- Layoffs can erode shareholder returns, with expected savings from workforce reductions offset within three years by unforeseen consequences such as reduced employee morale, turnover and loss of customers, according to recent research from Gartner.
- “The first thing to recognize is that there is an immediate upfront cost to layoffs as a business will need to reorganize itself around a smaller group of employees and typically incur costly upfront severance payments,” Vaughan Archer, senior director, research and advisory in the Gartner Finance practice, said in a statement. Businesses will likely see an increase in both “costly contractor hiring and demands for increased compensation from remaining employees who are now under a greater burden,” he said.
- Even if an organization avoids a “vicious cycle of employee turnover,” eventually, the business cycle will turn, leaving the organization scrambling for staff, the report said.
Many CFOs have resorted to layoffs after months of harsh macroeconomic headwinds and deliberations over how to cut costs.
Just a few weeks ago, Vera Bradley announced plans to cut workers amid a C-suite reshuffling, and EY also announced plans to slash its workforce after plans to break off into two separate entities fell through. Meanwhile, at least five dozen biotechnology companies have laid off workers this year, according to reporting from Industry Dive sister publication BioPharma Dive.
Many businesses who look to layoffs as a means to cut costs will see inadvertent consequences, ultimately negating any savings from workforce cuts, the research said.
“In the more negative scenarios, the factors detailed here are also going to harm growth in existing and new business, and ultimately a firm will start losing its customers,” Archer said. “None of this is conducive to long-term shareholder gains. CFOs need to work cross functionally with peers in HR, recruitment, sales and service to ensure they are properly accounting for the potential cost of layoffs.”
The research also outlined ways in which companies look to alternatives for layoffs, allowing them to manage personnel in a cost effective way without risking “organizational drag.”
Some workers may be open to voluntarily reducing their hours, according to the research. Reducing executive compensation, enacting a hiring freeze and “internal redeployment” — or transferring the skills of an employee elsewhere in the business — are also viable alternatives to layoffs.