Handling Layoffs

Originally published 12/23/07

The recent closing of Toot’s came as quite a surprise to employees and customers alike. But companies come and go. Toot’s isn’t the first restaurant that has closed down in Cookeville. And it won’t be the last.

The thing that shocked us, however, was the way in which employees found out that they had no jobs less than a month before Christmas.

Apparently, employees showed up to find new locks and a note that read: “We have done our best to provide an atmosphere of integrity and fun.”

The ex-employees who were interviewed by WTVF did not seem impressed.

But the purpose of this column is not to beat up on owners Rob and Tanya Holcomb. Instead the purpose is to show why other organizational leaders should handle things differently when faced with layoff or closure decisions.

When faced with a struggling business, many organizational leaders use layoffs to lower their labor costs hoping that this move will help the business survive.

So how well does this strategy work? Unfortunately, not very well.

In Responsible Restructuring, Professor Wayne Cascio explains that layoffs rarely result in positive financial turnarounds. Instead, the short-term savings are overwhelmed by the direct and indirect long-term costs of the layoffs.

Cascio’s book describes a number of companies that survived tough times because they decided not to use layoffs. One manufacturing company, for example, was ready to close one of its plants. Before going through with the closure, however, they decided to ask the employees for cost-saving ideas. Within six months the plant was one of the most profitable in the entire company.
This is a pretty good example of why companies hire people to start with; because they have brains and can think. Employees are less likely to help you come up with business-saving ideas if they’re locked out and being interviewed on television.

The networking giant Cisco Systems avoided layoffs by paying employees one third of their salary in exchange for working temporarily at a non-profit organization.
The possibilities are endless, but too many organizational leaders buy into the myth that layoffs will save a business.

But sometimes, layoffs are necessary. When layoffs are necessary, organizational leaders often believe another myth. They believe that nothing can be done to minimize people’s negative reactions.

Some amazing research shows that layoff victims, as well as layoff survivors, react much more positively to layoffs when they feel as if they are treated fairly during the process. Companies can drastically minimize negative reactions by carefully explaining the rationale for the layoffs and doing so in a sensitive face-to-face way.

But why should companies care if the layoff victims react positively or negatively to a layoff?
First, if business does improve, the company may want to rehire the ones who were laid off. Second, the layoff survivors, as well as the general public, react to the company according to how they treat the layoff victims. Finally, the layoff victims are much more likely to pursue legal action and favor government intervention if they believe they were treated unfairly during the process (even if they were treated legally).

There is one bright spot in all of this. In a free market, organizations with bad management will fail. The market appears to be working just fine on South Willow.