Good morning!
Let’s start the day by debunking a common myth: Job cuts are a surefire way to help cure a company’s financial woes. While a popular theory, the data suggests otherwise, writes Fortune’s Geoff Colvin in a piece this week. Mass layoffs can actually come with some hefty hidden costs.
Layoffs might seem like a quick and effective short-term solution—especially in an economic downturn—but experts say they have long-term implications. “Research shows that the anticipated benefits are often a mirage, while the costs are much greater than leaders realize,” writes Geoff. The setbacks often stretch far beyond the finances.
One of the greatest losses is historical knowledge. When employees exit a company, valued institutional and role-related knowledge leaves with them and is challenging to regain. Because of this, and many other factors, research finds that layoffs can hurt a company’s overall performance, with productivity plummeting during and after job cuts. And even when companies refill those roles, it takes a great deal of time and money to recruit, onboard, and train employees before they become productive contributors to an organization.
Layoffs can also throw a wrench in succession planning, obliterating the leadership pipeline. Geoff points to the recessions that marked the 1980s when banks laid off swaths of junior employees. Twenty years later, many HR chiefs struggled to find experienced executives to take over for the retiring cohort of leaders.
Here’s an excerpt from Geoff on why it pays to pause before pulling the layoff lever:
“To be sure, layoffs may be unavoidable in a sudden, severe economic shock—say, a once-a-century global pandemic. But even in extreme cases, business leaders might want to consider whether a layoff is truly unavoidable. A few major companies have refused to make mass dismissals for 70 years or more, including during the pandemic, and have thrived. Toyota avoided laying off employees in the 2008-2009 recession, even as General Motors, Ford Motors, and Chrysler dismissed tens of thousands. Lincoln Electric, a major Ohio-based maker of welding equipment with factories worldwide, hasn’t laid off employees in at least 75 years; its stock was recently near an all-time high.
Layoffs are alluring in difficult times and when the next quarter’s earnings are in peril. But that may be the short-term trap. As more CEOs consider downsizing their workforce, it would behoove them to question whether, in the big picture, the long-term case against layoffs is more persuasive.”
Amber Burton
amber.burton@fortune.com
@amberbburton
