Great Newsweek Cover Story on Why Layoffs Are Harmful
I had long given up on Newsweek as a source of news (hey, at least it’s published weekly unlike IndustryWeek). But this cover caught my eye at the airport on Friday, I had to buy it instead of waiting to read it for free online (“Lay Off the Layoffs – Our overreliance on downsizing is killing workers, the economyâ€”and even the bottom line.”). It’s a familiar refrain for Lean thinkers and I think you’ll enjoy the article by Stanford Professor Jeffrey Pfeffer.The article begins by highlighting the one U.S. airline that didn’t lay off workers after 9/11 – Southwest.
As its former head of human resources once told me: “If people are your most important assets, why would you get rid of them?”
Lean people, myself included, are always telling their clients and organizations that you can’t let Lean lead to layoffs. This teaching goes back to Dr. Deming who said that you can’t let productivity or quality improvement lead to layoffs. Many organizations have “no layoffs due to Lean” policies or even “no layoff” philosophies, in general. You’d expect morale, productivity, and quality to be higher in these organizations. The article does make a distinction for a situation where layoffs are unavoidable – huge drops in sales or other business problems. Yet Southwest passed up on that chance after 9/11. Toyota passed on that opportunity recently, as well (due to slow business and, most recently, due to quality problems). Newsweek lays out a different problem:
Companies have always cut back on workers during economic downturns, but over the last two decades layoffs have become an increasingly common part of corporate lifeâ€”in good times as well as bad. Companies now routinely cut workers even when profits are rising.
While layoffs are often taken as a necessary part of doing business, the article cites research that show layoffs harm companies in the following ways:
That research paints a fairly consistent picture: layoffs don’t work. And for good reason. In Responsible Restructuring: Creative and Profitable Alternatives to Layoffs, University of Colorado professor Wayne Cascio lists the direct and indirect costs of layoffs: severance pay; paying out accrued vacation and sick pay; outplacement costs; higher unemployment-insurance taxes; the cost of rehiring employees when business improves; low morale and risk-averse survivors; potential lawsuits, sabotage, or even workplace violence from aggrieved employees or former employees; loss of institutional memory and knowledge; diminished trust in management; and reduced productivity.
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And the commonly believed “myths” of how layoffs are beneficial (better stock price and higher profits) are disproven through these studies, as much as you can prove anything that’s not a scientific double-blind controlled experiment (as Pfeffer admits in the piece). The article even dispels the myth that layoffs lead to lower costs:
Layoffs don’t even reliably cut costs. That’s because when a layoff is announced, several things happen. First, people head for the doorâ€”and it is often the best people (who haven’t been laid off) who are the most capable of finding alternative work. Second, companies often lose people they didn’t want to lose.
The article tells a Dilbert-esque story of a guy who kept getting laid off and rehired (keeping his severance) by the same company, as they needed his skills. Newsweek also highlights the cost-cutting demise of Circuit City, something I wrote about in 2007, when I should have been able to predict their coming death spiral when they fired their highest-paid (and presumably, most effective) salespeople. You can always hire someone cheaper, if that’s your own goal. I wish I had directly predicted their demise back then. I won’t cheat by going back to edit the post. Anyway, it’s a pretty meaty story. I’ll invite you to check out the article and please come back to comment here for a lean-centered discussion. Does your organization have an explicit “no layoffs due to Lean” policy? What are your experiences here?