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The Long-Term Costs Of Mass Job Cuts… And How To Avoid Them

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by Dan Adams, founder of The AIM Institute and author of “Business Builders: How to Become an Admired & Trusted Corporate Leader

The layoff news just keeps on coming. Many of the job cuts being reported are in the tech sector, but the hatchet is also hitting industries from air travel to healthcare to music. Nobody loves mass layoffs, but their increasing frequency seems to imply an alarming level of acceptability. This is a symptom of a bigger problem — the tendency of today’s corporate leaders to make decisions based on short-term thinking.

Before the ’70s, mass layoffs were rare, and for good reason. They are quite detrimental to a company’s long-term health. Corporate America needs to return to that kind of thinking.

It’s not that layoffs are always wrong. Sometimes they can’t be avoided. But before making that grave decision, leaders should factor in all the consequences — short-term and long-term. If they truly understand the costs of layoffs, they’ll try hard to avoid them.

Mass layoffs tend to be ordered by the type of leader I call “Decorators,” meaning their focus is on kowtowing to Wall Street and looking good in the quarterly financial report. Conversely, “Builder” types drive sustainable growth by delivering differentiated value to customers — which means resisting the siren song of short-term cost controls like layoffs.

It goes without saying that layoffs take a devastating toll on the laid-off. Studies show they suffer 83 percent higher odds of a new health condition, twice the level of depression, four times the risk of substance abuse, and up to three times the risk of suicide. But how do layoffs hurt companies?

Here are three major consequences:

1. Innovation plummets.

A study shows that the number of new inventions post-layoff fell by 24 percent. Why is this so bad? Because companies that don’t focus on delivering superior differentiated value to customers are forced to compete on price — which leads to the dreaded “commodity death spiral.”

2. Remaining employees morph into “nervous sheep.”

When they see coworkers laid off, they lose trust and confidence. Rather than thinking like owners and innovators, they fixate on their personal security, plunging down Maslow’s hierarchy into survival mode. Not surprisingly, one study found employees retained after a layoff experience a 20 percent drop in job performance and a 36 percent decline in organizational commitment.

3. Talent retention takes a huge hit… and so does your brand.

Research shows that downsizing a workforce by just 1 percent leads to a 31 percent increase in voluntary turnover the next year. Obviously, this is terrible for your company, and not just in terms of the costs of recruiting and retraining. The blow to your reputation reverberates well into the future.

Talent matters now more than ever. The damage done in a layoff is so devastating to employees that you will likely never get them back, plus they will say negative things about the company.

Bottom line? Sidestep the mass layoff option if you can. But if you can’t — and again, Adams knows sometimes it has to happen — it’s time to take a hard look in the mirror. What can you change so you won’t find yourself in this position in the future?

A few tips for avoiding layoffs:

4. Start letting Builders (not financial types) call the shots.

Because Builders know that delivering real value to customers takes time, they’re generally averse to layoffs. They’d rather ride out periods of economic bumpiness than do something that harms growth long-term.

Builders should get out in front of financial folks and narrate their long-term growth strategy. That way, rather than being adversarial, the CFO becomes a willing partner.

2. Shift from a near-term to a long-term investor base.

Often, layoffs are a way to placate shareholders. You need patient investors who, like you, are focused on the longer-term. If quarterly earnings take a dip, these investors will understand it’s temporary. If you think finding such investors is a pipe dream, think again. They’re out there — and you can find them and persuade them to join you. As Warren Buffett said, “Companies obtain the shareholder constituency that they seek and deserve.”

3. Plan wisely for difficult economic cycles.

You know there will be ups and downs, so allow for them. Instead of over-hiring in peak times, you can outsource and engage recent retirees to handle higher demand. You can avoid high debt leverage, and instead build financial reserves. When a downturn hits, you can use it for training and other retooling so you can accelerate out of it.

4. Finally, choose “softer” alternatives over layoffs.

For instance, choose furloughs or temporary salary reductions over permanent job loss.

It’s better for top executives to take a pay cut than to ask the workforce to bear the brunt. Remember, you want to build trust, and this is a real way to put your money where your mouth is.

Ultimately, layoffs weaken companies. That goes against what he calls a leader’s “first duty,” which is leaving the company stronger than you found it.

“One leader’s decision can have irreversible outcomes for many,” he notes. “It’s not just the laid-off employees and their families who suffer; it’s everyone who works for you now and everyone who will work for you in the future. When you think about it that way, you’re more likely to exhaust every other possibility first.”


Dan Adams

Dan Adams is the founder of The AIM Institute and author of “Business Builders: How to Become an Admired & Trusted Corporate Leader“. He is a chemical engineer with a listing in the National Inventors Hall of Fame. Dan has trained tens of thousands of B2B professionals globally in the front end of innovation and works with senior executives on driving profitable, sustainable growth.

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