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Bad News For the Holidays - Why Companies Lay Off Employees
Bad News For the Holidays - Why Companies Lay Off Employees

Someone close to me was laid off this week despite top-notch performance and company-wide recognition.

No matter how many platitudes we float about how it happens "in the best of families" and "it happens to everyone," being laid off can be traumatic. Having worked in startups for much of my career, I have been forced by grim circumstances to initiate and manage layoffs more than once. I have likewise been laid off myself (after a significant merger.)  With some of the most prominent tech companies announcing layoffs in January of 2023 and more planned this December, I thought a blog article about layoffs would be timely. It's a big topic. I will share a series of three blog articles. The first will be on why companies make layoffs; the second will cover how to administer a mass dismissal properly and provide a case study of things you should not do if you are laying people off. Finally, a third will cover what you should do if you are laid off.  

Why do Companies Have Layoffs?

Let's start with a background on the 'whys' of layoffs. Set out below are eight common reasons companies lay off workers.  

Reduce Costs. If a company struggles to cover its costs due to a loss of revenue or increased costs, a logical first step is to try to save money on salaries and benefits by reducing the workforce to set things right. While this strategy may help the company survive in the short term, it can often lead to future problems (Wiese, 2023). I often recommend employers explore alternatives. These can include a temporary across-the-board salary reduction or moving to more minor, more flexible shifts. Employees can decide whether to move on or stay, but in my experience, most will stay, at least for a while.

Increase Efficiency. Another reason that companies make layoffs is to increase efficiency. Too many employees can lead to a lack of productivity and efficiency. Companies can increase their productivity and efficiency by reducing the workforce. For example, many employees have less to do when the company automates manual processes. One company I worked with employed this strategy when it moved service operations to another part of the country. The company used simple Interactive Voice Response technology to allow customers to self-serve for payments or balance information, eliminating the need for many CSRs and increasing customer satisfaction. As Artificial Intelligence becomes more and more powerful, look to see increased layoffs in all sorts of jobs, from programmers to accountants to various kinds of factory workers.

Remove Underperforming Employees. Another reason that companies make layoffs is to get rid of underperforming employees. If a company has employees who consistently fail to meet their goals or perform up to par, the employer may let them go during a round of layoffs. This strategy can help the company improve its overall performance by eliminating employees holding it back. This elimination of lower-producing employees was the strategy one company I worked with used to achieve its corporate profitability goals. The company laid off the lowest-performing third of its sales force, pushing sales per employee up immediately. This downsizing, net of charge-offs for terminations, significantly improved overall productivity and profitability.

Respond to Changes in Demand. Companies may also make layoffs in response to changes in their sales pipeline. If they experience a decline in orders, as we saw during the Pandemic, they may need to reduce their workforce to stay afloat. A drop in demand can be particularly difficult for companies solely reliant on one product or service. This is what happened to many fine-dining restaurants during the Pandemic.

Shut Down Operations. Especially at early-stage companies, profits and revenue can remain elusive for months and years. (Hendricks, 2014). Early-stage companies depend on ongoing investments from individual and venture capital investors to survive. Investors can lose confidence or interest in the project or begin to question the viability of the company's product. In that case, the company must either find a new investment group or close its doors and lay off its employees. 

Prepare for a Sale or Merger. Another reason that companies make layoffs is to prepare for or implement a merger. If a company's leadership plans to sell or merge with another company, it may need to reduce its workforce. This kind of layoff frequently occurs in the Tech sector because venture capitalist investors want to pursue an exit strategy and put a company they have invested in up for sale. The downsizing sometimes called "putting lipstick on the pig," allows the company's operating numbers (e.g., sales per employee) to look more enticing to prospective buyers. Post-merger, additional layoffs are likely in staff positions like HR, IT, or Accounting as the acquiring company seeks to consolidate operations and increase profits. (McClay, 2021) Often, seemingly irrational terminations of high-performing employees are made in silence, with the real reason for the layoff only coming to light months after the acquisition.

After-Merger Consolidation. Often, growing companies with access to capital pursue a strategy of buying up smaller companies. This often occurs in maturing economic sectors. Post-acquisition, the acquiring company is faced with having "two of everything," especially in administrative roles. Consolidation usually means that after the purchase, the acquiring company eliminates many HR, accounting, finance, systems management, or other middle management roles in the acquired company that were deemed "duplicative" by the acquirer. 

Because Other Companies Have Lay Offs. In my experience, board members are highly suggestible. When a firm in their sector, for example, technology, makes a large layoff, many board members at competing firms start asking questions of their operating executives. "What do they know that we don't know?" "Do we need all the employees we have? Company Y seems to be able to get along with many fewer?" are some of the common refrains. Early in my consulting career, a client hired us to call many of its competitors to find out how many employees they had in their corporate headquarters to find the answer! The CEO wanted to know if their so-called "corporate overhead" numbers aligned with those of other companies in the industry. 

While the reasons for the layoffs vary from company to company, sector-wide "belt-tightening" is common after a leading player implements significant layoffs. A round of layoffs in the tech sector was a recent example. After Elon Musk acquired Twitter and laid off a substantial portion of Twitter's workforce in late 2022, many other tech companies followed suit. The layoffs occurred in early 2023, though most analysts projected tech spending to rise in 2023! (Trueman, 2023). We've seen more layoffs in tech in late 2023-4.

To summarize, companies lay off employees for many reasons. Most layoffs have nothing to do with employee performance! In the following two articles, I'll review how to manage layoffs with a discussion of best practices and a case study of a recent significant dismissal that hasn't gone well. A final blog article will discuss what to do if you are part of a layoff

References

Hendricks, D. (2014, July 7). 5 Successful Companies That Didn't Make A Dollar for 5 Years. Inc.Com. Retrieved January 28, 2023, from https://www.inc.com/drew-hendricks/5-successful-companies-that-didn-8217-t-make-a-dollar-for-5-years.html

McClay, R. (2021, October 25). How Do Mergers and Acquisitions Impact the Employees? Investopedia. https://www.investopedia.com/ask/answers/041515/what-does-merger-or-acquisition-mean-target-companys-employees.asp.

Trueman, C. (2023, January 25). Tech layoffs in 2023: A timeline. Computerworld. https://www.computerworld.com/article/3685936/tech-layoffs-in-2023-a-timeline.html

Weise, K. (2023, January 19). Microsoft to Lay Off 10,000 Workers as It Looks to Trim Costs. The New York Times. https://www.nytimes.com/2023/01/18/business/microsoft-layoffs.html

 








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