Harvard Business Publishing

Carol Hymowitz interviewed me for a recent Wall Street Journal column, titled "Though Now Routine, Bosses Still Stumble During the Layoff Process." The interview sparked my curiosity, and I went back and read research on "downsizing," a topic I've been interested in since I did my dissertation research on the process of organizational death in the 1980s. In doing so, some persistent themes — and one interesting twist — jumped out. For the next three weeks, I'll be examining what I've learned about whether layoffs are necessary and how best to proceed when they are.

Although workforce reduction persists at a fairly high rate (especially involuntary staff reductions), the evidence that these practices actually help improve organizational performance is weak. Jeff Pfeffer and I reviewed every careful study we could find for our book on evidence-based management. We found studies showing that layoffs had no significant effects on performance. We found studies showing that layoffs had negative effects on performance. But we couldn't find any studies showing that — after controlling for other factors — layoffs improved long-term financial performance.

One of the main insights from this research is that managers often focus too much on the immediate savings in labor costs from layoffs, but not enough on the long-term HR costs and on more subtle negative consequences. Consider a Bain & Company study on "Debunking Layoff Myths" that examined S&P 500 firms during 2000 and 2001. Bain found that it often takes companies 12 to 18 months before the financial benefits of layoffs kick in, because of severance costs and more effects including the negative effects on "survivor" productivity. But by the time the savings start to take effect, the economy and company often begin to rebound, so many companies are then forced to spend large sums hiring a new batch of employees. What kind of people do they bring in? Often, it's people who have skills much like those who were sent packing during the job cuts. Bain concludes that, especially in knowledge-intensive businesses, "binge and purge" employment practices are rarely a wise way to control labor costs. The HR costs associated with hiring replacements can be high, and there are other effects such as the loss of firm-specific knowledge, reduced ability to recruit the best new employees, and damage to the motivation of survivors. Indeed, there is evidence from other research that the best employees jump ship after layoffs.

As the Bain researchers acknowledge, there are times when layoffs are unavoidable. But in those cases, too many organizations go about them in unnecessarily distressing ways. Jeff Pfeffer and I, after reviewing the best and worst ways to implement distressing organizational changes (including layoffs, plant closings, and mergers) found that four guidelines are essential. I'll present them next week.

HARVARD BUSINESS ONLINE RECOMMENDS:
Managing Change Collection
The Decision to Trust (HBR Article)
The Heart of Change Field Guide: Tools and Tactics for Leading Change in Your Organization (Paperback)