causa from Briercrest College and Seminary. He is founder and president of Managing God's Money.

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