Introduction
The decision to restructure, downsize or lay off employees is a decision that requires careful planning and consideration, yet employers frequently apply traditional layoff practices in a cookie-cutter manner in order to meet financial forecasts and stay within budgets. It is critical to consider the long-term effects that short-term cost cutting measures can bring. The following article will explore some of the Do’s and Don’ts of cost-cutting strategies and will suggest some alternatives to downsizing. It will also provide strategies and planning objectives if downsizing must occur.
Inherent in its definition, restructuring and downsizing means disruptions in the organization’s relationships with customers, suppliers and employees; disruption in the organization’s structure, culture and climate; disruption in the way the organization works and disruption in the factors that contribute to the organizations success or survival after the restructure or downsizing event. Additionally, responses to disruption in technology, markets, customer preferences, availability to resources (including human resources) may also cause organizations to consider restructure or downsizing solutions.
Before defaulting to a downsizing or restructuring solution, consider other solutions that may provide for less organizational disruption. When an event triggers an apparent need to downsize/restructure – be it a down-turn in the market, either forecasted or perceived; loss of customers, market preferences, etc. - it is important to consider important Do’s and Don’ts prior to making a final decision.
Do - Evaluate if the Job Cuts Will Actually Save Money
While downsizing has been viewed primarily as a cost reduction strategy, there is considerable evidence that downsizing does not reduce expenses as much as desired. Sometimes, expenses may actually increase. Short-term gains in decreased payroll and benefit costs can be far outweighed by decreased employee performance, loss of productivity, loss of key personnel due to uncertainty, loss of customers – both in business and loyalty, costs of hiring back previously laid-off employees once the market turns, and low moral of those who are left to pick up the slack.
Before considering a downsizing or restructure of operation – which should always be the last resort – consider other cost saving strategies that may eliminate the need to lay off your human capital. When considering cost-cutting strategies, including layoffs or restructuring, it is important to provide an explanation to employees regarding the purpose of the cost-reduction strategies.
One key to a successful downsizing, cost reduction or other restructuring plan lies in management’s ability to clearly convey to employees the purpose behind the cost-cutting efforts. Employee flexibility in favor of temporary cost cutting measures – for example taking short-term pay reduction vs. permanent job loss - is also crucial. Finally, enlisting employee buy-in through participation in any type of change will ensure a smoother, less disruptive change process.
Do – Have some viable solutions to reduce costs:
· Solicit cost–reduction strategies from employees – employees can often have very creative solutions that make an impact of reducing costs and “saving” jobs. Additionally, involving employees in the “problem” solving process, will illicit buy-in for any change that may result.
· Hiring Freeze – temporarily idle all hiring and reduce labor cost in the short-term. Surprisingly, some employers continue to hire new employees while trimming jobs at the same time. This sends a disturbing message to employees and reduces the likelihood of employees returning to the company in the future. Decisions to build new office space or other capital improvements might also be reconsidered as it can send the same disturbing message.
· Mandatory Vacation – involves asking employees to use a certain number of vacation days in a designated time period. This solution is geared to cutting labor cost in the short term. To quiet any employee grumblings, communicate to employee that this strategy will reduce the likelihood of possible job loss.
· Compressed Workweek – an often overlooked concept of temporarily reducing the number of hours in a workweek. For example, a company could implement a 25-hour workweek as opposed to a 40-hour workweek and reduce short-range payroll expenses. A compressed workweek can have both positive and negative effects on employees because they have more time to spend with their families, but are receiving less pay. Despite the reduced paycheck, a large majority of employees prefer this to losing their jobs.
· Temporary Facility Shutdowns – occur when a work site closes for a designated period of time. Typically, a skeleton crew still reports to work to handle customer service, accounting etc. Sun Microsystems avoided layoffs for a period of time by implementing the shutdown of all US plants for one week – the week of July 4th (SHRM Information Center, March 2003). This allowed employees to take vacation without using their vacations days – good for employee moral – and a temporary plant shutdown can create tremendous cost saving for a company while avoiding layoffs.
· Salary Reduction – is a much more severe cost-reduction measure and if implemented for an extended period of time can negatively affect employee morale. However, employees would sometimes rather have a smaller paycheck temporarily than have their job eliminated permanently.
If none of the above alternatives to downsizing work for your organization, you might want to consider the following in making your decision to reduce or eliminate positions.
Don’t Rush Ahead - Do your Homework
- Review all state, federal, and local regulations to ensure compliance. The Federal Worker Adjustment and Retraining Notification Act (WARN) requires companies employing at least 100 full-time employees to provide 60 day notification in advance of the plant closing or mass layoff. The California form of the act defines the employer as any person who directly or indirectly owns and operations a facility that has employed 75 persons within the preceding 12 months. The California act does not have a requirement that employees be employed full-time or require notice for layoff of seasonal or temporary employees, or those hired for a specific project.
- Review your own company policies regarding employment at-will policies, termination policies requiring “just cause,” progressive discipline and performance standards. Is there a written contract or union agreement that limits restructuring or downsizing?
- Consider any oral or implied contracts of employment. An oral contract may have been created if the employee was told that his/her job was secure, or that he/she would always have a job if they did a “good job.” One way to counter oral or implied contracts is to be sure the “at-will” policy is well documented (Employment Application, Employee Handbook) and communicated often to employees.
- Clearly define criteria or selection factors on which downsizing decisions will be made. Will decisions be made on seniority, performance or another factor? For example, if performance is used as a selection factor, do your employee records support the decision? The selection factor used must be applied objectively. If your organization will ask managers to document their selections to encourage an objective evaluation process, be aware that these documents can become subject to subpoena in the discovery process if the decision is questioned. One way to lessen the chances (there’s no guarantee) of having documentation subpoenaed is to designate the documentation as attorney-client privileged. Your legal counsel may advise that at the top of each evaluation page be placed “Privileged and Confidential: Prepared at the Request of (the attorney’s name).”
- Review employee files and identity potential problem areas such as foreign workers. Insure that your files and records are in order and have been properly maintained and complete prior to beginning restructuring or downsizing solutions.
- Plan for the contingencies. When disruption is inevitable, planning for the disruption may help to alleviate the need for, or at least the severity of, restructuring and downsizing. Answer key questions such as how the economy will affect the organization if it continues on its current path, if sales decrease by 25% or 50%, or if current technologies become obsolete. This will help you to outline what changes will need to be implemented.
- Know your stakeholders. Organizations answer to a large contingency of people and groups. Employees, share holders, lenders, investors, customers, vendors, strategic partners, and federal, state or local agencies are just a few of the people/groups that should be considered. All have different and conflicting interests and responding to each can be difficult. As part of your restructuring or downsizing planning activities it is prudent to identity which groups will play a roll in your decision-making processes and which groups will most likely be affected by your decisions.
- What lessons were learned from the past? Consider how restructuring or downsizing decisions were made in the past. Did the results of the previous efforts meet the stated objectives? What were the effects on productivity, morale, recruitment and retention and profitability? Would other cost-reduction methods have been more effective?
- Act with Speed, but not in haste, once the decision has been made to restructure or downsize. Act decisively but respectfully and fairly. Communicate the decision (once made) and implement the plan. As a general rule, there should be no surprises. Select a plan implementation team which should include at least HR, the CFO and CEO, legal counsel and the organization’s risk manager as well as public relations representation. Identify any pay, severance and benefits continuation requirements under federal and state wage laws. Review your employment policies and other employment agreements or health and benefits plans. Consider providing additional assistance to displaced employees in the form of career transition services, training, or employee assistance programs. As you implement the plan, always treat employees with respect and dignity.
- Provide managers with a script. Conducting any employment separation meeting is difficult at best. To make the process a bit easier on your managers or the person who will conduct the meeting, provide a script that states the business decision and provides information regarding any severance package, final pay, COBRA and Unemployment Insurance Benefits available. Provide managers training on how to deal with the emotions that employees will inevitably go through such as grief, bargaining, and anger to name just a few. It is also appropriate to provide an FAQ to answer the most common questions employee may have, such as, “Why was my position chosen?” or, “Who else is being laid off?”
- Bring about Closure. It is best to bring about “group closure” when there are layoffs by providing those left on the job an opportunity to express their concerns or emotions about what has occurred. Managers should hold the meeting the same day, if possible, and talk candidly about the recent events and the business decision. Providing information regarding the type of severance packages or outplacement benefits given to those displaced will alleviate some fears and let those who remain know that their colleagues are being taken care of, as well as providing knowledge of what they might expect if another round of layoffs is required. Remind employees that if they are asked to provide references for their colleagues, the requests should be directed to the manager or human resources (according to company policy). Finally, re-emphasize the organization’s Mission, Vision, Values and Goals to those who remain. Morale, climate and culture have been negatively impacted during layoffs and it is important to recreate positive work environments so that people can build their self-esteem, find their work satisfying and achieve at higher levels. Often there is a sense of guilt on the part of survivors because they did survive. It is best to get them engaged as soon as possible in rebuilding their departments.
Do Consider the Logistics - Finally, do layoff or terminate on a weekday other than Friday. Do put everything in writing that the displaced worker will find helpful and don’t belittle or demean the departing employee in any way. While current markets are bound to cause anxiety and initiate reactions to reduce costs, organizations who take a critical view of their operations and practice due diligence in researching the possible outcomes are bound to make better decisions. All in all, the bottom line of any cost reduction measure is to communicate the business purpose to the organization, enlist participation from employees, and treat all with respect and dignity.
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