Layoffs: Good Thing or Not?

March 1, 2002 · by Scott Simpson, FAIA

The introduction of new ideas, products and services creates opportunities for growth. At the same time—-when there is an excess of supply over demand—-markets contract, seeking equilibrium.

Everybody knows at least one thing about economics: what goes up also comes down. The fact that the marketplace is not stable-—that it thrives on change-—is actually good news, because it attests to the vitality of the economy. The introduction of new ideas, products and services creates opportunities for growth. At the same time—-when there is an excess of supply over demand—-markets contract, seeking equilibrium.

Currently the economy is still in a recession, leveling off after nearly a decade of expansion. This slowdown has been compounded by the events of September 11, which created a great deal of uncertainty in the marketplace. The good news is that, like flush times, down times don’t last forever, and sooner or later there will be an upswing. In the meantime, however, many firms are facing pressure to downsize. Anecdotal evidence suggests that staff are being cut by about 10% across the board in many firms, large and small.

What’s the best way to handle the question of layoffs? Firms with reasonable backlog may elect to hang on as long as possible in the hope that work will pick up soon enough. Retaining qualified staff can be a good strategy because talent is the core of any firm’s productivity and ability to survive long term. Without good people at the ready, recovery will be especially difficult when work picks up. In a pinch, some firms may impose salary reductions or limit working hours in order to protect their cash flow, but this can place an unfair burden on employees (especially those with fixed expenses such as mortgages).

If layoffs seem unavoidable, think before you act.You must balance the “gain” of a lower payroll against the true cost of shrinkage. Departing staff may be eligible for a severance package and accrued vacation or sick time, so you may be saving much less than you think. According to the Society for Human Resource Management, the norm for severance pay is one week’s pay for every year an employee has worked at a company, up to 26 weeks. Although, contrary to public opinion, severance pay is not mandated by law.

The staff who remain will have to pick up the slack in a pinch, so don’t overlook the possibility of overtime pay. Because junior level staff are often the first to leave (they’re the easiest targets), their work will have to be completed by more senior people with higher billing rates, which will erode your profit margins.

Then there is the eventual cost of replacing the talent when the economy picks up.Including advertising, interviewing, orientation and recruiting fees, the cost of hiring new staff can easily run 30-40% of base salary (and this has to be paid up front before they can bill productive time). Thus, the question of layoffs has more implications than first appear.

If you must cut, the best approach is to act quickly and strategically.Acting quickly is important because if you must return some of your employees to the industry-wide talent pool, it will help to give them a head start in seeking a new position. Not all firms are low on work; those who are busy will be looking for a few good people. As more layoffs occur, more people will be chasing fewer job openings, and those at the front of the queue will be in a better position to relocate.

So if you must cut, cut quickly, and make sure that you give your departed employees plenty of help. Offer to review their resumes, provide job counseling and letters of recommendation, and actively contact other firms to see if any openings are available. You might even offer to loan out staff to another office for a specified period of time.

This kind of nurturing management not only helps the departed, but reassures those who remain that you truly care about each and every individual in the firm.

As a word of warning, remember to take great care when you are forced to lay off a young staff member for financial and not performance reasons. In one situation, a talented young cad designer was laid off as part of a firm-wide reduction in force. He was brought into HR, given a folder of information and a check for two weeks of salary, along with the brief explanation, “Sorry, but things are a little slow. We’re going to have to let you go.” The young man—bright, talented and an absolute workhorse—was devastated and spiraled into a depression that had life-altering consequences.

And remember that all who leave automatically become part of your “alumni association”—they will be the ambassadors who tell the world about your firm and what it stands for, so make sure that the message is as positive as possible. Handling them the right way may even make “boomerangs” out of them—the term Gensler coined for people that return to the firm in the future.

The second key to successful layoffs is strategic implementation. Cutting staff is not just a matter of inventory control (“last in, first out”). When the market shrinks, your firm must adapt to new circumstances, and this may require reducing staff at all levels of the firm, including principals. You must be thoughtful enough to know what kinds of structural changes are needed to make sure that the firm can survive—-and thrive—-even in a slower economy.

You may have to trim infrastructure, providing less support across the board, and some people may not be able to work well under the new conditions. Is this the time for early retirement for some—-or perhaps a sabbatical? Younger staff are always a tempting target for layoffs because they are seen as expendable. But eliminating the cost of their relatively low salaries may not do much for the bottom line.

If layoffs are truly a necessity, it’s a good time to re-examine and re-engineer the entire organization. Who are the really productive people? Who has the capacity to help the firm most over the long haul? Make the changes that are needed and lay the groundwork for long-term health, including promoting and even granting pay raises to those who deserve it. This sends a loud and clear message that you intend to navigate the recession rather than just endure it.

It’s a fact of life that business cycles come and go. This does not mean that they can be ignored, but it does mean that you have to stay nimble—-in good times as well as bad. Resist the temptation to see yourself as a victim, pulling the covers over your head until the problem goes away.

Like a sailor, you cannot control the wind, but you can control the set of your sails and make the most of whatever weather comes your way. Despite the emotional and economic hardships that downsizing brings-—and make no mistake that these are considerable—-layoffs can be a good thing. They’ll force you to concentrate on your core mission. They’ll force you to prioritize your time and your talent. Most importantly, they’ll force action, enabling you to change for the better. All good firms evolve and adapt. The really smart ones find a way to improve even when the chips are down.

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