Effective Layoffs: Avoiding Layoffs in the First Place

Shifts in the economy are a fact of life. But managers and HR professionals are often forced into recommending layoffs during economic downturns because for months they have procrastinated and put off taking the appropriate preventative measures. As a layoff strategist, I recommend a forward-looking approach aimed at minimizing the need for layoffs in the first place. If you are the person responsible for workforce planning, here are some things you can do to prevent the need for layoffs. If no one is responsible, appoint someone and tie his or her job (and compensation) to managing headcount “fat.”

Tools For Avoiding Layoffs

The most effective ways to avoid layoffs are:

• The effective forecasting of workforce needs
• Redeployment of employees from areas of low need to areas of high need
• Maintaining a flexible workforce
• Increasing productivity and sales
• Effective performance management
• Implementing alternatives to layoffs

Smart managers learn from history and from the mistakes of others. By studying past patterns and trends, it’s possible to identify early warning signs that can help you forecast and prevent the need for layoffs.

VPs of HR need to be more proactive and less reactive in the area of forecasting and workforce planning. It’s time for HR to act more like hunters (who proactively seek out game) and less like farmers (who are reactive, and sit patiently waiting for their crops to grow). HR needs to take the lead in avoiding layoffs and in ensuring that your firm always has the right number of employees. When business revenues fall, there is a tendency to deny that there is a problem and to continue hiring and spending at the same pace. This keeps costs high. If revenues keep declining, the probability of the need for layoffs increases. As a result, it is important to monitor the growth in headcount, revenue, and sales because they are potential leading indicators of headcount fat (i.e. an excess of employees). Some of the factors to monitor include:

1. The revenue-per-employee ratio. The first step in effective workforce forecasting is to identify a ratio or “yield” model of the number of employees your company needs in order to generate a certain amount of revenue. The company starts by setting a baseline standard ($160,000 is the average benchmark in the high-tech field). During tough economic times, whenever the revenue per employee average falls below that standard for more than a month, managers must be required to take some action either to reduce headcount or to increase revenue.
2. Sales forecasts. All sales departments forecast upcoming sales revenue. HR needs to verify the past accuracy of these forecasts and use them to calculate the growth or shrinkage of the number of employees the company will need. HR databases need to be continually tied to those of the sales department.
3. Benchmark precursor competitors. Most industries have both leading and “lagging” firms. If you can identify where your firm normally fits into past layoff patterns, you can use that knowledge to identify “precursor” firms (firms that tend to have layoffs well before you do). These precursor firms can be monitored, and when the industry layoffs begin, you can use the firm as a predictor of when your company is approaching excess headcount.
4. Economic and industry forecasts. Accurate industry and economic forecasts can serve as warning signs for decreased growth. If the economy shrinks or the industry sales become stagnant, smart managers use that as a warning sign to reduce headcount growth.
5. Excess inventories. Sometimes sales forecasts are overly optimistic. When your warehouses begin overflowing, it’s a sure warning sign that production needs to be curtailed, and that you probably have excess headcount in other areas as well.

Other possible warning signs include:

• Your competitive market share decreases by more than 5%.
• The percentage of your total profit from products introduced in the past two years decreases to below 50%.
• More than 25% of your product divisions are unprofitable.
• Your capital burn rate indicates you may run out of funding within a year.
• The ratio of employees to managers increases by more than 10%.
• Employee turnover decreases by more than 25%.
• The backlog of unfilled orders decreases by more than 10%.
• Percentage of plant capacity utilized drops by more than 10%.

Redeployment of Employees From Areas of Low Need to Areas of Higher Need

The process of moving people internally and from jobs and divisions where there are excess employees to areas where there is a shortage is called redeployment. Intel, for example, is a company that is famous for its effective redeployment programs. Steps in effective redeployment include:

1. Identifying surplus and “shortage” areas (people, jobs, and divisions)
2. Proactively notifying and educating employees about the value of redeploying into high-need areas
3. Identifying the skills and competencies needed in shortage areas
4. Assessing employees to see who has a high probability of making the transition
5. Providing retraining and retooling to increase their competencies in the needed areas
6. Developing systems to assess and place candidates into the appropriate jobs
7. A reward system for incentivizing managers to “let go” of their human talent so that it can be redeployed to areas with a higher return
8. Creating an assessment process for evaluating their performance in their new placement

Maintaining a Flexible Workforce

Keeping your workforce flexible is a key component of your layoff strategy:

1. Require managers to keep a fixed portion (10%) of their staff “flexible” during times of decreasing revenues.
2. Outsource key production, MIS or product components to vendors, which allow us to scale down without the need to layoff. Outsource transactional or low value “overhead” functions to vendors.
3. Build strategic partnerships with other firms and let them do a portion of the “people intensive” work.
4. Utilize consulting firms to supplement your key competencies.
5. Hire contractors for short-term needs.
6. Hire temporary or seasonal help for short-term work.
7. Hire part-timers that are willing to work only during your peak periods of need. Offer job sharing options to current employees.
8. Convert regular full-time staff to contract status via third-party vendors.
9. Hire interns or college co-ops, who are cheap and easy to let go

Increasing Productivity and Sales

Another layoff avoidance strategy is to increase current employee productivity and revenue from sales. Some approaches to consider include:

1. Hiring away the best salespeople from your competitors
2. Increasing sales incentives
3. Increasing or modify sales training
4. Offering productivity incentives to your employees or increasing their percentage of pay-at-risk
5. Reengineering processes to improve efficiency
6. Raising hiring standards in order to attract more productive employees
7. Buying technology to increase efficiency and productivity

Effective Performance Management

Performance management is another aspect of layoff avoidance.

1. Identify low-performing employees for progressive discipline
2. Shorten the time span for giving employees a second chance
3. Institute “forced ranking” to force managers to make tough choices
4. Identify low-performing employees for additional training
5. Fire or buyout low performing employees

Alternatives To Layoffs

A few approaches that serve as alternatives to layoffs:

1. Reduce team size and operate at “undersized” staffing levels.
2. Increase targets and use “stretch” goals.
3. Offer both team and individual productivity incentives.
4. Increase the use of “distributed metrics” to help employees see their high and low productivity areas (and those of others).
5. Reduce PTO like sick and vacation days to increase the number of hours worked.
6. Explain the situation and ask workers to do “more with less.”
7. Redesign key jobs to eliminate low value work and duplication.
8. Sell off low-profit business units with high people costs.
9. Outsource operations that have previously been (or in the future may be) subject to layoffs.
10. Close low productivity plants and transfer the people to other plants.
11. Offer early retirement packages.
12. Institute a hiring freeze in areas that are most likely to undergo layoffs (e.g. production) if business slows.
13. Increase the number of approvals required for a hiring requisition.
14. Hire people in low-cost labor areas (countries and geographic regions) that can do the same volume of work that is now done in a high-labor-cost area.
15. Force people to take unused vacation to cut costs (due to accounting rules).
16. Offer employee pay cuts in lieu of layoffs.

What If I Cut Headcount Too Much?

We know that having excess employees can be expensive. However, what happens if you unintentionally cut your head count too far? This can also be expensive, as vacancies and understaffing can lead to missed deadlines and low product quality. CFOs generally work under the premise that “it’s better to have too few, rather than too many employees,” because they are considered an expense item. However, if you do cut too far, a quick-response recruiting function that can rapidly fill positions is an acceptable solution if you cut too far.

Conclusion

Workforce planning is one of the most neglected areas in HR. Most firms don’t do it well (in fact, most firms don’t do it at all!). In a rapidly changing world, planning is even more essential for firm success. So if you want to avoid layoffs you need to plan ahead, act now, and utilize some of the tools listed here.