As companies lay off even more workers, they could be making a mistake

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Despite brightening economic data — slowing inflation, low unemployment, and a seemingly nonexistent recession — the new year has started off with layoffs. So far in January, Citigroup announced it was cutting 10% of its workforce; within tech, Google cut hundreds of jobs across its engineering and hardware teams, while Amazon reduced headcount in its Prime, Twitch, Audible and other entertainment divisions. Even the NFL has offered voluntary buyouts to at least 200 employees.  

But not every layoff is the same. There are mass purges, like Spotify’s December decision to cut its workforce by 17%, or roughly 1,500 jobs, and social media company Discord’s 17% workforce reduction this month. Then there are companies like HP, announcing in November 2022 that it would release 6,000 workers over the next three years, and Google’s recent warning that more job cuts are coming in 2024.  

Is one way of reducing headcount better than the other?

According to Peter Cappelli, professor of management and director of the Center for Human Resources at the University of Pennsylvania’s Wharton School, when a company announces incremental layoffs, while avoiding immediate bloodletting, it instead sets off a chain reaction of unintended consequences.

“You will panic people and lose people who will quit rather than stick around and wait for the next round of layoffs, so that’s an incredibly bad idea,” Cappelli said.

In Cappelli’s view, the current wave of layoffs is not because of the economy, but rather because companies are feeling pressure from investors to cut costs. The cuts make investors feel like the company is being proactive, but that’s all the layoffs accomplish, Cappelli said, adding, “These layoffs won’t do any good.”

Still, it’s hard to argue that layoffs are never necessary, but how they’re done matters as much as why. Harvard Business School professor Sandra Sucher, author of “The Power of Trust: How Companies Build It, Lose It, Regain It,” said in general, mass layoffs are far more challenging to manage than layoffs in stages.

Big job cuts present big challenges

“Companies have to be extremely careful about who is retained, who is let go, and what is done with the work the people were doing before,” Sucher said. “The bigger mass layoff makes that harder to manage.”

Sucher acknowledged there are times when layoffs must happen. “Nokia had to eliminate 18,000 people across 13 countries because they were losing the phone battle. There was a change in market conditions, and they had no choice.” But laying off, either in stages or at once, because interest rates are high, “is not a strategy,” she added.

Stephanie Wernick Barker, president of the Addison Group’s Mondo Staffing, said that many companies over-hired during the pandemic. These recent layoffs, especially in the tech sector, are a correction of that.

“From 2020 to 2022, everyone took advantage of access to talent, remote capabilities, and access to capital at lower interest rates that created a boom of hires,” she said. “Then you’re faced with ‘did we over-invest?'”

Wernick Barker said she has yet to do any layoffs among her 200-person full-time staff and does everything to avoid that, including reassigning employees to other tasks if their current job’s ROI diminishes.

Avoiding anxiety among employees

However, the incremental approach to layoffs also carries risks.

“The drip-by-drip process puts everyone on notice that the company feels it is not making enough money, and it looks like the first tool is to let people go because costs can’t be controlled otherwise,” Sucher said. Spotify’s layoff announcement in December was the company’s “third time to the well, and that has to cause anxiety among employees,” she added.

Of course, there are ways to reduce the workforce without layoffs. Attrition, voluntary buyouts, and hiring freezes can be used to reduce headcount without the pain that layoffs inflict.

Ayman Al-Abdullah, former CEO of software startup company AppSumo, now coaches other executives and agrees that layoffs should not be a business strategy. He says the seeds for many layoffs are often sown when companies go on hiring sprees ahead of anticipated growth. When that growth doesn’t materialize, the companies have to trim expenses.

“I prefer a hiring approach to meet demand,” Al-Abdullah said, who helmed AppSumo from 2015 to 2021. During his time, the company grew from a few employees to 100 and even with the pressure of the pandemic, he said he refused to cut anyone.

But if a company does grow too large, Al-Abdullah calls layoff in stages the least attractive option.

“That is the worst way to treat their employees; it is much more humane to drop the axe, cut once, and cut deep,” Al-Abdullah said.   

In fact, he says cutting employees in stages is often the beginning of a company death spiral. “By doing it in stages, you are offloading the risk of the company to the employee,” Al-Abdullah said, adding that he can see no reason or benefit why a company like HP would announce layoffs years in advance.

“The employees who are staying lose trust in management, and the people that lose trust quickest are the A-players, and they leave, and the B-players become the A-players, but then they leave too, and you are left just with the C-players, and that creates a doom spiral at the company,” Al-Abdullah says.

Jennifer Dulski, CEO and founder of Rising Team, a Palo Alto, California-based workplace software platform, has also held leadership positions at companies like Yahoo and Google. She concurs with Al-Abdullah’s thoughts about layoffs in stages.

“One of the biggest regrets I have was not being able to make the cuts in one fell swoop,” she said. “It was much harder on the company and took a lot to build trust,” Dulski said. She advocates the cut-once-and-deep philosophy but said CEOs like Spotify’s Ek often have good intentions when they drag out their cuts.

“Most CEOS underestimate what they need to do,” Dulski said, and they generally want to hurt as few people as possible.

As far as companies that announce their layoffs years in advance, Dulski finds the motives puzzling because it keeps workers looking over their shoulder longer. But she says for global workforces, some countries, especially in Europe, require a far longer notification period for layoffs, so they may try to stay ahead of local laws.

“The best practice would be to do layoffs all at once. Because each time you do a layoff, it has the same negative effect on your employees, especially those who stay,” Dulski said, citing a Leadership IQ study showing that the vast majority of employees who survive a mass layoff report a decline in productivity.  

“Layoffs are just a massive hit to employee morale and engagement,” Dulski said. “People get scared they might be next.”


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