Take the Road Less Traveled - alternatives to mass layoffs

HR Magazine, July, 2001 by Frank Jossi

Says Beccie C. Dawson, vice president of Sage Software Inc., in Irvine, Calif., "Layoffs show there's no company loyalty to employees, no stability and encourage the best and brightest to start looking for new jobs."

Dawson believes layoffs signal a lack of management skill and little understanding of how head counts affect the bottom line. In the software business, revenue per employee should be around $185,000 to $230,000, and Sage uses those numbers to determine precisely how many employees it should have based on quarterly sales. About 17 percent of the workforce leaves every year and, if sales decline, Dawson simply does not fill the vacated positions. The company's managers conduct performance reviews and eliminate poor performers on a routine basis, which means that the fat usually has been trimmed before a downturn occurs.

Bain's Rigby agrees with Dawson. Research suggests that layoffs work only when a company is involved in a merger or strategic repositioning, rather than as a tool to save money or increase a stock price, he says.

"Tell me that a company is implementing layoffs because they overhired, didn't anticipate an industry slowdown, didn't know what else to do and will likely announce additional layoffs, and I'll be wondering what else they haven't anticipated and why I should own any of its stock," he says.

Layoffs also affect customers--just at the time you need them the most. Customers suffer from broken relationships with departed employees, the frustration of dealing with new staff and reduced service levels, Rigby says.

And layoffs are costly. Many companies have to pay severance, accrued vacation time and potentially higher unemployment premiums, along with potential legal costs due to lawsuits, according to John Fossum, professor of HR and industrial relations at the Carlson School of Management at the University of Minnesota in Minneapolis. A company that lays off a substantial number of employees tends to lose its luster in the marketplace as a good employer, he says, which is a poor strategy in a labor market that remains tight.

Avoiding Layoffs

There are other options. As Sage Software demonstrates, simple turnover and elimination of poor performers can save costs. "On average, U.S. companies see voluntary employee turnover of 15 percent to 20 percent per year," argues Rigby. "Another 5 percent to 10 percent are probably bad fits. To me, this says that companies experiencing volume declines of less than 10 percent can probably use a combination of cost reduction, intelligent hiring, voluntary turnover and performance management to minimize the number of layoffs required."

Consider the newspaper industry, which has been particularly hard hit by an advertising slowdown and other cost pressures. At the Moline Dispatch Publishing Co., publisher of The Dispatch in Moline, Ill., HR manager Donna Herbig says the company plans to curtail overtime and to institute a hiring freeze that will leave 12 full- and part-rime positions unfilled. The overtime rule has proved to be the most difficult to enforce, at least initially, because of the flooding of the Mississippi River in April, which left the newspaper with little choice but to cover what will be one of the biggest local stories of the year.