Layoffs Raise Many Problems for Tech Companies
One of the most documented issues is that mass layoffs often leave companies worse off financially than they were. For example, between the summers of 2000 and 2001, Bain & Company studied layoffs at S&P 500 companies. A bulk came from the tech sector, with telecom, computers, semiconductor equipment, office electronics, and electronics accounting for at least 44 percent of the layoffs. The findings ran counter to what many executives believe:- Just over 25 percent of the companies announced layoffs — certainly a significant portion, but far from a universal reaction.
- The best performing stocks were for companies that did the fewest layoffs. Companies that laid off between 3 and 10 percent of employees had, on average, flat share prices. Those that laid off more than 10 percent saw shares drop by 38 percent.
- Adjusted for sales growth rates, companies that don’t downsize outperformed those that did.
- Unless positions can be eliminated for long enough — at least six to 12 months, and possibly as long as 18 months for knowledge-based businesses — there is no financial payback to the company because it typically has to hire replacement workers as conditions are getting better.
The overall lesson that Bain drew was as follows:
The lesson from all this is that job losses can produce greater costs than benefits. A company will face severance costs, outplacement costs, damaged trust and credibility, and loss of knowledge from skilled workers who leave. Big job cuts can also affect the employees who stay. Declining morale means lower productivity — many will spend time looking for new jobs. Employees will tend to be less innovative, and less willing to take bold steps to solve problems.
There was, apparently, a difference when taking the reason for the layoffs into account. Simply cutting costs was an overall losing approach. But companies that laid workers off as part of consolidation after a merger saw an improvement in stock price.
That’s just one indication of the potential dangerous effects of layoffs. A 2003 study from the Institute of Behavioral Science found that employees who even indirectly experience layoffs — seeing co-workers being laid off – “reported poorer mental and physical health as compared to those without layoff contact.” Even worse in terms of health outcomes and job attitudes were those who directly experienced layoffs, not just losing a job, but being shifted to “different positions and areas in the organization.” As anyone who has been in management knows poorer attitudes and health mean more sick days, poorer work quality, and greater inefficiency, all of which directly cost money and add indirect expense through impaired retention and recruitment.
In the last couple of weeks, we’ve seen other ways that layoffs can come back to bite a company. One is the direct negative publicity that can accompany the action. After Microsoft announced its layoffs, Senator Chuck Grassley of Iowa wrote to say that keeping U.S. citizens in jobs over foreign workers on H-1B visas. Probably not the type of public scrutiny a company might want, particularly from a ranking minority member of the Finance and Judicial Committees. Can you say taxes, international trade, intellectual property, and antitrust interests?
And then there is another type of undesirable audience: former employees who hold a grudge and who have the technical knowledge to cause trouble. Look at what allegedly happened at Fannie Mae. Are high tech companies, which are laying off at a brisk, if not record, rates, really that much more attentive to security issues than a company in a regulated industry?
When sales are plummeting and the economy looks bad for at least the next two years, executives have to do something to keep their companies going. But even now may be a case where the most apparent answer is no help at all.
Erik Sherman is a freelance journalist whose work has appeared in Newsweek, the New York Times Magazine, Technology Review, the Financial Times, Chief Executive, and other publications. Follow him on Twitter.
BNET User Analysis