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Wednesday, February 17, 2010

Why are lay-offs so harmful?

Many thanks to Mark Graban that pointed me to a very interesting News Week article titled “Lay Off the Layoffs - Our over reliance on downsizing is killing workers, the economy - and even the bottom line”, by Dr. Jeffrey Pfeffer. The article speaks to the fact that lay-offs in fact do not save a company money, not in the long run nor in the short term. In fact it may have even more detrimental affects on a company than you may realize. The article states with reference to empirical evidence that
“…contrary to popular belief, companies that announce layoffs do not enjoy higher stock prices than peers—either immediately or over time.”
It is an interesting read for everybody, obviously for them that have been laid-off but also for the people doing the lay offs.

I think that the story behind the story is once again the topic of management and leadership. I strongly believe that in any situation it is always about people. That means that it is the people (managers) and their way of running a company that is the root-cause here. I have said before that you manage processes but you have to lead people. When you just manage people then they become an assets and when hard times are upon us, cutting costs by reducing your capital makes sense – right? Well no – isn’t that obvious - Apparently not?
“In the face of management actions that signal that companies don't value employees, virtually every human-resource consulting firm reports high levels of employee disengagement and distrust of management.”
“Layoffs are more like bloodletting, weakening the entire organism. That's because of the vicious cycle that typically unfolds. A company cuts people. Customer service, innovation, and productivity fall in the face of a smaller and demoralized workforce. The company loses more ground, does more layoffs, and the cycle continues.”
This reminds me of one of Dr. Demmings most commonly used quotes:
"Running a company on visible figures alone is one of the seven deadly diseases of management."
In this case it is financial metrics. It seems that in a recession most management executives are thinking of short term financial metrics rather than the long term health of their company? I am sure that these managers do not intend to do this and that they probably believe that they are doing the right thing. However it is this focus on managing rather than leading that is the problem. Managing the company’s business (The process) is more important than leading the people (organization). The end of the quarter's bottom line is more important than long term viability. Although this seem to be common practice, there is ample proof of companies that thrive by doing differently. Yes, by simply motivating and empowering their people. That is what makes them great companies, and also immensely profitable I may add

We are driven by this need to satisfy investors, whom I may add are also typically about short term gain. It seems that everything revolves around the need to make money now - the typical sales man approach, which is to pick up the closest shiniest pennies rather than to look ahead and possibly see a pot of gold on the horizon. Even if there is not one there at least you looked, and people appreciate that – do not underestimate what that means?


J. Solenberg said...

Speaking from the vantagepoint of the "blood" that has been "let" several times in the past few years, it's good to see that someone actually understands the damage layoffs can do. I love the Demming quote!

Anonymous said...

Short term thinking is a big part of the problem. A focus on managing numbers instead of the more difficult systemic issues to grasp is another big reason. Just cut people, look at the data I reduced my personnel costs by $x see I am taking action.

We need much better management than that.

Unknown said...

Well said. It's apparent that Dr. Demming and Peter Drucker saw the importance of leadership. No doubt that managing the metrics is essential, but those results are a product of the employees. Corporate leaders (and Boards of Directors) need to focus on the longer-term and not worry so much about short-term results, irrespective how that impacts their personal financial gains. Thanks for the post.