Managing Through Layoffs: Lessons from Research
Thursday, May 14, 2020
Author: Kim Cameron
This blog is a part of our series: Working Together to Go Through Hard Times
Layoffs have surged as a result of the current coronavirus pandemic. Millions of jobs have been lost, and furloughs are the rule of the day in a large majority of organizations worldwide.
Unfortunately, empirical research on layoffs and downsizing reports disconcerting findings. Most organizations deteriorate in performance as a result of layoffs. According to Leadership IQ, 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 declined since the layoffs and 69% of those surveyed say that the quality of their company's product or service declined. Other key findings found that 87% said that they were less likely to recommend their company as a good place to work; 81% said that customer service declined (also Cooper, Pandey, & Quick, 2012).
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 as a result of the layoffs, which was more important in the long term than the external economic conditions. The negative impacts of downsizing have been observed on product quality, efficiency, creativity, innovation, firm reputation and credibility, workplace performance, and interpersonal relationships (see Camereon, 1998; McMahan, Pandey, & Martinson, 2012).
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 laid-off employees. Research has shown that downsizing produced negative rather than positive results among most individuals affected (Cameron, 1993). 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 years (see Sullivan & Von Wachter, 2009).
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. 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 disappointment. 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 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.
- Treat employees as assets rather than as liabilities. Invest in their development and training for the post-downsized condition.
- Involve employees in identifying what needs to change and in implementing those changes. Encourage idea sharing rather than driving downsizing only from the top down.
- 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.
- 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.
- 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.
- 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.
- 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.
- Provide safety nets (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 minimum advanced notice.
- 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 let-go.
- 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 criteria used in the decision transparent and clear regarding who stays and who goes.
- Before announcing layoffs, attack sources of organizational inefficiency which often go unnoticed and unmeasured but which produce surplus costs. This includes data inefficiency (excess, unused information), procedure inefficiency (excess meetings), time inefficiency (excess response time, or wasted time), launch inefficiency (excess new programs), and idea inefficiency (excess, unused ideas). Make the obvious headcount costs a priority only after a fine gained analysis of inefficiencies.
Layoffs and job cuts have been shown to exact unwelcomed costs from organizations, yet sometimes, as in the current crisis, layoffs are inevitable. When this is the case, managers can mitigate the difficulties and produce positive outcomes over the long run by following some prescribed procedures. The way layoffs occur is more important than the fact that they occur in producing long-term positive outcomes.
- Cameron, K.S. (1993) "Organizational downsizing." In Huber, H. and Glick, W. (Eds.) Organizational Change and Redesign. New York: Oxford University Press, 19-65.
- Cameron, K.S. (1998) “Strategic organizational downsizing: An extreme case.” Research in Organizational Behavior, 20: 185-229.
- Cooper, C., Pandey, A., and Quick (Eds). Downsizing. New York: Cambridge University Press.
- Data, D.K., Guthrie, J.P., Basuil, D., and Landey, A. (2010). Causes and effects of employee downsizing: A review and synthesis. Journal of Management,16: 281-348.
- Leadership IQ (2015) Leadershipiq.com/blogs/leadershipiq/tagged/research.
- 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.
- Sullivan, D. and Von Wachter, T. (2009). Job displacement and mortality: An analysis using administrative data. Quarterly Journal of Economics, 124: 1265-1306.
Kim S. Cameron is a Co-Founder and Core Faculty of Center for Positive Organizations. He is also a William Russell Kelly Professor Emeritus of Business Administration; Professor Emeritus of Higher Education at University of Michigan.
Cameron’s research has been identified as among the top 10 social science scholars in the world in being downloaded from Google. Reports of the work have appeared in 15 scholarly books and more than 140 academic articles. His latest books include Oxford Handbook of Positive Organizational Scholarship (Oxford University Press), Positive Leadership (Berrett Koehler), and Practicing Positive Leadership (Berrett Koehler).
"Working Together to Go Through Hard Times" is an effort from BCon to contribute in providing some insights for leaders to cope with the unprecedented situation like the current COVID-19 pandemic by reaching out to researchers and experts who has been working closely with us to share their views.
The COVID-19 pandemic has its effect far-beyond the spread of the disease itself, it is causing human, economic and social crisis. In the world full of uncertainties, where business-, social-, and political leaders are struggling, we need to, more than ever, collaboratively work together to overcome the difficulties by leveraging our strengths, experiences and expertise.
Hope the writings will be an encouragement to think and act right through the difficult time.
Find more contents around the series here.