The Downside of Downsizing


By alanhill, 16 March, 2012

The Financial Mail reported that banking giant ABSA may be planning to cut 3000 jobs as a result of its business reorganization initiative. The bank has not made an official announcement, but rumours already abound, and employees are concerned about job losses. ABSA has expressed concern that staff costs have increased by 9%, while other costs grew by just 6%. Staff costs account for around 54% of the total expenses.

Cutting expenses seems to make sense in tough times, but while cutting staff costs appears to be the quick and easy solution; it is not always the best option in the long run. There are undoubtedly very sound reasons to retrench staff. The industry may be shrinking; market size may be changing; changes in technology may require fewer employees etc. However, many layoffs are the result of attempts to cut overall expenses, increase profitability, boost the share price and become the “lean, mean business machine”.

According to an article in Newsweek (February 2010), layoffs often fail to achieve those objectives. Research by the University of Colorado lists the direct costs of retrenchments as being:

• Severance pay
• Paying out accrued leave
• Outplacement costs (if any)
• The cost of rehiring employees when business improves
• We can add the potential costs of arbitrations and Labour Court cases

The hidden and indirect costs are often more damaging:

• Low morale (of the survivors)
• Risk averse behaviour of survivors
• The fall out of litigation (also read reputational damage)
• Sabotage
• Violence
• Loss of institutional memory and knowledge
• Diminished trust in management
• Reduced productivity

Contrary to popular belief, companies that retrench staff do not enjoy higher share prices than their peers. In fact retrenchment announcements often had a negative effect on share price. Layoffs also do not increase individual company productivity. A Wharton University study showed that while labour costs per employee decreased under downsizing, sales per employee also decreases.

Another popular myth is that layoffs increase profits (otherwise why do it?). A study of 122 companies found that downsizing reduced profitability – especially in research intensive industries.

When retrenchments are announced, good people (who can find alternative employment) often head for the door first. So the company loses people it really did not want to lose. Retrenchments also increase fear and lower morale in the workplace. That carries hidden costs for a very long time to come. When the economy improves, these are often the staff who look to leave the company because they are disillusioned (as a result of the retrenchments).

Retrenchments often weaken a company and have huge implications at a personal level. That is why the Labour Relations Act places so much emphasis on consultation and negotiation. It is, after all, a “no fault” dismissal. Having sat through many retrenchments, I still find the process difficult and emotional. Nobody likes retrenching (I hope). Some employers, however, use the opportunity to “get rid of dead wood” – a particularly dangerous practice that will come back to bite you.

I think the message is – always look for alternatives to retrenchment. Engage employees in looking for solutions in an open, honest and transparent dialogue. Expect anger and negativity – peoples lives are at stake. And if it has to be done, make sure you have professional advice every step of the way. Lastly, don’t think it’s over when it’s over. The ripples take a long time to settle. Management, and HR particularly, have a huge job ahead to ensure that employee engagement and morale improves.