It’s time to debunk the myth that layoffs save companies money

February 2, 2023, 12:57 PM UTC
employee layoffs illustration
Laying off employees is a short-term solution to cost-cutting and can have detrimental effects.
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Good morning!

Let’s start the day by debunking a common myth: Job cuts are a surefire way to help cure a company’s financial woes. While a popular theory, the data suggests otherwise, writes Fortune’s Geoff Colvin in a piece this week. Mass layoffs can actually come with some hefty hidden costs. 

Layoffs might seem like a quick and effective short-term solution—especially in an economic downturn—but experts say they have long-term implications. “Research shows that the anticipated benefits are often a mirage, while the costs are much greater than leaders realize,” writes Geoff. The setbacks often stretch far beyond the finances.

One of the greatest losses is historical knowledge. When employees exit a company, valued institutional and role-related knowledge leaves with them and is challenging to regain. Because of this, and many other factors, research finds that layoffs can hurt a company’s overall performance, with productivity plummeting during and after job cuts. And even when companies refill those roles, it takes a great deal of time and money to recruit, onboard, and train employees before they become productive contributors to an organization. 

Layoffs can also throw a wrench in succession planning, obliterating the leadership pipeline. Geoff points to the recessions that marked the 1980s when banks laid off swaths of junior employees. Twenty years later, many HR chiefs struggled to find experienced executives to take over for the retiring cohort of leaders.

Here’s an excerpt from Geoff on why it pays to pause before pulling the layoff lever:

“To be sure, layoffs may be unavoidable in a sudden, severe economic shock—say, a once-a-century global pandemic. But even in extreme cases, business leaders might want to consider whether a layoff is truly unavoidable. A few major companies have refused to make mass dismissals for 70 years or more, including during the pandemic, and have thrived. Toyota avoided laying off employees in the 2008-2009 recession, even as General Motors, Ford Motors, and Chrysler dismissed tens of thousands. Lincoln Electric, a major Ohio-based maker of welding equipment with factories worldwide, hasn’t laid off employees in at least 75 years; its stock was recently near an all-time high. 

Layoffs are alluring in difficult times and when the next quarter’s earnings are in peril. But that may be the short-term trap. As more CEOs consider downsizing their workforce, it would behoove them to question whether, in the big picture, the long-term case against layoffs is more persuasive.”

Amber Burton

Reporter's Notebook

The most compelling data, quotes, and insights from the field.

Fortune’s Ellen McGirt expects Black History Month to hit differently this year as leaders are pressured to respond to national conversations surrounding critical race theory, book-banning, and curriculum battles.

“It serves as a reminder for many corporate leaders that they have reached the end of an uncomfortable grace period, a march toward culture change bookended by state violence—between the time George Floyd couldn’t breathe and begged for his mama and more recently when Tyre Nichols begged for his while being beaten to death…Wobbling on diversity commitments is not helping the corporate cause,” she writes. 

Subscribe and read the latest edition of Fortune’s Raceahead newsletter here.

Around the Table

A round-up of the most important HR headlines, studies, podcasts, and long-reads.

- Job openings in the U.S. rose to 11 million in December, defying analyst expectations of a cooling job market. ABC News

- Lawmakers in Maryland proposed a bill to provide tax credits for companies adopting a four-day workweek. Insider

- In some countries, it's illegal for employers to contact employees outside of work hours, ostensibly making work-life balance the law. Washington Post

- Japanese trading house Mitsui & Co. lifted its ban on side jobs in an effort to recruit and retain young talent. Bloomberg


Everything you need to know from Fortune.

Work-life balance top 10. Connecticut has the best work-life balance due to its high minimum wage and generous maternity leave policies, according to a new report. —Chloe Berger

Layoff training. Companies must train managers to handle layoff conversations with care. Here's a sample script to follow. —Paige McGlauflin

Alexa, do the robot. Amazon is adding about a thousand robots daily to its workforce; they could outnumber employees by 2030, says ARK Invest’s Cathie Wood. —Prarthana Prakash 

Veteran leadership. The CEOs of the World’s Most Admired Companies All-Stars list have one thing in common: longevity. On average, they've served in their roles for almost 25% longer than the average Fortune 500 CEO. —Matt Heimer and Scott DeCarlo

This is the web version of CHRO Daily, a newsletter focusing on helping HR executives navigate the needs of the workplace. Today’s edition was curated by Paolo Confino. Sign up to get it delivered free to your inbox.

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