Russell Klosk is a Managing Director with Accenture Strategy and a globally recognized expert on the Future of Work.
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By most measures, the U.S. and global economies are strong. U.S. economic growth has been better than 2.5% each of the last three quarters and job growth, while slowing, remains strong. However, slowdowns in capital spending, C-level insecurity, over-hiring and wage pressure, particularly at the line and staff levels, have caused contractions in certain industries.
Unlike in a recession, layoffs are hitting hardest with highly skilled knowledge workers and in particular with executives, the leaders who drive results; companies aren’t cutting fat, they're cutting bone. They are doing it at a time when digitization and technologies such as generative AI are forever changing the future of work and when they truly have the ability to look at real quantitative data. So what can be learned from the past with these new tools? How can companies avoid doing irreparable harm that lasts for years against the realities of the current quarter or fiscal year?
1. Layoffs should be the last resort.
One of the primary challenges faced by first-time CEOs is what happens when the first slowdown or downturn hits. The quantitative data would tell us that, while layoffs can reduce costs and improve earnings per share, the net impact on customer trust, employee morale, engagement and productivity, as well as employer and overall brand do far more harm than good. From my experience, the damage done can take years to rectify and it only takes one round to undo decades of good work.
If a division is being shut down and skills are not transferable—or if a company is in such dire financial straits that it is unlikely to survive it—it is understandable, but the challenge of one or two basis points of profit or growth versus the long-term harm done and the lost earning opportunities over the next three years, as well as the increased costs for retention and recruiting, are far worse otherwise. Optimization can occur through voluntary attrition and buyouts; layoffs are rarely needed.
The reality is that most companies lay off the wrong people and pay for it for years; the average tenure of a CEO who conducts layoffs is 16 months.
If you kill morale, anyone with options will probably start looking; the ones who leave voluntarily in the next 12 to 18 months are the ones you need the most. There is nothing worse for productivity and morale than layoffs.
2. Understand your future workforce needs.
The tendency to overcorrect over a six- to 12-month period is real. Wall Street rewards it with near-term increases in stock price, but market share, innovation and good workforce strategy are long-term plays—as is talent strategy. CEOs must have gravitas and vision even if it sacrifices near-term stock prices.
Companies often struggle to turn business strategy into work demand forecasts. True workforce planning is a game changer on cost, sales and innovation, but few companies invest the time and cultural change to build the capability. But without this, you can’t understand what you require from your talent and layoffs become a financial exercise alone and not driven by the operational needs of the business.
3. Get good at workforce analytics.
Good talent analytics are needed to determine anyone who would be impacted. It cannot simply be who is having a bad quarter or bad year—it has to be a question of who your consistent performers are, year over year, and who has the skills you will need two, three or four years down the road.
Make decisions on who should be impacted not by “what will hurt me the least” or who is having a great year versus a bad one, but who has the skills for tomorrow. Consider those who consistently perform year in and year out—and even those softer-skilled individuals who everyone leans on, the leaders in function if not in title.
4. One size does not fit all.
The two biggest mistakes companies make in layoffs are A) making universal declarations such as “every department will cut 5%,” ignoring that business is fluid; some groups grow, some shrink, some are bets on the future, some will never grow again and overhead functions are not just purely a cost play but have real impacts on everything from innovation to culture that impacts customers and bottom line. Cut where the business is shrinking and not likely to grow again.
B) Never cut at all levels. Where is the bloat? We’re seeing executive ranks get hit hard, but not at the top where they have blown up in recent years: C-level and one down. Line executives drive sales and delivery and manage production, and in most organizations, this is less than 5% of employee headcount and it is not where the bloat is any longer. But losing them impacts everyone in the rank and file and their peers.
If you overhired and can’t absorb it, cut there. If you can’t raise prices to keep up with changing wages, get help with your retention and rewards strategy instead of making cuts. Hitting your executives sends a bad message to rank and file; it drives all sense of security from your company.
5. Know who your informal leaders are.
If someone was tagged as top talent, they must be safe. If someone is the informal leader who is the glue within a company, the person people lean on and everyone thinks of when they don’t know where else to go, protect them. Companies forget the message layoffs send and destroy their culture, and nine out of 10 companies pay for that mistake for five to 10 years after layoffs. So if you must, make sure those who really are the drivers of your culture—not those who are politically astute—are the ones who get your loyalty first.
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