Layoffs are bad for service firms

Service firms have used layoffs with greater frequency. But, shouldn't people-oriented businesses exercise even more care in using this 'management tool'? Newsweek has a great cover story that kicks off this discussion.
Written by Brian Sommer, Contributor on

Layoffs - A poor 'management science' overused by poor managers

This week’s issue of Newsweek has a must-read cover story. It’s titled “Layoffs are bad for business” by Jeffrey Pfeffer. Except for situations where businesses are facing permanent structural changes to their industry or company, layoffs are often the result of poor management, poor management planning or knee-jerk allegiance to short-term earnings to appease Wall Street expectations.

The Newsweek article starts off by telling this one instructional vignette. It tells how Southwest Airlines chooses not to layoff employees post-9/11. Turns out, they were the only major carrier who didn’t and now they are the largest domestic carrier with a stock valuation in excess of all other carriers combined. Mr. Pheffer then adds a remark made to him by the former HR head at Southwest: “If people are your most important assets, why would you get rid of them?” Service firms often tell me that their people and their reputation are their most important assets. But, the numbers of service professionals laid off tells me that service companies don't think much of jettisoning their 'assets' and they don't seem to see a connection between their layoffs and their reputation.

Today, I was on a call with colleague Dave Hofferberth of SPI Research and he related to me the story of how a service firm he tracks made cuts for the recession and now faces a conundrum. They made the cuts to maintain (and actually improve) the margins expected of them by Wall Street. Now, as business is picking up, they have too much work and too few employees. Their problem today is that they don’t want to hire new employees as these people will not be as chargeable in the near-term as they come up to speed. That lack of chargeability will depress margins in the short-term. But, if these people aren’t hired, then the current staff complement will start to revolt under the overly burdensome workload.

I’ve heard the same story at another firm, too.

Years ago, in my early consulting days, my employer would shift resources from one economically challenged market (i.e., a region, an industry, a country) to another where work was more abundant. Yes, that meant the consultancy took a bit of a hit in added travel costs for the out-of-town workers but these temporary market movements were not going to impact the long-term success of the firm.

I was in an office at the time that was reeling from a major dropoff in work to the energy sector. About 40% of my colleagues were re-deployed to projects in the Northeast and Midwest. About 18-24 months later, the price of oil recovered and business was booming in our neck of the woods. Our office got its people back with a lot of side benefits:

- no re-training or learning curve costs were incurred as these people never left the firm - morale was great – People appreciated having the out-of-town opportunity as it meant no disruption in their career - returning staff possessed ever more skills and had higher billing rates upon their return

I saw this cycle repeat itself several times. I, as an employee, took comfort in the knowledge that my career was secure as there would always be some demand for my skills somewhere in the firm’s global operations.

That feeling, though, went away in the mid-1990s when the company’s newer leaders terminated several pyramids of professional staff in the Northeast. In management’s review of the industry requirements of that part of the country, they felt that a ‘correction’ was needed to better balance demand with supply. The affected personnel, generally, were not offered opportunities in other offices. They weren’t sent to other projects in other parts of the firm. They were laid off.

The morale in the firm fell that day and, in my opinion, never fully recovered. That first layoff decision reminded everyone that:

- They really didn’t have careers. They were workers who would remain employed as long as the company had localized demand for them.

- The company is now making short-term labor and earnings decisions. The company was no longer concerned about optimizing for long-term results. Staff were no longer long-term assets of the firm but short-term costs of doing business.

- The company had begun its pre-occupation with always exceeding its quarter-to-quarter financial operating guidance.

While Valentine’s Day is coming, I’m not writing this as I’ve got an overly romantic or out-dated view of worker/employer loyalty. I’m writing this because too many employers do layoffs without considering:

- whether this is a short-term blip in business conditions or a permanent correction. If you’re a Detroit-based automobile supplier, I understand your need to downsize your firm as your market has massively contracted. But, if it is a short-term blip, would your firm be better served with something other than layoffs? Would a few mandatory days off work better? Should workers be re-deployed to other locations/tasks?

- how they will ramp up again when market conditions improve. Once you fire workers (or shutter a plant), it’s pretty hard to get back that ‘old magic’ again. If an employer laid me off, I don’t think I’d return. If I did return, I’d never consider my relationship with my employer to ever be the same. Once the trust is gone, can it ever be restored?

The Newsweek article goes on to dismiss a lot of myths around layoffs. Much of these contradict the prevailing ‘wisdom’ of modern management theory. Read this article to the end and you’ll see a lot of this wisdom corrected.

One of those pieces of wisdom that Pfeffer discusses is the myth that layoffs often boost stock prices. It apparently isn’t true. My theories as to why this is false are that:

- Short sellers in the stock market do a lot of work to assess the current status of a company, its sales, etc. A layoff announcement probably just confirms what they already know – this company is in trouble. They’re already shorting the stock and the stock price will head south as soon as the layoffs are announced.

- Damaged firms use layoffs, a lot, as they ‘restructure’, ‘downsize’, ‘rightsize’, etc. Because they are already damaged, stock buyers/sellers are not bidding up the price until they see some signs of a positive turnaround. Layoffs are a sign of continued problems not upside. Without evidence of an upside, the price will, at best, languish or fall further.

- Post-layoff, the company’s employees are going to be overworked and not engaged with the company. Many of the best and brightest will have bolted for better run companies. Now, what you have left is a company with poor management, a sub-stellar, de-motivated workforce and declining prospects. Yeah – I’ll short that stock, too.

Bottom line: I think layoffs are generally the tool of weak management. Again, if the company is in real trouble or its markets have fundamentally changed, layoffs are acceptable but how many people today were cut loose by failing companies versus companies who couldn’t see beyond the next few quarters. Layoffs rarely are the fault of the people who got let go. They are often the fault of management.

If you’ve been laid off and are looking for a new gig, evaluate your next prospective employer with an eye to how they view employees. Will you be an asset of the company or a variable cost? If it’s the latter, run. They don’t deserve you.

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