Layoffs have been making a lot of news recently. In some cases, it’s because the companies making layoff announcements are well-known brands, such as PepsiCo, Goldman Sachs and HP. Sometimes it’s because of the large numbers of people involved; when a company like Amazon announces plans to lay off up to 20,000 people in coming months, you pay attention. And then, there are the well-publicized management messes like what’s happening at Twitter or what happened earlier this year at Better.com, which has conducted several rounds of layoffs, including through Zoom.
But, the cruel fact is that sometimes layoffs are a necessary part of business. In this article, I’ll discuss why and when they might be necessary and how they can potentially be avoided or minimized.
First, we should note that 2022 layoff rates are actually low, from a historical perspective. According to the latest stats from the U.S. Bureau of Labor Statistics, there are approximately 10 million job openings—about 1.7 openings for every person looking for a job. Therefore, it’s important to put the recent news in perspective and not panic.
Why are we seeing layoffs now?
A number of factors have converged over the past several months that are forcing companies to assess current staffing.
Inflation, continued supply chain issues and limited investment capital are among the reasons some companies are seeing slower growth or even revenue downturns. Consumers are changing their purchasing habits and venture capital money is drying up. To counter these issues, executives look to reduce staffing and related costs to rebalance incoming and outgoing cash.
Some companies, like Amazon, went on hiring binges during the pandemic in order to meet dramatic surges in demand. (Amazon went from 798,000 employees in 2019 to 1.6 million in 2021.) These companies, many of which were encouraged by investors to “grow like crazy,” now find themselves overstaffed for the current business climate.
Then there are layoffs that are actually part of normal business cycles, especially in the tech segment. Often fueled by investors, start-ups can grow quickly and double or triple revenue in the first few years. This creates a demand for hiring that can continue unchecked.
But, over time, business growth naturally slows. Competition increases, marketing becomes more sophisticated (and probably more expensive) and company structures become more complex.
Some companies manage this cycle well. They invest heavily in marketing and product management, focus on continuous sales training and have a recurring revenue strategy that can scale.
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However, often business growth is dependent on innovation. This is particularly the case for tech and consumer companies. When a company lets down its guard and innovation slows (Netscape, AOL, and even Facebook are examples), the business can quickly be impacted. Witness the layoffs at Salesforce, Meta, Lyft and others.
Most mature companies have weathered these forces over decades. IBM, Microsoft and ADP have reinvented themselves many times. Defense contractors frequently lose large contracts and lay off entire teams as a result. Consumer goods companies continuously move people into new units as consumer needs change. These companies have learned that talent mobility is often a better solution than letting a lot of people go.
When is a layoff necessary?
This is the big question, and the answer requires careful thinking. Layoffs spook investors, the company loses valuable skills and institutional knowledge, and surviving employees feel uncertain and demoralized and often end up being overworked. It can take years for a company to recover from a layoff, and some never regain their footing.
Those companies that have grown slowly and deliberately might get through tough times with a hiring freeze. Another option is reducing pay or benefits. (If taking the route of pay cuts, be sure they’re done equitably and consider asking senior executives and other highly paid staffers to take bigger cuts.) Furloughing employees, common during the COVID pandemic, is another consideration.
Any of these options requires a leadership team that can instill trust and confidence and demonstrate empathy. Effective leaders must be able to convince people to sacrifice on behalf of the company, take on new responsibilities and even move to different areas of the company. This is also when a culture of learning, talent mobility and teamwork is critical.
However, sometimes executives don’t read the tea leaves, are encouraged by investors to grow as fast as possible or just make flawed decisions, and staff reductions are required.
How to avoid layoffs
First, you can be a conservative leader. Even in times of market growth and what may seem like unlimited opportunities, you and senior leaders should sit down and discuss worst-case scenarios. You should also document the processes for reducing staff counts if ever necessary, along with the associated expense estimates (such as severance and benefits extensions). Growth naturally creates additional infrastructure to support, so great managers can look ahead while at the same time planning for the worst.
Second, is your hiring strategy increasing productivity or reducing it?
In growth stages, each employee added increases efficiency. An incremental engineer, salesperson or marketing person lets you divide the work into more specialized pieces, allowing the output per hour to increase as you hire.
However, scalable efficiency only works to a certain point. Hiring can tend to continue unchecked as line managers ask for budget increases. The organization can begin to sprawl and become more layered and complex; employee responsibilities can start to overlap and duplicate. If you don’t constantly look at opportunities to create shared or centralized services and standard platforms, productivity per employee starts to lag.
It’s our job in HR to help company leaders consider important questions and potential scenarios—in good times and bad. Are employees becoming more productive or less? Are we pinpointing current market needs or chasing the old game? Do we have to hire this fast? Are we doing everything possible to arm current employees with the skills that will take the business into the future?
There’s no guarantee that your organization will never need a layoff. But critical thinking and planning can help your company prepare for the unexpected.