Talent Hoarding – Can Reduce The Huge Hidden Costs Of Layoffs (A surgical approach for identifying those to be released)

Shareholders should be outraged when their execs use broad layoffs, which have a painfully low ROI. In fact, along with M&A actions, a large-scale layoff may have the most disruptive business impacts of all talent actions. So as an alternative, I recommend a “gradual and surgical release” alternative approach, which can reduce labor costs without disrupting workforce productivity.

You might not be surprised to learn that some already see it as silly. When companies purposely release large numbers of hard-fought over, trained talent that you might not be able to replace when you need them again? Unfortunately, the use of broad layoffs is widespread. Partly because most executives are unaware that the salary savings from each laid-off employee (the actual process goal) won’t likely even cover the large severance and outplacement costs for each released worker. Executives are often uninformed about the many negative costly impacts that occur as a result of being short-staffed after a large-scale layoff. This sudden disruption will directly impact team productivity, retention, and morale. Finally, when calculating the “real total costs” of layoffs. Be sure to include the fact that the actual layoff announcement alone will likely damage your external employer brand image for years. And exacerbate your already record-breaking retention problems among the remaining employees. 

The Process Won’t Improve Until Executives Know The Hidden Costs Of Traditional Broad Layoffs 

In almost all cases, you are likely to release too many and the wrong employees. Work with the COO and CFO in order to calculate the actual total cost of a traditional broad layoff. The frequently under-calculated layoff costs that must be included in a compelling business case are listed below.

  • Business impact costs – it’s naïve if you fail to realize that to start off, your productivity and product development will suffer during this period of turmoil. In addition, your customers will certainly notice, and many will become concerned. And that may cause your competitors to double their efforts to take away those customers. Realize that the layoff process negatively impacts revenue-generating and revenue impact jobs, and your organization’s overall revenue will suffer. Next, large-scale layoffs will also increase your unemployment insurance costs. Remember to calculate the wasted employee development costs that walked out the door with your released employees. In addition, the costs of the many lost ideas and secrets that your departing employees may take with them to a competitor firm.
  • Widespread disruption is costly – it’s not even a slight exaggeration to say that large-scale layoffs are highly disruptive and divisive in many ways. They obviously increase the anxiety among both survivors and those that are to be released. And that will lower productivity. However, the largest of all costs will likely occur when widespread regrouping is required, when the job duties must now be redistributed among the now smaller team. And with fewer workers to do the same work, you can also expect an increase in another current employee issue, worker burnout.
  • Retention costs among survivors – retention issues will become larger when recruiters at your competitors begin to target you immediately after they learn about your layoffs. In addition, just conducting large-scale layoffs will likely make “your surviving employees” worry about why they (as opposed to other colleagues) were allowed to stay. These survivors will also likely immediately begin forwarding about the likelihood of future layoffs. These remaining employees will also be concerned because their workload will increase, and there won’t be budget for any new innovation. Your remaining employees may also leave because their released colleagues that find new jobs may urge them to accompany them to their new firm. And your remote and global workers will also be more likely to leave if the company’s releasing process makes them feel even more isolated. Taken together, these concerns will likely make most remaining workers rethink whether they want to stay. And, of course, don’t forget the costs of losing diverse employees that you fought so hard to recruit and retain.
  • Rehiring costs – because external hiring is much more expensive than internal movement. Your salary costs may actually increase over time when you eventually hire replacements. You should also add to your hiring cost calculations hiring managers’ time and recruiting costs. Also, calculate expensive risks and costs associated with a higher candidate rejection rate, hiring a subpar replacement, hiring a replacement that is more expensive, or not being able to find a replacement at all. Also, calculate the costs of your new-hire failure rate, their low initial productivity, and the onboarding/training costs of each new hire. Finally, realize that your recruiting function will likely also have been gutted. You might find that your company won’t have the recruiting power necessary to hire top talent into a company that is viewed as being unstable.
  • Costs to your recruiting image – the announcement of large-scale layoffs by itself will directly hurt your employer brand image and future recruiting. And if the layoff experience was negative, it will likely show up on social media and discourage applicants. Also, when the layoff is handled poorly, this bad taste will make released employees even more reluctant to return.
  • The costs of increased union activity – if you currently have a nonunion environment. Beware that in today’s climate, where unions are expanding into new industries and companies. Your remaining workers may strive to reduce the pain of future layoffs by supporting a union.
  • The costs of a diluted culture – it may not be a big deal if you don’t pride yourself on having a strong culture. However, if the layoff includes employees that are active in maintaining your corporate culture. Your culture will immediately begin to degrade. And it will take another hit once again when you hire a large number of replacements (who are not advocates of your culture) further down the road. 
  • It may even hurt your share price – the mishandling of a large-scale layoff at a major firm will almost always garner negative publicity. And that, unfortunately, may directly reduce your share price and anger your shareholders.

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Begin With These Prioritization Steps 

The word “surgical” in the title of my alternative approach suggests that decisions on what should be prioritized as “a keeper” can be surgically targeted. However. that is only possible if a precise, objective, data-driven process is utilized. So here are the 5 surgical prioritization steps under this gradual/surgical program. 

1) Don’t begin with rigid targets

It’s a mistake to adhere to a fixed target percentage of the workforce that is to be released. Or to a precise dollar of salary savings target. These targets must be flexible if labor costs are to be reduced while you simultaneously maintain your workforce capabilities and current productivity levels. 

2) Prioritize your business units

Obviously, the jobs and the individual employees in your company’s highest priority business units and teams should be given first priority. Based on the growth rates, product and customer impacts, revenue generation, and profit margins of the business unit.

3) Prioritize these positions

The next step is to implement an objective, data-driven position prioritization process. Where all positions are prioritized, and then the lowest priority jobs are targeted for reductions. I recommend that you prioritize your jobs based on the following factors. 

  • Jobs that have already been designated as mission-critical.
  • Jobs with a high revenue or product impact.
  • Jobs that are hard to fill, so that you can’t quickly replace them with fully trained staff during a future difficult recruiting market. 
  • Jobs where there is an extremely high dollar cost when a serious error occurs.
  • Positions that have historically been exempt from hiring freezes. 
  • Jobs where there is only a single employee in this job within a business unit. 

4) Prioritize these employees 

An objective process must be used in order to prioritize which individual employees will be kept. Assign the highest “keeper priority” to your employees that are identified using the following factors. 

  • Employees that are proven innovators.
  • Employees that are top-performers.
  • Employees that are the primary contact with a key customer or strategic partner.
  • Employees with critical current and future skills (including diversity).
  • Employees that successfully coach and mentor others.
  • Employees that act as informal leaders on high-priority teams. 
  • Employees on the succession plan or that are in your leadership development program 
  • Employees that have the capability of doing multiple important jobs and to act as a backfill. 
  • Employees that are designated as “keepers” (a Netflix approach) because their manager is willing to fight to keep them.

5) Don’t use these factors for prioritizing “keepers”

In most cases, the following factors should not be used in prioritization. 

  • You should never use politics, friendships, or even compassion as a basis for prioritization.
  • Employees should not be given a high priority solely because of their seniority, their job level, or the amount of pay that they receive.
  • Low performers, quiet quitters, and toxic employees should be the first to be released. 
  • Jobs that will likely be replaced by technology should receive a low keeper priority.

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Additional Key Features Of The Gradual And Strategic Release Program

If you choose to implement this alternative to mass layoffs, here is a list of the key program features that you should consider.

  • Include a slow-release capability – a primary goal of this alternative approach is to slow the release of talent until it’s absolutely necessary. So instead of having to release a large amount of talent all at once. Realize that you can release talent gradually. Transfer your best-performing “not a keeper” employees from permanent employee status to short-term employment contracts. They can be gradually and painlessly released near the time when your company actually experiences a business downturn in the upcoming months. Or they can easily be made “permanent” once again after this employment flexibility is no longer needed.
  • Renew your commitment to a contingent, flexible workforce – in our volatile VUCA times. Executives must take actions to maintain a highly flexible, agile workforce where talent can be easily and cheaply added or released when your needs change. That means, in most cases, making sure that at least one-third of your company’s work is done by contingent, outsourced workers or technology. It also means that your managers must have the courage to actually meet this contingent work target percentage in their team.
  • Maximize internal redeployment – in many cases, the company doesn’t really have too many employees. They are merely working in the wrong job. So in the case where high-performing employees may not be needed in their current job. If they learn quickly, rather than releasing them. They should instead be redeployed internally using proactive intra-placement. 
  • Provide hiring flexibility – an across-the-board hiring freeze will damage growing business units. So consider an alternative where key priority positions are still filled. But in most cases, they have hired only under a contract-to-permanent hiring agreement. During this time of limited hiring, all recruiters should focus exclusively on hiring the very best performers that were foolishly laid off by your top competitors. Then you can capture both the ideas and the best practices of your competitors.
  • Allow reasonable overtime – if overtime costs remain an issue, you can still require approvals for all overtime. However, overtime should still be used to ensure continuing productivity without the need to hire new employees.
  • Avoid other freezes – avoid any misguided freezes on salary increases, transfers, and promotions. They may have the unintended consequence of increasing the turnover rate among your very best keeper-employees who can easily move to another firm in order to get more money or a promotion.
  • Reduced employee buyouts – you must avoid the most damaging feature of most layoff programs: voluntary buyouts and early retirements. The very best can (and will) quickly take this option. And walk out with a pile of money and almost immediately go to a competitor.
  • Utilize post-exit interviews – because data shows that employees are much less honest and forthcoming when interviewed on their day of departure. Require post-exit interviews for those released employees that you might like to return. These are telephone exit interviews that are delayed by at least one month. They can better reveal the strengths and the weaknesses of your layoff process.
  • Maintain contact with the best – among your released employees. You should also identify those that perform well and have critical skills. So that you can keep in touch with them because you might like them to return. So during their exit interview, ask them to keep in touch by joining your online talent community. Where you can let them know about jobs that they might qualify for. 
  • Make the release process transparent – help to minimize the uncertainty and anxiety that often is associated with releasing talent. Widely communicate the details of your process and which jobs have been prioritized. Also, include an HR hotline where individual questions can be answered.
  • Closely monitor business growth projections – your workforce planning team must work closely with corporate strategic planning. So that the volume of your releases can be adjusted whenever business growth rates change.

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If you can only do one thing – commit to becoming a champion of more beneficial and less costly layoffs. Start by conducting thorough research on the best practices, common costs, and problems associated with the past layoff processes in your industry. Then work with your CFO’s office in order to obtain at least a rough estimate of the tremendous business impacts in dollars that were caused by your previous layoff process.

Final Thoughts

There are three basic goals of any strategic workforce reduction effort. They are 1) maintaining the talent needed for productivity/innovation. 2) being able to rapidly increase or decrease labor costs and 3) gaining a competitive advantage by maintaining your talent capabilities during these turbulent times. So if you read this article closely, you will now realize that most traditional corporate processes have failed to meet any of those goals. And HR routinely fails to provide quantitative metrics on how effective your layoff turned out to be. I predict that if your CEO becomes fully aware of the millions of dollars of significant hidden costs associated with weak layoffs. Their head will literally spin.

Author’s Note 

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About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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