With the economic recovery finally beginning to show signs of life, companies around the country are preparing or already starting to increase the pace of hiring in an effort to meet increased demand.
However, some companies may find themselves unable to take full advantage of a re-energized economy and burgeoning opportunities because of short-sighted downsizing strategies employed during the economy’s descent.
Workforce reductions have become an unfortunate component of the business landscape. The most recent recession was the worst since the Great Depression. Announced job cuts in 2008 and 2009 totaled nearly 2.5 million, according to planned layoffs tracked by our firm. Private sector payrolls shrank by nearly 8.9 million jobs from February 2008 through February 2010, according to data from the Bureau of Labor Statistics. That is more than the approximately 7 million jobs combined lost in the previous three recessions (1981-82, 1990-91 and 2001).
The speed with which the housing market collapsed, and the subsequent financial-sector collapse, forced many companies to make quick and sometimes uncalculated workforce decisions. In this environment, it is very likely that they made one or more of the cardinal errors of downsizing: cutting too many workers, cutting the wrong workers and, after the cuts were completed, neglecting the workers left to carry the load.
As the economy regains strength, the consequences of these downsizing mistakes may already be materializing, as evidenced by reports of skill shortages in certain regions and industries.
The economy has a long way to go before reaching pre-recession levels, but there have been improvements in recent months on several fronts. In a survey last month of leading economists by The Associated Press, the consensus was that, despite rising gas prices, the economy is improving faster than expected and that unemployment could fall to 8 percent by early November.
Now, imagine a company in a low-unemployment area that announced layoffs during the recession. As the economy continues to rebound, this company could have a difficult time finding local talent. And, with a still-depressed housing market and millions of homeowners underwater, it might not be easy to find out-of-town talent willing to relocate.
Within a year or two, it could be difficult for any company to find skilled workers, regardless of their downsizing strategies. Those that committed the aforementioned mistakes as the recession took hold could suffer more than those that took more calculated measures.
In a perfect world, companies would never need to lay off workers. Unfortunately, downsizing has become a permanent part of the business landscape, whether it is in response to fundamental shifts in an industry, changes in technology or downturns in demand. However, sometimes the urgency to reduce payrolls, stemming from internal and external pressure to cut costs, can lead a company to eliminate too many workers.
The negative consequences are numerous, including a decline in customer service, the inability to meet existing and/or future demand and higher turnover among surviving workers.
When business conditions improve, companies are no longer able to simply “call back” laid-off workers. They will have to spend time and money to recruit, hire and train new people. Companies that delay the rehiring process in light of these challenges will only further strain the existing workforce, resulting in lower productivity.
The other downsizing mistake is laying off the wrong workers, such as high performers and those who have unique skills or institutional knowledge. These individuals are particularly difficult to replace once the economy recovers, as they are in high demand. Older workers, often enticed to leave in a mass exodus by generous early retirement packages, possess invaluable corporate memory that is vital to grooming future leaders.
While deciding how many and which workers will be affected by a reduction in force is important, it is equally important not to lose sight of the challenges faced by those who survive the downsizing. According to a 2009 survey of human resources executives by our firm, 54 percent consider employee engagement the biggest challenge that companies face after job-cut announcements. The next biggest challenge, selected by 23 percent of respondents, was easing anxiety over the possibility of additional layoffs.
Companies that focus solely on output will create a workforce that is motivated by fear of job loss instead of by loyalty and pride. That may work for the remainder of the downturn, but as soon as the recovery begins, the company will undoubtedly experience heavy turnover.
Employers cannot simply tell workers to “do more with less.” There must be a back-and-forth dialogue to address employees’ concerns and fears. They must be an active part of the problem-solving process.
In the end, downsizing mistakes are made by companies that do not take the time to fully understand the problems they think job cuts will solve. They see profits falling by a certain percentage and conclude that labor costs must be cut by a certain percentage.
However, as many companies discover too late, this quest for short-term gains in the bottom line often comes at the expense of long-term sustainability and future growth opportunities.
John A. Challenger is chief executive officer of global outplacement firm Challenger, Gray & Christmas Inc. of Chicago, which pioneered employment transition counseling as an employer-paid benefit in the 1960s.
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