To make it through a tough business cycle, layoffs should be a last resort #makerbusiness

Layoffs are one of the most powerful strings a business can pull to cull its expenditures and balance its bottom line. They are normalized as an effective and healthy response to financial troubles, whether or not those troubles are the result of temporary or long term obstacles.

..customary U.S. business practice…is to let employees go at the first sign of trouble. Boeing, for instance, regularly furloughs large numbers of people in response to the business cycle. Its response to the current pandemic? Ax 10% of the workforce. At the end of May, Forbes magazine compiled a list of companies that had cut staff as of that date. No surprise here: it goes on for page after page.

A recent article in Harvard Business Review calls this wisdom into question.

The recent “Open Letter to Business Leaders,” written by three Harvard Business School students and cosigned by 1200+ MBAs and counting, appears to ask the impossible of the Fortune 500 CEOs to whom it is addressed. “Put your employees first now,” it urges. “Retain them, re-deploy them if needed, and most importantly, pay them.”

Perhaps this is a hard demand of companies all of a sudden in this moment, but it may at the very least be beneficial to consider this as a new way to build businesses. An anecdote from the HBR article highlights why:

We were reminded of this during the fierce recession that began in 2008. One of us, Bill, was traveling on Southwest Airlines, and he complimented the gate attendant on the fact that — unlike most other major airlines — Southwest hadn’t let anybody go. “It’s no accident,” she replied. “The other airlines are loaded up in debt. They have no choices. We have more than a billion in cash, so we have all kinds of options. Would you like to see the new markets we are opening in?”

When I was young I was taught that good ethics is good business. This maxim might be more aspirational than it is universally true, but as a guiding principle it applies to dealings with customers, employees, marketing, etc. Treat employees well, they will be loyal and work hard in return. Support good causes, the community will recognize that and support you. A cynic might scoff at noble intentions, but in the end it doesn’t really matter that much — if you’re having a positive impact and doing good things only for productivity’s sake, everyone is still better off.

This Southwest anecdote is an example of what retention provides, an engaged and loyal employee. The employee is also clearly knowledgable. This knowledge is of course lost when you layoff a significant portion of staff. This is not to say that cutting staff is is always avoidable, but should be avoided if possible. What is strange about many instances of large scale layoffs is that businesses often end up rehiring for those positions. This isn’t entirely surprising when companies live and die by their quarterly earnings reports.

There is much criticism of the quarterly business cycle and valuation, and you can be sure to add this to the list: short term layoffs to boost the perception of financial health. When you cut your staff, you’re losing years of institutional and idiosyncratic business knowledge. The opportunity cost of replacing and training new staff that *you planned on rehiring anyway* is less visible than the money you save laying off a large portion of expenses (employees’ livelihoods), but it will appear further down the road. Leaving aside the human cost, this is bad business for the company and everyone that invests in it.

Large companies can take lessons from [this]. One obvious one is to maintain a strong balance sheet. If Boeing, American Airlines, and others hadn’t spent so much on pre-pandemic stock buybacks, they would have had more cash in the bank. You can’t cope with an emergency if you haven’t anticipated the possibility that an emergency will come along.

Cash is there for all kinds of things – big capital investments, stock buybacks, emergency funds, etc.  – add to this list *not* cutting necessary and seasoned workers to preserve balance sheets for a short period of time. What could be a better use of capital during a crunch?

Business leaders need to make the case for retaining staff in these situations, and analysts need to recognize this as, if nothing else, strategic. Indeed, look to private companies to lead the way here. They are much more insulated from the whims of investors and free to plan their business health for a long time horizon, and not the next earnings report. 

Read the whole article over at HBR.

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