Layoffs aren’t as effective at cutting costs as you think

Let’s start the day by debunking a common myth: layoffs are a surefire way to help remedy a company’s financial woes. While a popular theory, the data suggests otherwise, writes Fortune’s Geoff Colvin in an article this week. Mass layoffs can in fact lead to considerable hidden costs.

The layoffs may seem like a quick and effective short-term fix, especially in an economic downturn, but experts say they have long-term implications. “Research shows that the expected benefits are often a mirage, while the costs are far greater than leaders realize,” Geoff writes. Setbacks often extend far beyond finances.

One of the greatest losses is historical knowledge. When employees leave a company, valuable institutional and role-related knowledge goes with them and is difficult to recover. For this reason, and many other factors, research finds that layoffs can hurt a company’s overall performance, with productivity plummeting during and after layoffs. And even when companies fulfill these roles, it takes a lot of time and money to recruit, onboard, and train employees before they become productive contributors to an organization.

Layoffs can also throw a wrench into succession planning, obliterating the leadership pipeline. Geoff talks about the recessions that marked the 1980s when banks laid off many junior employees. Twenty years later, many HR managers have struggled to find experienced executives to replace the cohort of retiring leaders.

Here is an excerpt from Geoff explaining why it pays to take a break before pulling the layoff lever:

“Certainly, layoffs may be unavoidable in the event of a sudden and severe economic shock, say, a once-in-a-century global pandemic. But even in extreme cases, business leaders might want to ask themselves if a layoff is really inevitable. A few large companies have refused to carry out mass layoffs for 70 years or more, including during the pandemic, and have thrived. Toyota avoided laying off employees during the 2008-2009 recession, even as General Motors, Ford Motors and Chrysler laid off tens of thousands. Lincoln Electric, a major Ohio-based welding equipment maker with factories around the world, hasn’t laid off employees in at least 75 years; its stock was recently near an all-time high.

Layoffs are alluring in tough times and when next quarter earnings are in jeopardy. But that may be the short-term pitfall. As more CEOs consider downsizing, it would behoove them to consider whether, overall, the long-term arguments against layoffs are more compelling.

Amber Burton

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FortuneEllen McGirt expects Black History Month to hit differently this year as leaders are forced to respond to national conversations about critical race theory, book bans and program battles.

“It reminds many business leaders that they have reached the end of an uncomfortable period of grace, a march towards a culture change marked by state violence – between when George Floyd could not breathing and begging for his mom and most recently when Tire Nichols begged for hers while being beaten to death… Hesitation over diversity commitments does not help the company’s cause,” she wrote.

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Around the table

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– U.S. job openings hit 11 million in December, defying analysts’ expectations of a shrinking labor market. ABC News

– Maryland lawmakers have proposed a bill to provide tax credits to businesses adopting a four-day work week. Initiated

– In some countries, it is illegal for employers to contact employees outside working hours, ostensibly making work-life balance the law. Washington Post

– Japanese trading house Mitsui & Co. has lifted a ban on side jobs in a bid to recruit and retain young talent. Bloomberg

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Top 10 work-life balance. Connecticut has the better work-life balance because of its high minimum wage and generous maternity leave policies, according to a new report. —Chloe Berger

Dismissal training. Companies must train managers to handle layoff conversations with care. Here is an example script to follow. —Paige McGlauflin

Alexa, do the robot. Amazon is adding around a thousand robots to its workforce every day; they could more than employees by 2030, says Cathie Wood of ARK Invest. —Prarthana Prakash

Veterans Branch. The CEOs on the All-Stars list of the World’s Most Admired Companies have one thing in common: longevity. On average, they have held their position for nearly 25% longer than the average Fortune 500 CEO. —Matt Heimer and Scott DeCarlo

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