Using layoffs as a first choice in cost saving

Dinesh WEERAKKODY

One of the biggest issues facing most of our employers today is to manage down employment costs and improve productivity in the work place.

To please boards what many top executives often do is they cut jobs because it seen to be the fastest, easiest way to manage down employment cost and increase sales per employee.

Often it's really one of the most expensive and shortsighted decisions that a management can take in the short run.

Layoffs are often done to save money. Unfortunately, cutting jobs is usually a short-term fix, detrimental to the company.

But many companies persist in using layoffs as a first choice for cutting costs simply because many companies are caught up in the powerful temptation to lay people off when companies are desperate to improve bottom line.

Calculating the savings from firing staff is easy. But my experience is figuring the real cost of a redundancy program is often very difficult.

In fact, you can't do it precisely. So many companies, rather than trying to get the costs approximately right, just assume that the cost of lay offs equal the severance costs and pay back is less than three years.

That's is very wrong, and it can get a company into big trouble.

Sometimes, of course, layoffs are unavoidable if the company is over weight at the waistline and recruitment has taken place with no proper basis.

HR Context

From a HR context, many companies now state an explicit goal of being an employer of choice in their industry. That's a lofty goal in an economy where the war for talent is a long-term necessity.

Therefore a company needs to be mindful how badly a layoff could damage the company's brand as an employer-and its ability to attract the best talent in the future? Layoffs greatly increase the chance that a company could be firing a future company leader.

Then the other concern is Morale costs. Even the survivors pay a price. They will certainly experience some grief.

They also fear the loss of their own job. Then often when companies lay off employees strictly as a cost-saving measure, investors and analysts may see the move as a sign of internal trouble-and that can send the share price down.

Also companies need to be mindful of re-hiring costs.

The day will come when business picks up, and when it does; the company will face the costs and delays of hiring and training new employees.

While the companies that have held on to their staff will be able to respond far more aggressively.

Not many companies can avoid layoffs in a downturn. Yet some manage. What do they do instead? Everyone today understands that good steward of their resources would ensure they don't need to cut jobs and many employees are ready to accommodate and support all operational excellence initiatives.

Furthermore, companies that develop a reputation of too readily off loading staff whom they until recently called the most valuable asset will suffer eventually when business improves.

While modest job cuts may be required, companies should look at amalgamating roles; halt all non-urgent recruitment and scrap roles that cannot contribute to the bottom-line.

Other options to free liquidity would be to unlock the cash tied up in the business that has poor IRR.

Companies can start by reducing inventory, stretching payables, managing facility costs, combining organizational units, have rigorous appraisal systems that differentiate high/low performers, stepping up the collection of receivables, process improvements and perhaps even postponing non-critical capital expenditure.

After all those adjustments and initiatives, if job cuts still become an absolute necessity to take out the excess people, then companies need to have a clear process that is tailored, flexible and transparent to manage the redundancies and finally strategy to manage the political fallout.

(The writer is CEO of HR Cornucopia)