Why don't companies apply more risk analysis to layoff decisions?

Before swinging the budget axe, companies need to apply the same analytics they apply to other critical decisions, such as supply chain management

A few weeks back, we discussed the potential brain drain of talent away from North American shores. Just as threatening to growth and innovation is the potential brain drain from organizations: companies that made deep cuts in their workforces over the past two years risk driving away the talent they need to move ahead in the coming economic growth phase.

As reported last month, a Forbes-SAP study of 200 large companies shows leading executives are concerned that all the cutting that took place over the past year has hobbled their future growth prospects.

Amazingly, while many companies are increasingly basing their key decisions on analytics and data, when it comes to layoffs, they still tend to rely on gut thinking. Peter Cappelli, a management professor at University of Pennsylvania's Wharton School, says the risks are not only in brain drain, but also in increased litigation over the choices made during the economic downturn.

He cites a survey he saw in which two-thirds of companies engaged in layoffs were not involving their human resources managers in the decisions. "That is amazing," he relates. "If you thought your human resource people are not good enough to give you answers to those questions, you should find some who are. But if you are not asking those questions, you are doing something wrong. You might as well just be flipping coins."

These knee-jerk cuts run against the grain of everything businesses have been working toward in recent times. "It's kind of amazing the extent to which companies are very sophisticated in supply chain analysis and thinking about how they buy parts and how they sell products, but when it comes to these people issues, they are just kind of going with their gut most of the time," Cappelli says.

Before swinging the budget axe, companies need to apply the same analytics they apply to other critical decisions, Cappelli continues. Consider an "array of options. It is not as simple as, 'do we layoff or not?'  There are lots of ways to think about the problem."

Consider the costs and benefits of layoffs, Capelli urges. "Ask a lot of 'why' questions. 'Why are we doing it? Is this the best way to cut if we have to cut costs? And what are the consequences of those costs?'"

Additional questions that need to be asked include: "What are the costs of cutting people? What do we think the benefits are? How long out will it go? And once we do it, what is our plan once business picks up? How long will that take? Will we be able to get people like this back? What are the effects on the people inside?"

Downsizing has earned the nickname "dumbsizing" for good reason. Workforce cuts are often necessary business decisions, but simply cutting 10% across the board without regard to the long-term mix of skills and employee motivation needed to move forward may be counter-productive. Who will be there to guide the business as new opportunities pick up again?

This post was originally published on Smartplanet.com


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