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Layoffs Can Carry Stiff Hidden Costs, So Consider the Alternatives

The definition of “succeeding” in a recession can mean something quite different for a global manufacturer struggling to remain in business, than it does for a younger and smaller firm with the flexibility to pursue market-changing strategies or products.

But for many companies, succeeding in the present environment is synonymous with survival. And a natural corporate survival instinct is to cut costs, particularly labor.

But as Wharton’s Peter Cappelli explains, the cost-cutting process, with all its permutations, is neither cut and dry, nor a cure-all.

“If we assume that a recession is a temporary decline in business driven by factors outside your control, then the goal is to cut operating costs down to the level of current demand and to do so in a way that makes it possible to scale back up as quickly as possible,” says Cappelli, a professor of human resources at Wharton. 

“Most companies fixate on the former — they focus on cutting costs and do so by laying off employees because labor costs are most of the costs in a typical operation,” notes Cappelli. “What they ignore is that it can cost a fair amount of money to lay people off – administrative costs, severance pay, possible litigation liability. And the big issue is that when business comes back, the company will often have to hire again, absorbing all the costs of hiring, training, getting new employees up to speed, etc.” 

Carefully considering alternatives to layoffs will contribute to the health of the business and to workforce cohesion, post-recovery, according to Cappelli.

“The key task is to try to figure out how to cut operating expenses and do as little damage as possible to the ability to ramp back up when business returns. One of the big skills here is being able to forecast demand, which most organizations are lousy at doing. Alternatives to layoffs, such as forced furloughs or vacations without pay, pay cuts, etc., are a good alternative to layoffs because they keep the workforce together.”

Mike Useem, director of the Center for Leadership and Change Management at Wharton, says the absolute best defense for a recession is to come in prepared for it — already lean and anticipating a protracted time of lower financial results. Company leaders can maintain organizational morale by making themselves visible, being honest about the severity of the situation, and taking steps, “To assure people that leadership is leading, not hiding in a bunker,” Useem says.

What else? “Be clear about how you make money, what the driver is of your business model,” Useem says. To some extent, that means finding the delicate balance between investing in appropriate R&D and in training for personnel, versus holding the line on costs. “I think the best out there are taking some of those steps.” He acknowledges the difficulty, though: “Sometimes you know what you want to do, but don’t have the cash to do it.”


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