wo great forces are transforming the very nature of work: automation and ever fiercer global competition. To keep up, many organizations have had to rethink their workforce strategies, often making changes that are disruptive and painful. Typically, they turn to episodic restructuring and routine layoffs, but in the long term both damage employee engagement and company profitability. Some companies, however, have realized that they need a new approach.
Consider the case of Nokia. At the beginning of 2008 senior managers at the Finnish telecom firm were celebrating a one-year 67% increase in profits. Yet competition from low-cost Asian competitors had driven Nokia’s prices down by 35% over just a few years. Meanwhile, labor costs in Nokia’s Bochum plant in Germany had risen by 20%. For management, the choice was clear: Bochum had to go. Juha Äkräs, Nokia’s senior vice president of human resources at the time, flew in to talk about the layoff with the plant’s 2,300 employees. As he addressed them, the crowd grew more and more agitated. “It was a totally hostile situation,” he recalls.
The anger spread. A week later 15,000 people protested at Bochum. German government officials launched an investigation and demanded that Nokia pay back subsidies it had received for the plant. Unions called for a boycott of Nokia products. The news was filled with pictures of crying employees and protesters crushing Nokia phones. Ultimately, the shutdown cost Nokia €200 million—more than €80,000 per laid-off employee—not including the ripple effects of the boycott and bad press. The firm’s market share in Germany plunged; company managers estimate that from 2008 to 2010 Nokia lost €700 million in sales and €100 million in profits there.
In 2011, when Nokia’s mobile phone business tanked, its senior leaders decided they needed to restructure again. That would involve laying off 18,000 employees across 13 countries over the next two years. Chastened by their experience in Germany, Nokia’s executives were determined to find a better solution. This time, Nokia implemented a program that sought to ensure that employees felt the process was equitable and those who were laid off had a soft landing.
One of us, Sandra, has spent eight years researching best practices for workforce change in global multinational companies. She has seen that all too frequently companies do bad layoffs, do layoffs for the wrong reason, or worse, do both. By “bad,” we mean layoffs that aren’t fair or perceived as fair by employees and that have lasting negative knock-on effects. The job cuts in Bochum ignited outrage because Nokia had generated so much profit the year before. Consequently, they were seen as unjust and took a steep toll on Nokia’s reputation and sales. And when we say “wrong reasons,” we mean done to achieve short-term cost cuts instead of long-term strategic change. In 2008, Nokia did have the right reasons, but it still suffered because of its process.
Some governments, recognizing the massive damage layoffs create, have written laws protecting employees against them. For example, a number of European countries require companies to provide a social or economic justification before they can conduct layoffs. France, however, recently eliminated the requirement to provide an economic justification, and in the United States companies can conduct layoffs at will. Regardless of how easy it might be to cut personnel, executives should remember that doing so will have consequences.
The research clearly shows that bad layoffs and layoffs for the wrong reasons rarely help senior leaders accomplish their goals. In this article, we’ll present a better approach to workforce transitions—one that makes sparing use of staff reductions and ensures that when they do happen, the process feels fair and the company and the affected parties are set up for success.
Why Layoffs Are Ineffective
If Nokia’s story sounds familiar, albeit a little more colorful than usual, that’s because it is. In the United States alone, the Bureau of Labor Statistics reports, 880,000 to 1.5 million people were laid off annually from 2000 to 2008 and from 2010 to 2013 (the last year data was compiled). This happened even when the economy was expanding. During 2009, the height of the Great Recession, 2.1 million Americans were laid off. Globally, unemployment rose by 34 million from 2007 to 2010, data from the International Labour Organization shows.
Layoffs have been increasing steadily since the 1970s. In 1979 fewer than 5% of Fortune 100 companies announced layoffs, according to McMaster University sociology professor Art Budros, but in 1994 almost 45% did. A McKinsey survey of 2,000 U.S. companies found that from 2008 to 2011 (during the recession and its aftermath), 65% resorted to layoffs. Today layoffs have become a default response to an uncertain future marked by rapid advances in technology, tumultuous markets, and intense competition.
Yet other data on layoffs should give companies pause. In a 2012 review of 20 studies of companies that had gone through layoffs, Deepak Datta at the University of Texas at Arlington found that layoffs had a neutral to negative effect on stock prices in the days following their announcement. Datta also discovered that after layoffs a majority of companies suffered declines in profitability, and a related study showed that the drop in profits persisted for three years. And a team of researchers from Auburn University, Baylor University, and the University of Tennessee found that companies that have layoffs are twice as likely to file for bankruptcy as companies that don’t have them.
After a layoff, survivors experienced a 20% decline in job performance.
All too frequently, senior managers dismiss such findings. Some argue that since companies do layoffs because they’re already in bad shape, it’s no surprise that their financial performance may not improve. Layoffs are so embedded in business as a short-term solution for lowering costs that managers ignore the fact that they create more problems than they solve.
Companies that shed workers lose the time invested in training them as well as their networks of relationships and knowledge about how to get work done. Even more significant are the blighting effects on survivors. Charlie Trevor of University of Wisconsin–Madison and Anthony Nyberg of University of South Carolina found that downsizing a workforce by 1% leads to a 31% increase in voluntary turnover the next year. Meanwhile, low morale weakens engagement. Layoffs can cause employees to feel they’ve lost control: The fate of their peers sends a message that hard work and good performance do not guarantee their jobs. A 2002 study by Magnus Sverke and Johnny Hellgren of Stockholm University and Katharina Näswall of University of Canterbury found that after a layoff, survivors experienced a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a 20% decline in job performance.
While short-term productivity may rise because fewer workers have to cover the same amount of work, that increase comes with costs—and not only to the workers. Quality and safety suffer, according to research by Michael Quinlan at the University of New South Wales, who also found higher rates of employee burnout and turnover. Meanwhile, innovation declines. For instance, a study of one Fortune 500 tech firm done by Teresa Amabile at Harvard Business School discovered that after the firm cut its staff by 15%, the number of new inventions it produced fell 24%. In addition, layoffs can rupture ties between salespeople and customers. Researchers Paul Williams, M. Sajid Khan, and Earl Naumann have found that customers are more likely to defect after a company conducts layoffs. Then there’s the effect on a company’s reputation: E. Geoffrey Love and Matthew S. Kraatz of University of Illinois at Urbana–Champaign found that companies that did layoffs saw a decline in their ranking on Fortune’s list of most admired companies.
Employees who are downsized pay a price beyond the immediate loss of their jobs. Wayne Cascio, a professor at the University of Colorado, points to the Labor Department’s survey of workers who were laid off during 1997 and 1998, an economic upswing. Most were worse off a year later: Only 41% had found work at equal or higher pay, 26% had found jobs at lower pay, and another 21% were still unemployed or had left the workforce entirely. The effects follow people throughout their lives. A 2009 Columbia University study that looked at employees who had been laid off during the 1982 recession showed that 20 years later they were still earning 20% less than peers who had kept their jobs. The aftershocks aren’t limited just to earnings: According to a study by Kate Strully, an assistant professor at SUNY, laid-off employees have an 83% higher chance of developing a new health condition in the year after their termination and are six times more likely to commit a violent act.
The Search for Alternatives
A few companies have been experimenting with better ways to handle their changing workforce needs. Take AT&T. In 2013 the company’s leaders concluded that 100,000 of its 240,000 employees were working in jobs that would no longer be relevant in a decade. Instead of letting these employees go and hiring new talent, AT&T decided to retrain all 100,000 workers by 2020. That way, the company wouldn’t lose the knowledge the employees had developed and wouldn’t undermine the trust in senior management that was necessary to engagement, innovation, and performance. So far, the results seem very positive. In a 2016 HBR article, AT&T’s chief strategy officer, John Donovan (now CEO of AT&T Communications), noted that 18 months after the program’s inception, the company had decreased its product development cycle time by 40% and accelerated its time to revenue by 32%. Since 2013, its revenue has increased by 27%, and in 2017 AT&T even made Fortune’s 100 Best Companies to Work For list for the first time.
In her work, Sandra has studied seven companies that, like AT&T, have successfully pursued alternatives to traditional layoffs. An analysis of their experiences reveals that an effective workforce change strategy has three main components: a philosophy, a method, and options for a variety of economic conditions.
A workforce change philosophy serves as a compass for senior leaders. It builds on a company’s values and spells out the commitments and priorities the company will abide by as it implements change. A philosophy helps leaders answer the following questions:
- What value do we believe employees contribute to our business and its success?
- What expectations do we have for employees’ engagement, loyalty, flexibility, and ability to adapt and grow?
- What do we owe employees as a fair exchange for what they have given us?
- How can employees help us develop and implement workforce change?
The philosophy of the French tire maker Michelin, for example, includes hiring people for their potential rather than for the job. In its labor relations policy, the company describes its commitment to employees’ long-term growth. Each employee is assigned a career manager who oversees his or her development and helps make sure it aligns with Michelin’s needs.
A workforce change strategy should anticipate three different scenarios.
The company also has a defined approach to workforce change and restructuring. Michelin’s labor relations policy described it like this in 2013:
Restructures are inevitable in certain circumstances in order to maintain the company’s global competitiveness. These restructures must, as far as possible, take place at times when the company’s health allows mobilization of adequate resources to attenuate the social consequences. Whenever possible, staff at the entities concerned and their representatives are invited to work together to seek and suggest solutions for restoring competitiveness and reducing overcapacity, which may open up an alternative to closing an activity or site. When restructuring is unavoidable, it must be announced as soon as possible and carried out according to the procedures negotiated with the staff representatives. The ensuing changes on a personal level must be supported for as long as is necessary to ensure that the reclassified employees find a satisfactory solution in terms of standard of living, stability, family life and self-esteem.
When Nokia was contemplating that massive workforce reduction in 2011, its senior leaders articulated a philosophy with four core values:
- We will accept our responsibility as the driver of the local economies and aim for the highest of aspirations in supporting our previous and current employees.
- We will take an activist role and lead the program with our brand, expertise, and resources in the key areas that matter most.
- We will involve all of the relevant parties in the program design and operations.
- We will communicate openly towards all stakeholders, including employees, unions, government, and local stakeholders, even when we do not know the full answers.
As Nokia’s philosophy highlights, workforce change can affect many people beyond employees. A company must communicate its intent directly without leaving any of them in the dark or piecing together scraps of information to figure out what the future holds.
Having a clear methodology will allow companies to explore alternatives to layoffs, and if they cannot be avoided, minimize the harm they cause. To establish one, firms need to address three questions:
- How will we plan for workforce change on an ongoing basis?
- Who will be accountable for managing and supervising it?
- What metrics should we use to determine whether our actions are effective?
In 2013, Michelin’s CEO, Jean-Dominique Senard, asked the members of his team to turn the insights they’d gathered from the previous decade’s restructuring efforts into a formal process for workforce change. As a result, Michelin integrated three planning processes—product planning, territory planning, and restructuring planning—into one. The product-planning groups project their anticipated production for the next five years, and then the territories identify which regions will have too much or too little production capacity and what technologies each factory will need. The restructuring plans come out of the dialogue between the product and territory heads. For example, in October 2013, Michelin determined that it would have overcapacity for truck tire production in its Budapest factory and decided to close it in mid-2015. By making that call early, Michelin’s team had time to carefully plan objectives for the shutdown and create a way to reduce the impact on the affected employees (something we’ll discuss more later).
Michelin has set up an accountability structure that clearly delineates who is responsible for what. The company’s executive committee, led by the CEO, oversees workforce change globally. Because more than 50% of Michelin’s factories and most of its workforce reductions are in Europe, a European restructuring committee supports the executive committee. It identifies factories that should be closed or downsized and directly oversees all European restructurings. Finally, Michelin establishes a committee for each factory that will be affected, consisting of regional and country executives who are responsible for implementing the restructuring plan. Two senior executives at headquarters—a director of restructuring and a director of product planning—coordinate the entire process.
Like any other good strategy, an effective workforce change strategy includes goals against which success can be measured. An example of these comes from Honeywell. In the 2001 recession, right before Dave Cote became its CEO, the company laid off 25,000 employees, or nearly 20% of its staff. Sales fell by 11% from 2000 to 2002. When the recession hit in 2008, and it looked as if more workforce changes might be required, Cote set two goals: to improve on Honeywell’s poor performance during the 2001 recession, and to be in a stronger position than its competitors when the recovery came.
To measure the first goal, Cote decided to compare the company’s sales, net income, and free cash flow figures for the two recessions. As it turns out, the firm was able to improve substantially on all three measures. In 2009 Honeywell’s sales were 39% higher than its 2002 sales, its free cash flow was 94% higher, and its net income was more than six times higher. To monitor progress on the second goal, performance against competitors, financial data providers developed two measures: the percent change in operating income from the 2007–2008 peak to 2011, and total stock returns in 2012. At +1.8%, Honeywell had the highest post recession increase in operating margins (versus -4.5% to +1% among its peers). And at 75.28, Honeywell also had the highest three-year total stock return in 2012, 50% better than its closest competitors return and four times better than the lowest-performing competitor’s.
Originally posted on Harvard Business Review