If I told you that you could save a third of the gas you use by cutting of one-third of your engine, you'd look at me like I was nuts. But if I said you could save a third of your employee costs by laying off a third of the employees, well, that might sound smart. The difference is you can see the adverse impact of cutting up your engine; the adverse impact of a layoff is not only difficult to calculate, it largely takes years to fully manifest.
If someone had told Carly Fiorina that the reason she won't win the U.S. Senate seat in Congress is because she did a lot of layoffs as CEO of Hewlett-Packard, I'll bet she wouldn't have done them. Layoffs are typically done for the wrong reasons and to please financial analysts who couldn't spell "strategic" if their lives depended on it. Those analysts are focused on quarterly results and, unfortunately, they force that same focus on chief executives. All you have to do is look at Sun to see the truth of this.
Layoffs Are Like Bad Chemotherapy
Layoffs are the massive reduction of a work force in the face of a financial threat. The employees did not cause the threat, the layoffs are not designed to directly address the cause of the threat, and the impact of the layoffs is impossible to fully calculate. Like chemotherapy, layoffs do a substantial amount of damage in hopes that they will allow the company to survive. However, if the cause of the problem isn't addressed, they are used repetitively and often the patient, or in this case, company, doesn't survive.
Chemotherapy is supposed to concentrate on only the cancer cells. Layoffs aren't done that way for two reasons: Bad employees aren't the cause of the problem, and review programs typically don't do a good job of identifying bad employees anyway.
If I were to tell you that you had cancer and weren't producing enough red blood cells, would you take a knife and cut off large portions of your body so the blood cells you did produce were more adequate for what is left? Of course not because you would be destroying parts that are actually producing red blood cells and you'd die more quickly. Yet that is exactly how layoffs generally work.
Unless a company has lots of people getting paid to sit around and do nothing, each person laid off provides some function needed to maintain the income level of the company. It could be directly, as in a salesperson or manufacturing job or it could be indirectly, such as a marketing, service, middle-management or executive job, but that person generally is doing something of some value to the company.
Now have you ever seen someone actually try to calculate this before a layoff? Think for a minute: How are people typically selected? By review, against some metric they are ranked against other employees. The top-ranked stay; the bottom-ranked leave. What if you did that same assessment on your body: How much do you really need your nose, ears, four of your fingers, toes, and seriously, is sex that important?
Rankings are largely subjective and don't take into account the health of the team. They also don't take into account informal relationships between groups, executives, customers or the inherent value of the knowledge the employee has. And people certainly aren't ranked according to their real value to the company. How would you even calculate that?
When "Dead Wood" Isn't Dead
There is an old story about an efficiency expert that came in to look at one of the big steel companies. He saw a guy sitting at a desk doing nothing and smartly said to one of the richest men in the world that he could save money by firing that dead wood. The executive replied that the "dead wood" came up with an idea that saved the company a million dollars and was worth keeping on board just in case he came up with another one.
Bill Gates has said that one of the biggest mistakes that Microsoft made was giving options because key people took them and left. Why then would you ever institute a process that would get rid of people in bulk?
Both Gates and Steve Jobs don't even have college degrees and likely would be laid off at their own companies if they didn't run them because the lack of a college education typically would rank them lower than peers. Hell, Jobs got fired, right? How'd that work out? Layoffs are firings en masse.
Layoffs Are Too Easy
What makes layoffs attractive is that they are relatively easy. Unless you have a lot of employment contracts or a strong union, it is vastly easier to tell people to go home than to close plant sites, get rid of equipment or eliminate perks (particularly executive perks). And going to the heart of the problem, which is typically poor revenue performance, that is really difficult.
The other thing that makes layoffs easy is you don't have to feel for the people. Getting rid of one person is tough, particularly if you know him or her, but with a layoff, you can numb yourself. It isn't your fault as a manager; you are simply following orders and the top executive just sees numbers and will protect the people he or she knows and likes. It's comparatively painless against actually doing the hard work of individual people management. But it's still hard not to look at a layoff as a betrayal.
Wrapping Up: Layoffs Are Slow Company Killers
I used to call them the last resort of incompetent executives, but that's not really true is it? There is a reason to use layoffs effectively and that is by a new turnaround CEO in order to get the firm's attention and to build a team that is loyal and a company that can be managed. Otherwise, it is simply an executive going for short-term benefits by making a decision that has severe and largely unknown costs. Perhaps the best argument against layoffs is they are a betrayal of the trust between employees and management. Trust is so hard to build and shouldn't be sacrificed so easily.
Layoffs give key resources to competitors, break relationships with customers, make the firm sicker and only adversely affect revenues (which is typically the problem the executive is trying to fix). They are speed over quality, they are surgery with a chain saw, and they are generally done because others do them and without enough questioning.
Granted top executives can spike their income by doing them. We just saw an entire industry (banking) make decisions designed to spike executive income and look how wonderfully that turned out. Oh, and by the way, if the problem is too many underperforming employees, might the problem be grading on the curve, poorly trained management or bad metrics? Don't you think it might be better to find out before chopping off parts of the company en masse? Like chemotherapy, layoffs have a place. But they should be done only as an extreme measure to save a failing company and even then done right. They shouldn't be done just to make the income statement look more attractive to financial analysts whose own industry has demonstrated such poor judgment of late.
It's something to think about.