Grinding through without layoffs

Much of the discussion on this blog has focused on trust, and specifically, building workplaces where trust and respect and reciprocity help engineer employee loyalty and facilitate creativity. Nothing tests trust in a workplace more completely than hard times. The latest numbers are alarming: America lost 600,000 jobs in the month of January. In the past year the country has lost 3.6 million jobs. Some of these job losses were a result of firms closing their doors, but many of these are layoffs. Mark Zando from Moody's reports: “Businesses are panicked and fighting for survival and slashing their payrolls."
Where do layoffs get you? Gordon Medlock, who teaches in the Graham School's Human Capital Management program offers the following set of observations.
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There are several studies that suggest that layoffs during times of economic crisis are negatively correlated with return of customers during the upswing and increase in shareholder (stock price) value. One of the clearest is the analysis of Southwest Airlines' no layoff policy and its responses to the airline industry crisis after 9/11. In a study comparing all the airlines during that period – “layoffs negatively predicted recovery of [a company’s] passenger traffic with 99% certainty, and negatively predicted recovery of its stock price with 95% certainty” (from The Southwest Airlines Way, by Jody Hoffer Gittell, published in 2003). In other words, the more employees you laid off, the longer it took for customers to return and for your stock price to recover.

Another (less rigorous) study by John Dorfman, a money manager and author of the article “Job Cuts Often Fail to Bolster Stocks,” reported that companies that announced job cuts during the period form 1996-1997 underperformed comparable companies from the S&P 500 by a difference of 0.4% growth versus 29.3%. Of course there could be other factors besides the job cuts to account for that difference, but it suggest that companies that, for whatever reasons, feel the need to make those cuts, are also the companies that are not doing as well as their competitors.

The key point in all of this, however, is that you can’t simply implement a no-layoff policy if it is not part of your long term strategy. Companies that have no-layoff policies, such as Toyota and Southwest and FedEx, all have business plans that enable them to retain valued employees during economic downturns. They include strategies related to retention of cash resources, lean organizations, gradual growth, long term strategy perspectives, continuous improvement strategies, and a commitment to valuing their people. If a company is not committed to these values and strategies – and the comparison between General Motors and Toyota is an excellent case in point – then it will be much more likely to use layoffs to cut costs.

Finally, there is a lot of research on the connection between employee engagement (the willingness to apply discretionary effort to achieve results on the job) and the financial success of an organization. It is well documented that layoffs adversely affect employee engagement, morale, trust, and productivity.