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Layoffs
Cost More Than You Think
Cutting
jobs may seem the fastest, easiest way to manage in a recession.
But it's really one of the most expensive.
By
Geoff Colvin
April 8, 2009
As Warren Buffett likes to say, "It's
better to be approximately right than precisely wrong."
Every CEO should remember those words when confronting the
powerful temptation to lay people off.
 When
you're desperate to save money, calculating the savings from
firing staff is easy. But figuring the costs—the real
costs—is hard. In fact, you can't do it precisely. So
a lot of managers, rather than trying to get the costs approximately
right, just assume that they equal the severance costs. That's
being precisely wrong, as Buffett would say, and it can get
a company in trouble.
Sometimes,
of course, layoffs are unavoidable. But before you pull the
trigger, consider their true price:
Brand
equity costs
Hundreds of companies
now state an explicit goal of being an "employer of choice"
in their industry or locale. That's a worthy goal in an economy
where the war for talent is a long-term fact of life. How
badly will a layoff damage your company's brand as an employer—and
its ability to attract the best talent?
Top law firms compete
ferociously for the best new lawyers, yet many of those firms
are laying people off. New York-based Simpson Thacher &
Bartlett figured this was the moment to offer associates a
chance to take a year off to work on a public service project
and get paid $60,000 plus benefits—less than half their
normal pay but a lot better than nothing. And it makes the
firm much more attractive to the next crop of law school graduates.
Leadership
costs
Layoffs greatly
increase the chance that you're firing a future company leader.
You may never know whom, but the effect is still real. The
banking and electric-utility businesses went through severe
cutbacks in the 1980s, and executives in both industries have
told me that they paid a heavy price 20 years later when they
needed experienced, knowledgeable leaders and found only a
broad empty space in the ranks.
Morale
costs
Even the survivors
pay a price. They "will certainly experience some grief.
They also fear the loss of their own job," says leadership
consultant Wally Bock. Sometimes the effects are worse. Workers
who remain after a layoff file dramatically more medical claims,
reports a study by Cigna and the American Management Association.
Wall
Street costs
Don't count on
a layoff announcement to make your stock go up. It might,
if you're laying off people because you're combining two companies
in a merger, says Bain & Co. But if you're laying off
employees strictly as a cost-cutting measure, Wall Street
may see the move as a sign of trouble—and send your
stock down.
Rehiring
costs
The day will come
when the economy turns up, and when it does, you'll face the
costs and delays of hiring and training new employees. Companies
that have held on to their workers will be able to respond
far more quickly. Northwest Airlines learned that lesson when
it fired hundreds of pilots during tough times in 2007. When
business picked up later that year, it had to cancel hundreds
of flights because it didn't have enough pilots. The airline
scheduled its remaining pilots too aggressively, and at the
end of each month many of them had used up their permissible
flight hours. The company had to speed up its recall and retraining
of laid-off pilots.
Not many companies
will avoid layoffs in a recession as bad as this one. Yet
some manage. What do they do instead? Toyota continues to
pay people but uses the time for training, education, and
public service projects. The city of Atlanta recently cut
hours and pay by 10%. FedEx has imposed graduated pay cuts—less
for front-line workers, more for managers.
Then there's Aflac,
which has never had a layoff in its 54 years of existence.
Janet Baker, senior VP of corporate learning, told me how
that record fuels a virtuous circle: "Everyone understands
that we've never had a layoff and is a good steward of our
resources to make sure we don't have one."
How much
is that worth? How much do layoffs really cost? Just remember
that it's a lot—even if you never know precisely.
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