The Hidden Costs of Layoffs

Is downsizing a feasible or good option to bail out a company out of its financial problems? Companies often resort to downsizing to heal their financial woes. However, they over certain ‘Hidden Costs of Layoffs’. Here are some facts that companies need to consider before bringing out the axe.

1. The direct savings of layoffs are often wiped off by considerable indirect costs.

Layoffs usually seem to be a feasible option to cut costs in the short-term; the direct and indirect costs of downsizing can paralyze a company’s long-term revenue-generating streams. Initially for the first couple of quarters the books would depict a rosy picture, however in annual picture would be a bitter pill to bite. These indirect costs would range from losing experience sales and marketing employees who have strong relations with clients, to cost of replacement etc. This type of “binge-and-purge” tactic, common during recessionary periods, can place an organization in an unfavorable position when the recession comes to a close.

2. Your best employees might bolt after a round of cuts.

There are high chances that the top performers who have survived the axe of layoff won’t necessarily feel obligated to soldier on. Studies have confirmed that employees are far more likely to quit jobs in environments of repeated downsizing. The likelihood that an employee will quit actually increases the more layoffs he or she “survives”.

3. Layoffs don’t improve organizational performance.

The most hampering impact of a layoff is that the company would experience that their top brass who have survived the layoff would be on a lookout for better opportunity. This is the result of the lack of trust and confidence that has developed amongst them. They would prefer to sail on smooth waters then fighting the violent high seas. This would in turn have its toll on the productivity of the company. This is the prime reason why layoffs do not improve organizational performance.

4. The best types of workplaces often suffer the most.

For companies that touts themselves as receptive to the needs and personal development of its workers, layoffs can ring in more trouble. Layoffs can be perceived as a violation of the psychological contract between an organization and its employees, resulting in decreased trust and greater stress in the workplace. It would have a negative impact on the survivors of the layoff, whereby their commitment would be reduced hence having an impact on the overall productivity of the company.

5. Employee retention is linked with customer retention.

The perception of a layoff on the outsiders of the company would without doubt be negative. Convincing them that layoffs are absolutely necessary is probably impossible, since most companies that lay off employees aren’t actually in dire straits. There is a direct correlation between employee loyalty & customer loyalty. In the light of the aforementioned issues concerning the negative impact on the employees and their productivity, there is a reason to believe that customers would also have a negative perception for the company and would reconsider their ties with the company in long run.

There can be further more hidden impacts and costs of layoffs which may not be enlisted above. However, the question still remains…Is layoffs/ downsizing the best way out of a financial crisis??

Contributed By:

Mr. Param Shah

(Assistant Registrar)

Globsyn Business School - Ahmedabad