Layoffs can be bad business: 5 strategies to consider before cutting staff

Many companies are quick to reduce headcount when economic headwinds appear, but they risk weakening their businesses. A case study by Sandra Sucher explores the hidden costs of layoffs

By Ben Rand

Published: Oct 12, 2023 02:53:49 PM IST

Updated: Oct 12, 2023 03:01:05 PM IST

Sometimes layoffs are necessary, and the costs of not acting can be catastrophic. Image: Shutterstock

The pattern has become painfully predictable in recent years: As the economy shows signs of a slowdown, companies hand out layoff notices to stabilize profitability and calm investor fears.

That cycle seems to be in place in the post-pandemic business world, as historic spikes in inflation and corresponding increases in interest rates prompt fears of a recession. Indeed, a recent Harvard Business School case study details how four tech giants laid off almost 40,000 workers between November 2022 and March 2023. But an accompanying research note parsing the layoffs for lessons shows it doesn’t have to be this way.

Layoffs are an example of “hope triumphing over science,” says Sandra Sucher, the MBA Class of 1966 Professor of Management Practice at HBS, who wrote both pieces of research. She points to study after study that show that layoffs have hidden costs that make companies less profitable, innovative, and productive.

Senior leaders may be saying, “If companies I know and admire are doing this, it can’t be that bad, or else they wouldn’t do it,” Sucher says. “But there are lots of orthodoxies that can be challenged, and this is one.”

Sometimes layoffs are necessary, and the costs of not acting can be catastrophic, Sucher acknowledges. But, she says, there are right and wrong ways to approach workforce change. Done smart, responding to headwinds can strengthen the organization long term, says Sucher, who collaborated with research associate Marilyn Morgan Westner on the case study and with both Westner and research associate Christopher Diak on the background note.

Sucher outlines five strategies for companies that want to get workforce change right:

1. Understand your legal obligations

Globalization has opened new opportunities and markets for businesses, but it has also brought new complexities. Countries have different legal requirements for layoffs in areas such as required severance pay, advance notice to employees, and engaging with labor unions. Some countries even require approvals from local governments.

Labor law differences also exist between states, and even those sometimes conflict with federal law. A management team that fails to factor these differences into planned layoffs, assuming that US practices are commonplace, is sure to face turbulence, Sucher says.

“There’s a tendency to think that our rules, or any way that we interpret the law, is universal,” she says. “It’s just not true.”

Also read: Why "copycat" layoffs won't help tech companies — or their employees

2. Reduce costs without cutting people

Layoffs can be effective in certain circumstances, such as a merger or acquisition. But relying on them as a response to more temporary economic shifts, such as recession, often proves less successful, Sucher says.

In those instances, companies should consider cutting operational costs without cutting staff, through measures such as reducing inventories, payables, and supply chain costs. Labor expenses can be contained with hiring freezes, wage freezes, furloughs, and early retirement programs, as well as limiting overtime. Companies can also suspend certain benefit payments, such as 401(k) matching contributions.

“These are some of those commonsense things that may not occur to people because they are thinking with their labor hats on and not their general business hat,” Sucher says.

3. Develop a fair process

Sometimes layoffs are unavoidable. In such situations, companies can mitigate the hidden costs if executives develop specific policies to follow in downsizing and make everyone aware of the company’s approach and its commitment to acting fairly for all involved, Sucher writes.

“Doing so requires identifying your commitments to employees and asking the fundamental questions: What exactly does a company owe its employees? How will they be engaged in designing, communicating, and carrying out workplace change programs? What is the policy on severance pay, and how are decisions to be shared?” Sucher says.

Sucher cites Michelin as a company that has thought deeply about its relationship and obligations to employees. The French industrial giant, she says, sees the job offer as the beginning of a long-term relationship focused on mutual growth.

Michelin vows “to restructure during good times, rather than bad times,” Sucher says, “because they want to ensure they have the financial resources to take care of people properly.”

Also read: Flood of layoffs, dropping job volumes and changing work trends: Troubles in lives of Indian IT workers

4. Apologize—and mean it

Poorly run layoff programs can be tremendously damaging to a company’s reputation. If current and downsized employees feel they were treated shabbily, word will travel.

Company executives are often reluctant to take responsibility for the strategic mistakes that led to the downsizing. But that’s now showing signs of change.

For example, Patrick Collison, the chief executive of payments company Stripe, blamed himself and his management team for a recent set of layoffs. “We’re very sorry to be taking this step,” he said in an email to employees, “and John and I are fully responsible.”

While an apology may seem of little consequence to laid-off employees, it can help restore trust between surviving employees and prospective future employees. Sucher notes that an apology “builds a bridge” between the company and its stakeholders.

5. Invest in laid-off employees

Companies can reinforce the bridge by committing to help downsized employees get back on their feet. Many organizations address this through severance pay, but increasingly, severance pay packages include other valuable items to help a downsized employee, including non-wage benefits such as health care, job placement, immigration support, and vesting of stock options.

Nokia, the telecommunications company, has taken a far-reaching approach in its downsizing philosophy. The company, Sucher says, offers five different options to help employees get a fresh start, including grants to help downsized employees start new businesses or pursue non-profit work.

In the end, Sucher says, companies must understand the hidden costs of downsizing and the full slate of options for responding. In a way, it’s almost a necessity in an ultra-competitive future, she says, because “a layoff is a lousy way to take care of business.”

This article was provided with permission from Harvard Business School Working Knowledge.