The layoff news just keeps on coming. Many of the job cuts being reported are in the tech sector, but the hatchet is also hitting industries from air travel to healthcare to music. Nobody loves mass layoffs, but their increasing frequency seems to imply an alarming level of acceptability. This is a symptom of a bigger problem — the tendency of today’s corporate leaders to make decisions based on short-term thinking.
Before the ’70s, mass layoffs were rare, and for good reason. They are quite detrimental to a company’s long-term health. Corporate America needs to return to that kind of thinking.
It’s not that layoffs are always wrong. Sometimes they can’t be avoided. But before making that grave decision, leaders should factor in all the consequences — short-term and long-term. If they truly understand the costs of layoffs, they’ll try hard to avoid them.
Mass layoffs tend to be ordered by the type of leader I call “Decorators,” meaning their focus is on kowtowing to Wall Street and looking good in the quarterly financial report. (It’s not a compliment!) Conversely, “Builder” types drive sustainable growth by delivering differentiated value to customers — which means resisting the siren song of short-term cost controls like layoffs. (Leaders can visit areyouabusinessbuilder.com for a quick self-assessment.)
It goes without saying that layoffs take a devastating toll on the laid-off. Studies show they suffer 83% higher odds of a new health condition, twice the level of depression, four times the risk of substance abuse, and up to three times the risk of suicide (Sandra J. Sucher and Marilyn Morgan Westner, “What Companies Still Get Wrong About Layoffs,” Harvard Business Review, December 8, 2022). But how do layoffs hurt companies? Here are three major consequences:
1. Innovation plummets. My book, Business Builders: How to Become an Admired & Trusted Corporate Leader, cites a study showing that the number of new inventions post-layoff fell by 24% (Sandra J. Sucher and Shalene Gupta, “Layoffs That Don’t Break Your Company,” Harvard Business Review, May-June, 2018). Why is this so bad? Because companies that don’t focus on delivering superior differentiated value to customers are forced to compete on price — which leads to the dreaded “commodity death spiral.”
2. Remaining employees morph into “nervous sheep.” When they see co-workers laid off, they lose trust and confidence. Rather than thinking like owners and innovators, they fixate on their personal security, plunging down Maslow’s hierarchy into survival mode. Not surprisingly, one study (cited above by Sucher and Gupta) found employees retained after a layoff experience a 20% drop in job performance and a 36% decline in organizational commitment.
3. Talent retention takes a huge hit … and so does the company’s brand. Sucher and Gupta’s research shows that downsizing a workforce by just 1% leads to a 31% increase in voluntary turnover the next year. Obviously, this is terrible for a company, and not just in terms of the costs of recruiting and retraining. The blow to its reputation reverberates well into the future. Talent matters now more than ever. The damage done in a layoff is so devastating to employees that a company will likely never get them back, plus they will say negative things about the company.
Bottom line? Leaders should sidestep the mass layoff option if they can. But if they can’t — and again, I know sometimes it has to happen — it’s time to take a hard look in the mirror. What can leaders change so they won’t find themselves in this position in the future?
A few tips for avoiding layoffs:
1. Start letting Builders (not financial types) call the shots. Because Builders know that delivering real value to customers takes time, they’re generally averse to layoffs. They’d rather ride out periods of economic bumpiness than do something that harms growth long-term.
Builders should get out in front of financial folks and narrate their long-term growth strategy. That way, rather than being adversarial, the CFO becomes a willing partner.
2. Shift from a near-term to a long-term investor base. Often, layoffs are a way to placate shareholders. Leaders need patient investors who, like themselves, are focused on the longer-term. If quarterly earnings take a dip, these investors will understand it’s temporary. Finding such investors is not a pipe dream; they’re out there — and leaders can find them and persuade them to join their company. As Warren Buffett said, “Companies obtain the shareholder constituency that they seek and deserve.”
3. Plan wisely for difficult economic cycles. Of course, there will be ups and downs, so leaders should allow for them. Instead of over-hiring in peak times, an option is to outsource and engage recent retirees to handle higher demand. Businesses can avoid high debt leverage and, instead, build financial reserves. When a downturn hits, businesses can use it for training and other retooling so they can accelerate out of it.
4. Finally, choose “softer” alternatives over layoffs. For instance, choose furloughs or temporary salary reductions over permanent job loss. And it’s better for top executives to take a pay cut than to ask the workforce to bear the brunt. Remember, leaders want to build trust, and this is a real way for them to put their money where their mouth is.
Ultimately, layoffs weaken companies. That goes against what I call a leader’s “first duty,” which is leaving the company stronger than they found it.
One leader’s decision can have irreversible outcomes for many. It’s not just the laid-off employees and their families who suffer; it’s everyone who works for that business now and everyone who will work for it in the future. Those who think about it that way are more likely to exhaust every other possibility first.
Dan Adams is the founder of The AIM Institute and author of the books Business Builders and New Product Blueprinting, as well as the blog Awkward Realities and video series B2B Organic Growth. He is a chemical engineer with a listing in the National Inventors Hall of Fame. Adams has trained tens of thousands of B2B professionals globally in the front end of innovation and works with senior executives on driving profitable, sustainable growth.
Business Builders: How to Become an Admired & Trusted Corporate Leader (The AIM Institute, 2023, ISBN: 979-8-854-42618-3, $19.95) is available at bookstores nationwide and from major online booksellers.
