Finance chiefs are increasingly tasked with balancing risks and benefits tied to layoffs as they make difficult cost-cutting decisions in response to rising expenses from myriad pressures — including tariffs and digital spending. 

U.S. layoffs this year through July rose to 806,383 — a 75% increase year-over-year, marking the highest January-to-July tally since 2020, when pandemic shutdowns pushed up pink slips beyond 1.8 million, Newsweek reported, citing statistics from Challenger, Gray & Christmas and impacts from government downsizing, corporate restructuring and the growing effects of artificial intelligence.

“Facing lower economic growth forecasts, an elevated cost of capital and policy uncertainty, CFOs are turning to cost optimization programs to defend margins,” Gartner, a consulting firm, said in a recent report.

“However, CFOs face a difficult trade-off. They must ensure the margin-preserving cost optimization programs don’t inadvertently cut too deep into the human capacity and capabilities required to drive growth during the next cycle,” Gartner said. 

While layoffs are on the rise, they aren’t always productive, according to the report, written by Vaughan Archer, a senior director and analyst in Gartner’s finance practice. Common mistakes include avoiding conflict by spreading cost-savings goals evenly across functions, determining who will be laid off by adhering to inflexible rules like first-in-first-out, or failing to anticipate costs resulting from layoffs, such as the need for contractor hiring or overtime pay to complete essential with less staff. Such unanticipated problems result in “unsustainable cost creep.”

Vaughan’s report outlines some practical steps finance chiefs can take to help their firms make smarter decisions on workforce cost challenges and, if needed, layoffs: 

1. Help your firm exhaust non-personnel cost-cutting options. Payroll typically accounts for a big chunk of functional and operational spending: for example, it accounts for 74.6% of the average finance function budget, according to the report. But CFOs should give their firms a range of other cost-savings measures that don’t affect headcount or require restructuring charges before moving on to layoffs, Gartner said.
2. Forget across-the-board staff reductions. CFOs must keep in mind the strategic importance of functions or teams to the broader corporate strategy when making headcount cuts. “Not all personnel expenses are created equal, and by treating them as such, CFOs risk penalizing the more efficient parts of the organization and eroding important sources of value,” Gartner said. 
3. Give budget-holders tools and data to make layoff decisions. Some managers use backward-looking measures when developing a list of potential employees to be cut. Instead, employees should be segmented "according to how they align with the future business strategy and their direct impact on revenue or performance.” Also, CFOs need to give management information that will enable them to quantify salary and non-salary cost reductions associated with a layoff, as well as the upfront costs that include severance, prorated bonuses, and other expenses associated with certain cuts, Gartner said.  
4. Stick with cost-cutting: And set up tracking systems to ensure the company does. CFOs must guard against gains in cost reduction initiatives being eroded via new expenses such as overtime and aggressive rehiring. “Tasking FP&A, for example, with maintaining a rolling list of departments and roles where cuts have been implemented in the last two years will help monitor cost reemergence,” Gartner said. 
5.  Communicate to retain critical talent. CFOs must work with senior human resources leadership to clearly communicate the financial rationale of the layoffs and cost-cuts. “Communications must address two critical phases: preparing management for employee layoffs and ensuring retained employees — especially top performers — remain consistently engaged, focused and motivated post-layoff,” Gartner said.