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6.Employees may be needed again before termination savings are fully realized. If economy does begin rebounding by mid 2002, then many of anticipated savings of reducing workforce will have not yet been fully realized before companies will need to begin replacing terminated workers. The expense of replacement includes both termination costs as well as costs of training and integrating new hires. Thus, in cases where terminations include substantial severance and outplacement costs, these plus training and initial inefficiency costs of rehiring frequently equal one to several years of terminated workers' cost to organization.
7.Possible need to bring employees back as independent contractors at higher total cost. The shrinking labor pool together with fact that a high percentage of middle-aged and older terminated employees are either beginning their own businesses or opting for early retirement will mean that many of those who are willing to return to former employers will want to do so under their own conditions. A large number of these may choose to do so as independent contractors preferring to gain a greater degree of control over their own lives. Many companies initially prefer this approach believing that they may only require services of former employees for a limited period of time. Frequently, however, weeks and months become years and independent contractors, knowing inner workings of organization and where projects and sponsors may be found, remain costing company significantly more than if they had remained on payroll.
8.Hidden costs that are never fully accounted for such as declining morale, lost customer relationships and lost productivity due to over- stressing remaining employees. There are very real costs associated with mass layoffs that in my experience are almost never fully assessed. Declining morale, disrupted customer relationships, a frequently steep decline in customer service and frustration of remaining employees who cannot possibly absorb all of responsibilities of their departed coworkers, results in a surrender to cutting corners wherever possible.
9.Future sales may be lost due to inability to ramp up delivery quickly as economy improves. I have already addressed at some length labor pool shortage that may well be just around corner. An economy spurred by tax cut, a weakened dollar propelling export sales and/or a drop in oil and gas prices could individually or in combination cause demand in many industries to grow rapidly. Where will they find sufficient personnel fast enough to meet that demand? Any failure to respond quickly to increased demand will result in lost sales and possibly long term market share erosion.
10.Diminished market position and status as market leader, innovator and corporate citizen. I am frequently amazed at lengths that major corporations will go to and investment they willingly incur during "good times" to build their image in public's mind. However, as soon as economy dips, slashing begins with little thought as to negative impact it can have within days upon years of careful work and millions of dollars invested to build that image.
When cutting is absolutely necessary, do so with a scalpel rather than meat cleaver. Across-the-board percentage staff reductions are most damaging variety and should only be used in those instances which demand immediate and drastic cost reductions compelled by imminence of business failure. The use of global reductions as a general cost reduction methodology is tantamount to an abdication of responsibility by leadership and management. Whenever large scale reductions of any sort are made, they should be matched by reductions of a corresponding magnitude in senior executive compensation. Huge compensation packages for corporate executive leaders have been justified as necessary to attract and motivate best talent available and as just rewards for their leading mega-corporations to unprecedented high profit levels and market valuations. This standard must also apply in reverse and thus, significant drops in profit and worth, requiring deep cost cutting throughout organization, should be equally reflected in deep cuts to senior executive compensation levels.
As an alternative to layoffs and terminations, corporate leaders and managers should look to rapidly redeploy corporate assets in order to bolster revenues and profits. In case of people assets, this can often be done through reassignment of personnel to those areas and functions of organization offering greatest potential for rapid internal innovation. Such action frequently results in innovative breakthroughs of enormous immediate value to company as people new to a given function approach it with a fresh perspective and a different experience and personal knowledge base from which to draw upon.
Although severe cost cutting can increase near term profitability of virtually any corporation, ultimately, broad-based innovations of its committed and motivated employees is essential to restoring profitable long term growth, especially in periods of economic downturn. And its is sustainable growth, not temporary savings, that should be primary goal of every business leader.
John Di Frances is the Managing Partner of DI FRANCES & ASSOCIATES, LLC founded in 1983. Phone:1-262-968-9850 Fax:1-262-968-9854 208 E Oak Crest Drive Wales, WI 53183 www.difrances.com synergy@difrances.com