By February 17, 2010 7 Comments Read More →

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 economy—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 life—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.

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 door—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?


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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

7 Comments on "Great Newsweek Cover Story on Why Layoffs Are Harmful"

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  1. Bryan says:

    From a financial viewpoint, people are the only appreciating asset we have. Everything else in the business depreciates with time. Why we treat people worse than our equipment is a puzzle yet to be solved.

  2. Jefferson Martin/synfluent
    Twitter:
    says:

    Early in my career (the dark ages of the mid ‘seventies) my first job was at a company supplying fire suppression materials to underground coal mines.

    Only a few days into the experience, the mines nearby were idled for economic reasons laying off thousands of workers. Our company, though, had a policy of hiring and retaining the best workers for the long term and no one was given furlough.

    While the miners waited out the three month downturn with little more than subsistence benefits, we shifted to re-fitting the plant with new tools; scrubbing the floors; repainting, and just about any maintenance that could be brought forward- and, for regular pay.

    This policy must have been painful to the owner during the downturns but when we re-started ops we hit the ground running. The mines, on the other hand, took almost a month to carry out repairs to reach their readiness for work, and were staffed by some fairly angry people.

    People should be cared for like machines. Apply a heavy dose of ‘preventative maintenance’ to insure that we are able to perform when called upon to do so.
    .-= Jefferson Martin/synfluent ´s last blog ..Purpose and Paradigm Shifts =-.

  3. Mark Welch says:

    The Newsweek article could have another title – “Greed Kills.” It’s something how so much of this comes down to leadership and core values, and actually living those values.

  4. Thanks for sharing this. You beat me to the punch. I actually have the article sitting in front of me on my “to read and possibly blog about” pile. But I haven’t gotten to it yet.

    While I don’t subscribe to the theory that you can NEVER do a layoff (such as an industry where seasonal demand lasts 6 weeks and spikes your volume of work 2 fold), I think people need to carefully consider why, how, and when the “layoff lever” gets pulled. First, as you point out in the Circuit City example, you can’t cut your way to prosperity (side note: they actually had a continuous improvement department with lean people in it, but it lacked sponsorship and leadership). Second, you must education the organization as to understanding economics of this industry, which actually helps them understand the customer better. Third, if absolutely necessary, then just do it. Don’t dribble it out one person at a time. Don’t continue grabbing every free resource available and putting them into the street.

    I’ve never met an organization that has all the resources they need to do everything they ever wanted to. Put people to good use. I remember an organization I was benchmarking 15 years ago that took the best front-line team members at continuous improvement and put them together as a full-time complex problem solving team. When the front line ran out of ideas to solve a problem, they called in these guys. And they won national awards for some of their projects. There is always something better you can invest those available resources into.

    Jamie
    .-= Jamie Flinchbaugh ´s last blog ..The Fall of the Mighty Toyota =-.

  5. Mark Graban
    Twitter:
    says:

    Jamie – I agree with you and Professor Pfeffer that sometimes layoffs are truly necessary if it comes down to saving the company. If you’re the proverbial buggy whip maker, you can’t just keep people on forever. But, by not quickly jumping to layoffs as the first “cost cutting” strategy (especially if you expect production/sales to rebound), companies would benefit in the long-term.

  6. Dave Hagan says:

    I finished reading “Toyota Culture” by Liker and Hoseus a while back. An interesting read about investing in people. If you haven’t gotten to that book yet I recommend it highly.

    I work in construction where Lean is just gaining a foothold. As you probably know the industry is leading the country in unemployment rates when compared to other industries. The traditional construction cycle of hire, layoff, and re-hire is very entrenched. Keep in mind that this is a business where sales can double and then be halved again in relatively short time spans, making layoffs necessary – to a point. Today, the companies that are keeping their best people (and finding productive if nontraditional work for them) will undoubtedly sprint across the starting line when the economy begins to recover.

    Here’s a question for you – do layoffs serve the customer? I say “yes”, but only if the company’s survival depends on such drastic action. The answer is more often “no” – layoffs do not serve the customer! Time and money spent severing and re-creating employee relationships can be better allocated to improving service, improving efficiency, and investing in the future.

  7. Mark Graban
    Twitter:
    says:

    Dave – thanks for the comment. Do layoffs serve the customer if it guarantees the company’s survival? Only if the customer would have no other alternatives, I’d say.

    If hire-fire-rehire adds costs and harms quality, that’s not good for the customer.

    A business where production doubles/halves/doubles — that’s tough. Toyota, remember, purposefully level loads production (“heijunka”) even when their sales aren’t level, so they can avoid hire-fire-rehire. Toyota *does* use temporary staff, so there’s some hire-fire-rehire, but not with core production associates and permanent employees.

    The the boom/bust of housing, maybe that same ideal can’t be met.

    Thanks for reading.

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