By Eric Campbell
Chairman and CEO, Level 5 Advantage, Inc.
There are many reasons companies conduct layoffs through a reduction in force (RIF) program. Some examples include:
Addressing a downturn in business or broader economic recession.
Eliminating post merger redundancy.
Realigning the workforce during a restructuring of the company’s product and service offering.
Introduction of automation.
Outsourcing of certain business operations.
Regardless of the reason, if you are considering a RIF program, we urge you to give serious consideration to reaching the company’s goals through alternative means. Simply put, downsizing an organization’s workforce through layoffs rarely results in reaching the desired objectives. The one-time charge to earnings can be significant and the hit to the productivity is usually considerable as the remaining employees mourn the loss of colleagues and scramble to do more with less. In the case of downsizing to address an economic slowdown, when the economy rebounds, the company must ramp up rapidly again at considerable cost in order to take advantage of the recovery. If the rebound occurs less than 12 months from the date of the layoff, the costs far outweigh the benefits of conducting a layoff.
There are circumstances where a RIF is unavoidable but in ALL cases it should be the absolute last resort.
In this article, we address RIF alternatives where the objective is cost reduction. We categorize alternative cost reduction measures in terms of tiers which characterize the company’s current business condition. These include 1) short-range adjustments; 2) mid-range adjustments; and 3) long-range adjustments. The cost reduction strategies discussed in this paper have been used by many well known names including FedEx, Hewlett Packard, Texas Instruments, Sun Microsystems, Borland Software, Accenture, Volkswagen, and Walmart.
The success of the workforce cost reduction alternatives discussed in this paper depends heavily on the flexibility of the workforce in accepting reductions in various employee related expenses. Frequent and honest communication is critical in gaining employee buy-in. Executive management must clearly convey to employees that the downward adjustment to employment related expenses is calculated to prevent the need for layoffs.
Finally, it is critical that other non-employee related expense reduction efforts be implemented in conjunction with the measures discussed in this paper and communicated to employees. Non-employment related cost reduction measures may include reducing the use or frequency of outside services for facilities maintenance such as janitorial, landscape maintenance, and deferring certain non critical facilities maintenance. In operations this may include renegotiating supplier contracts, use of alternative raw materials and suppliers.
Short-Range Adjustments address a temporary slowdown in business resulting in lowered revenue forecasts lasting one to two quarters (3 to 6 months). In this scenario a company will implement cost-reduction measures that match the expected short-term change in business levels. These expenditure adjustments allow the company to completely avoid layoffs and return to normal business operations after no more than four months. Declining sales and/or sales forecasts signals the need to consider short-range expenditure adjustments to maintain a healthy balance sheet. Immediate recognition of a business lapse and immediate engagement in preliminary cost-reduction methods will focus the company in a cost-sensitive mode for a quick recovery.
The company’s ability to overcome an economic or business downturn and avoiding the more severe mid-range adjustment (6 to 12 months) depends on the company’s agility in reacting to the business environment. Prompt implementation of a human capital management process upon sensing a business slowdown will prevent extended negative consequences.
Cost Reduction Alternatives
Cost-reduction methods solicited from employees: In my personal experience as an HR practitioner, I have found that conveying information about the looming slowdown to employees creates a sense of urgency and gives employees a greater sense of self determination. Providing a formal feedback and brainstorming mechanism, employees will provide innovative ideas. Employees on the front line are often more directly impacted by the inefficiencies of the organization and, as such, posses a unique perspective. Employees often think of resourceful solutions when they have the opportunity to make a direct impact on their work environment. Overall employee morale is much higher owing to their increased sense of self determination and the understanding that the company is making a conscious effort to reduce costs with the employees’ best interests in mind.
Hiring freeze: Temporarily idles all hiring and reduces labor costs in the short term. A disturbing number of employers continue to hire new employees while trimming jobs at the same time. This sends a conflicting message to employees and reduces the likelihood that laid-off employees will return to the company in the future. By moving employees who work in a position which can be eliminated into vacant positions in other areas of the company, an employer can prevent layoffs while increasing the business knowledge of valuable employees.
Mandatory vacation: Establishing mandatory vacation involves asking employees to use a certain number of vacation days in a designated time period. This program is geared toward cutting labor costs in the short term. Employees might not want to use their vacation days in this manner, but they will prefer the job security over forced vacation.
Compressed workweek: The concept involves temporarily reducing the number of hours in a workweek. A company may implement a 35-hour schedule and reduce short-range payroll expenditures. The positive effects for employees include having more time to spend with families and the large majority of employees will prefer this practice to losing their job. One of the benefits for the company is that company production does not inherently decrease with reduced business hours. Employees are under more pressure to produce the same results and, therefore, manage to reach the same output levels.
Temporary facility shutdowns: Closing a facility for a specified period of time works best when it occurs near holidays. Typically, some skeleton functions still report to work (i.e., customer service, accounting, etc.). A shutdown allows employees to take vacation without using their vacation days and it works well if the shutdown occurs near holidays. A temporary plant shutdown can create tremendous cost savings for a company while avoiding layoffs, but overall company production temporarily decreases.
Salary bonus pay reduction: Care must be taken to structure the salary and bonus pay reductions in a manner that does not run afoul of US Wage and Hour regulations or existing remuneration laws in other countries in which affected employees work and live. This practice is obviously not popular with employees so it must be used only very infrequently and the duration should not extend beyond Mid-Range timeframe below. Some employee tension can be mitigated if the reductions are uniformly applied, and begin at the executive level starting with the CEO.
Mid-range adjustments address a longer-term but still temporary business slowdown resulting in lowered revenue forecasts lasting more than two quarters or 6 to 12 months. If a company initially implemented Short-Range cost reduction measures, believing the downturn to be less severe, executive management can transition to mid-range adjustments at any point during the first 2 quarters and still successfully prevent layoffs. A slowdown of this nature may involve an industry-wide slowdown or a deeper economic recession. Consequently, more aggressive cost-reduction methods are required in order to avoid layoffs. As with Short-Range adjustments, executive management must clearly convey to employees that the adjustments to expenses are calculated to prevent the need for layoffs. This will foster employee buy-in and loyalty.
Cost Reduction Alternatives
Extended salary reduction: This involves prolonging the salary and bonus reductions described in the Short-term Adjustments into the 6 to 12 month range. Another method to alter variable pay includes substituting restricted stock awards for variable cash payments awarding company stock in place of monetary bonuses effectively decreases cash payments to employees. This option is not financially viable in all countries. In the US, depending on the equity vehicle, a company may be required to take a one-time charge for the issuance of grants to employees. Here again, care must be taken to structure the reductions to conform to local employment laws.
Voluntary sabbaticals: Sabbaticals allow employees to take voluntary leaves for designated periods of time with reduced or no pay. The company typically still provides benefits. A common pay schedule is as follows: three-month leave at 50-percent pay; six-month leave at 40-percent pay; nine-month leave at 30-percent pay. An alternative cost-effective pay schedule consists of three- to nine-month leaves at 30-percent pay. The company may allow employees to take on contract work with other companies while on leave as long as confidentiality, invention assignment and conflict of interest agreements are updated and signed to prevent them from working for competitors.
Generously offering sabbatical leaves instead of pink slips should be the norm rather than reducing the workforce through layoff. Employers should be more frugal with sabbaticals in times of economic prosperity (the opposite of the way most companies operate). The costs of replacing employees far exceed the costs of the sabbatical. An additional benefit is that most employees will be re-energized upon return.
Employee lease: This innovative cost saving measure involves lending (or contracting) employees to vendors, strategic business partners, or other local companies for a period of time. The leasing company continues to pay benefits and salary while the leasor reimburses or pays the company a fixed fee for the use of their employee.
When a company implements an employee lease program, some employees are thankful that their employer is making an effort to retain them. Other employees prefer not to be assigned to a company they might not want to work for. This practice is effective for dramatically reducing labor costs. However, difficulties occur if there are few local companies in need of leased employees with a particular skill set. Other obstacles exist if the business downturn is due to a broader economic recession where there are few companies in need of temporary workers.
Employee lending to nonprofit organizations: Instead of being laid off, employees are given the option to work for a local nonprofit organization for a designated period of time while being paid a reduced salary. The company continues full coverage of benefits. After the lending period ends, employees have a grace period, while still being paid, to find a job inside the company again. The pay schedule would be similar to the sabbatical leave pay schedule. This program allows employees to remain in a location while receiving benefits and a partial salary, and helping the community.
Internal Employee Reassignment: In situations where the company has previously outsourced certain business functions (customer services, technical support, etc.) an employer may consider the cost benefit of bringing the function back in-house and reassigning personnel in positions that are otherwise no longer necessary to the newly in-sourced business functions. Major obstacles include the transferability of skill sets and the employees desire to transfer into a new role.
The primary consideration in determining whether or not to outsource a business function to a third party is not always cost savings but exchanging a fixed cost for a variable cost (scalability up or down). If the real cost of bringing the function back in-house is greater than maintaining the outsource relationship then the function should remain with the outsource vendor.
If business conditions dictate significant cost reductions over a 12 to 24 month period, the company should view layoffs as a viable option.