Why Layoffs Should be Avoided

Rob Enderle

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.

Add Comment      Leave a comment on this blog post
Nov 9, 2009 8:37 AM a. asdf a. asdf  says:

--"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."

No I wouldn't.


Actually, it's more like 20% fuel savings on half an engine.

On the subject of layoffs, I think companies should be hiring in downturns. You can find get more qualified people cheaply and be prepared for the uptick in the economy. It's like buying stocks at the bottom.

Nov 9, 2009 9:59 AM Rob Enderle Rob Enderle  says: in response to a. asdf

Agree, labor is cheap and you can get some really talented and greatful employees as the moment. That, however, would be thinking strategically. 

On the engine, took them a long while to get that right.  Recall the first time GM tried this it didn't go that well. 

Nov 13, 2009 5:16 AM Raj Menon Raj Menon  says:

Firstly, I am glad you did not use the word "resources" through out your post. Why is it important? I just published my new post called "Agile Lessons #1: Humanize Your Team" http://tinyurl.com/yfadcm3 and my radars are still on that subject.

Your message is very strong and well written. Most of the same reasons you point out apply for "forced resignations" and other forms of attrition as well. My philosophy has been "fire the leader, before you fire the team" coz I do believe that "people leave leaders first before they leave the company". So, if financial benefits may be the justification for layoffs, a management-level layoff may be more strategic and beneficial to consider before getting rid off the easy-to-remove, hard working team members. 

Does that make sense? Or am I totally off topic. I hope not. Anyway good post and analogies. Thanks.

Nov 13, 2009 5:19 AM Rob Enderle Rob Enderle  says: in response to Raj Menon

No you are on topic and I agree.   Layoffs destroy teams, if there is a problem with execution that problem typically starts with the leadership and, therefore, the solution should start there as well. 

Nov 16, 2009 5:54 AM Rob Enderle Rob Enderle  says: in response to Margaret Dawson

Agreed this isn't tech only, its a trend I'd like to see stopped.  Thanks for the comment!

Nov 16, 2009 12:26 PM Margaret Dawson Margaret Dawson  says:

So true. Thanks, Rob, for pointing out what should be obvious. I don't think it's just tech that has fallen victim to this "strategy", but we unfortunately lead the way sometimes. That's not to say there aren't companies with fat to trim, but, typically, that fat is not what is cut.

Nov 17, 2009 2:48 AM Cynthia Sexton Cynthia Sexton  says:

Right on target and well said!! If only this post was required reading for executives...As I recall, America was built into one of the greatest nations in the world by teams working together to accomplish a clearly stated goal. Many executives like to use the word "team", but most don't really understand what it means, since they're typically too busy playing politics to ensure their own individual agendas. Once upon a time (was it really that long ago?), Management By Walking Around ensured that employees were seen and heard without filters, and managers kept their jobs, in part, because of the quality of the work and the loyalty they inspired. Many execs are afraid to walk the floors now, or consider their time too important to waste by seeing what's happening at the ivory tower's foundation. These days it seems that employees are considered as costs, not the assets they truly are. Reality check -find a successful company, and you're sure to find employees who feel valued, appreciated, and heard. Most people I know would take a lower salary just to have those three things in their career.If a sports team continually fails, the coaches are the focus of change, right? So heads up Senior Execs. I challenge you to start walking around and listening to your assets. You might actually learn how to improve the company, the bottom line, or at least improve your own performance. Otherwise, the next time the Board discusses layoffs, they might (should) be thinking about how many new workers YOUR salary will cover...

Nov 17, 2009 12:39 PM Amarto Chakrabarty Amarto Chakrabarty  says:

Excellently written, and pointed out well. The problem is that nobody is droolling over the actual problem to solve it but only escaping the problem without strategically thinking about its after effects.


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