The Wheatley Institution

Fellow Notes


Managing Through Layoffs: Lessons from Research

“Downsizing negatively affects employee relations. However, there are steps that can help leadership lessen the pain associated with layoffs.”

Kim S. Cameron | March 21, 2016
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Someone drives away in a cab after having been laid off from their job.



Layoffs have surged in the first quarter of this year as employers in the retail and energy sectors pulled out the pink slips. U.S.-based companies announced 75,114 planned job cuts in January, up more than 40 percent from a year ago. Wal-Mart recently announced plans to close 269 stores and expects to let go 16,000 workers. Likewise, Sports Authority will close 140 stores and lay off 3,400 employees, while Staples has closed 300 stores since 2013 with over 1,000 jobs lost. The energy sector is rapidly ratcheting down employment numbers as oil prices remain at record lows.

Unfortunately, empirical reseach on layoffs and downsizing reveals some disconcerting findings.  Most organizations deteriorate in performance as a result of layoffs.   According to Leadership IQ,[1] a leadership research and training company’s survey of over 4,000 employees in 319 companies, 74% of employees who kept their job amidst the recession report that their own productivity has declined since the layoffs and 69% of those surveyed say that the quality of their company's product or service has declined.  Other key findings found that  87% said that they are less likely to recommend their company as a good place to work; 81% said that customer service has declined.[2]

In a review of 22 studies of the effects of downsizing on financial performance (i.e., ROI, ROE, ROA, ROS), profitability deteriorated in the vast majority of firms. The negative impacts of downsizing have been observed on product quality, efficiency, creativity, innovation, firm reputation and credibility, workplace performance, and interpersonal relationships.[3]

Downsizing produces negative rather than positive results among most individuals affected.

Moreover, the effects on individual employees are no less disturbing. Personal well-being, physical and emotional health, family relationships, and personal economic factors tend to deteriorate among employees who are laid-off.  Research has shown that downsizing produces negative rather than positive results among most individuals affected.[4] In fact, when matching employment records with death certificates, it was found in two studies that job loss leads to a 15 to 20 percent increase in death rates in the subsequent 20.[5]

Despite its poor track record, downsizing remains a strategy of choice for most firms faced with excess capacity, bloated employee ranks, uncompetitive cost structures, economic downturns, and declining efficiency.  Most managers simply see no other choice available to them.  And often they are right. Many companies simply cannot remain in business with the same number of employees as in the past.

One important outcome of two decades of research on downsizing is that the way in which downsizing occurs is the single most important factor in accounting for long term success or failure. That is, managers can make a substantial difference in determining whether layoffs produce negative or positive outcomes. Here are a dozen prescriptions that have emerged from my and others’ research that can guide leaders faced with the need to manage through layoffs:

Approach

1. Approach downsizing as an opportunity for improvement rather than as merely a reaction to a threat or crisis.  Emphasize enhancements and innovations that could not have been implemented otherwise.

2. Treat employees as assets rather than as liabilities.  Invest in their development and training for the post-downsized condition.

3. Involve employees in identifying what needs to change and in implementing those changes.  Encourage idea-sharing rather than only driving downsizing from the top down.

Leadership

4. Ensure that leaders are visible, accessible, and interacting frequently with employees instead of succumbing to the temptation to avoid confrontation, pain, and discomfort. Stay available and open to employee questions and suggestions.

5. Associate downsizing with a clearly articulated vision of a desired, optimistic future for the organization, not merely as an escape from the past or as a reaction to crisis.

6. Project positive energy and initiative in order to motivate the workforce instead of adopting a defensive or paranoid perspective. Authenticity and sincerity is crucial so that positive energy is not interpreted as a sham.

Communication

7. Ensure that everyone is fully informed of the purposes of downsizing, the strategies to be pursued, the costs involved, and the time frame to be followed rather than revealing only "need to know" information and keeping sensitive information at the top. Clearly communicate fairness and equity.

8. Over-communicate as the downsizing process unfolds so that information is provided frequently, consistently, and honestly to all employees rather than allowing rumors and ambiguity to flourish. Report on the progress and processes involved in the downsizing rather than reporting only final decisions and results.

Support

9. Provide safety nets (e.g., adequate lead time, financial benefits, counseling, retraining, outplacement services, etc.) for those who leave the organization to smooth the transition to another position, rather than letting people go with only the required severance pay and advanced notice. 

10. Provide equal attention to and support for those who stay in the organization and those who leave.  Those who stay will also experience trauma and uncertainty, so devote time, training, and information to remaining employees as well as to those you must let-go.

Implementation

11. Administer downsizing equitably and fairly by ensuring that adverse impacts are not experienced unevenly by unempowered people (e.g., minorities, certain age groups) rather than implementing strategies based on power.  Make the decision transparent clear regarding who stays and who goes.

12. Before announcing layoffs, attack sources of organizational fat which often go unnoticed and unmeasured but which produce surplus costs.  This includes data fat (excess, unused information), procedure fat (excess meetings), time fat (excess response time, or wasted time), launch fat (excess new programs), and idea fat (excess, unused ideas).  Avoid targeting only the obvious headcount costs.

Layoffs and job cuts have been shown to exact unwelcomed costs from organizations, yet sometimes layoffs are inevitable.  When this is the case, manageres can mitigate the difficulties and produce positive outcomes by following some prescribed procedures.  The way layoffs occur is more important than the fact that they occur in producing positive outcomes.


[1] Leadership IQ (2015) Leadershipiq.com/blogs/leadershipiq/tagged/research.

[2] Cooper, C., Pandey, A., and Quick (Eds). Downsizing. New York: Cambridge University Press.

[3] Cameron, K.S. (1998) “Strategic organizational downsizing: An extreme case.” Research in Organizational Behavior, 20: 185-229;
McMahan, G.C., Pandey, A., and Martinson, B. (2012). To downsize human capital: A strategic human resource perspective on the disparate outcomes of downsizing. In Cooper, Pandey, & Quick (Eds). Downsizing. New York: Cambridge University Press.

[4] Cameron, K.S. (1993) "Organizational downsizing." In Huber, H. and Glick, W. (Eds.) Organizational Change and Redesign.  New York: Oxford University Press, 19-65.

[5] Sullivan, D. and Von Wachter, T. (2009). Job displacement and mortality: An analysis using administrative data. Quarterly Journal of Economics, 124: 1265-1306.