A CEO explains why indiscriminate layoffs can hurt a company’s functioning and reputation

During an economic crisis, the instinct of most leaders is to hold on to the money and pay for only the most fundamental business expenses. And while cost-cutting is justifiable for most expense categories, one category should be kept out of this bucket – human capital.

The right set of people builds a company’s core, and it’s no secret that a steady foundation is needed in times of crises. Having the right team is the wild card that will help you get to the other side. But if you look at human capital as a mere cost that can be cut, it’s a rather foolish call, one that leaves the very foundation of the company shaky.

Like most businesses, Beetle Inc., a British e-commerce giant, took a hit during the 2008 downturn. The CEO, Alan, exercised a company-wide lay-off of 8,000 employees, almost impulsively. Most of the employees were handed the pink slip over a text or email. Some of the laid-off employees had been long-tenured or recently promoted. Roughly 7 per cent of its total full-time workforce was laid off, the Board initially saw it as a smart move. Little did they know that this was the beginning of the end. The lay-off massively impacted Beetle’s reputation.

Employees who were retained began discouraging potential talent from joining Beetle, citing instances where colleagues who had received high recognition and positive reviews were terminated. As the workload of the laid-off employees began shifting to the ones remaining, the productivity and efficiency at Beetle took a huge hit. The stories of those who were asked to leave enraged communities across countries, and the brand began losing customers. The emotional connect the brand had with its audience began to diminish, and consequently, stock prices began to plunge.

Lay-offs have a huge ripple effect, especially the ones which are done to achieve short-term cost cuts instead of long-term strategic change. Apart from monetary repercussions, they have a direct impact on the company’s reputation. While the measure might be necessary to a certain extent, it’s something leaders need to manage with thought, caution and empathy.

When you think about the average cost of laying off an employee, it can run into thousands. When you decide to fill the position, you have advertising and promotional spends, screening and interviewing costs, and background verification costs. When the new hire joins, you incur onboarding costs in the form of management time and training. And as the new recruit settles into the role, you incur lost productivity costs. Most organisations don’t have systems to track these exit costs which is the main reason for the mystery behind the real cost of employee turnover.

Apart from incurring actual costs, mass lay-offs take a toll on productivity and morale. Company culture suffers and the bonds built over the years are lost. To save a few pounds, Beetle Inc. let go of valuable employees who knew the company inside out, and whose combined knowledge and experience could have led the company through the crisis.

When an uncertain future is staring at us all and when the economy is on shaky ground, downsizing an overly large workforce may be necessary for some firms given the state of the economy, the responsibility towards shareholders and the pressure of maintaining high financial performance. However, it is prudent to consider how this decision will affect other systems.

It is prudent to assess your organisation’s critical roles and skills before making any workforce-related decisions. Instead of immediately laying off employees, exploring opportunities to redeploy their skills to other projects and implementing cross-training initiatives to develop employees’ versatility can enable them to take on multiple responsibilities.

Several initiatives can help in talent management strategies during a downturn, these include introducing voluntary time-off programmes which allow employees to take unpaid leave while keeping their jobs secure; focusing on reducing costs in areas that don’t directly impact talent and skills; involving employees in brainstorming cost-saving strategies; continuing to recognize and reward exceptional performance, even during tough times; implementing flexible compensation packages and prioritizing employee well-being through wellness programmes, mental health support and work-life balance.

Lay-offs are expensive, and their effects are profound and long-lasting. Keep in mind the return on investment and spillover benefits of investing in your human capital when you consider how to spend your resources. Coach your workforce to improve their skills and prepare for the market trends that will emerge as the market heads towards an upturn. Recessions are not permanent. With an adaptable, flexible and resilient staff, you not only fortify your organisation to survive the downturn but also position it to start off strong and thrive in the recovery.

Excerpted with permission from Doing Business in Uncertain Times, Ramesh Nair, Penguin India.