Are layoffs killing, rather than saving, our companies?

When the Great Recession hit, layoffs were the go-to strategy for most companies. They cut works left and right in an effort to increase efficiency, and dump long-term liabilities Newsweek is running an interesting article summarizing a series of studies on the effects of layoffs on companies, and the results are interesting. For the most part, layoffs lead to less productivity and less profitability for companies.

Layoffs don't even reliably cut costs. That's because when a layoff is announced, several things happen. First, people head for the door—and it is often the best people (who haven't been laid off) who are the most capable of finding alternative work. Second, companies often lose people they didn't want to lose. I had a friend who worked in senior management for a large insurance company. When the company decided to downsize in the face of growing competition in financial services, he took the package—only to be told by the CEO that the company really didn't want to lose him. So, he was "rehired" even as he retained his severance. A few years later, the same thing happened again. One survey by the American Management Association (AMA) revealed that about one third of the companies that had laid people off subsequently rehired some of them as contractors because they still needed their skills.

Another interesting correlation often forgotten by management is that your employees are also your customers. Every employee laid off is an employee no longer able to afford your services. This can lead to a downward spiral as every lost employee cuts demand, which leads to calls for more cuts.

Clearly, we need to rethink the knee-jerk turn to layoffs when the economy goes south. I am hoping no one calls for a legislative solution here. Better it come from the managers themselves. But it may be inevitable.