Which of the Following Are Important to Ensure That a Decision Like Trevors Does Not Occur Again:

In Brief

The Situation

Automation and fierce competition are forcing many companies to resort to frequent rounds of layoffs.

The Problem

All also often, layoffs done for short-term gain harm employee engagement and actually reduce profitability.

The Improve Mode

Some companies take developed workforce change strategies that make sparing employ of staff reductions and ensure that when they practise happen, the process feels fair and the visitor and the afflicted parties are set up for success.

Ii great forces are transforming the very nature of work: automation and always fiercer global competition. To go on up, many organizations have had to rethink their workforce strategies, often making changes that are disruptive and painful. Typically, they turn to episodic restructuring and routine layoffs, but in the long term both impairment employee engagement and visitor profitability. Some companies, notwithstanding, have realized that they need a new approach.

Consider the case of Nokia. At the first of 2008 senior managers at the Finnish telecom firm were celebrating a one-year 67% increase in profits. Yet competition from low-cost Asian competitors had driven Nokia's prices downwardly by 35% over simply a few years. Meanwhile, labor costs in Nokia'due south Bochum institute in Germany had risen by 20%. For management, the pick was articulate: Bochum had to go. Juha Äkräs, Nokia's senior vice president of human resource at the fourth dimension, flew in to talk most the layoff with the institute's 2,300 employees. Every bit he addressed them, the oversupply grew more than and more agitated. "Information technology was a totally hostile situation," he recalls.

The anger spread. A week afterwards 15,000 people protested at Bochum. German government officials launched an investigation and demanded that Nokia pay back subsidies information technology had received for the plant. Unions chosen for a boycott of Nokia products. The news was filled with pictures of crying employees and protesters burdensome Nokia phones. Ultimately, the shutdown cost Nokia €200 million—more than than €lxxx,000 per laid-off employee—not including the ripple effects of the boycott and bad press. The firm's market share in Germany plunged; company managers gauge that from 2008 to 2010 Nokia lost €700 million in sales and €100 million in profits in that location.

In 2011, when Nokia's mobile phone concern tanked, its senior leaders decided they needed to restructure again. That would involve laying off eighteen,000 employees across 13 countries over the next two years. Chastened past their experience in Germany, Nokia'south executives were determined to find a better solution. This time, Nokia implemented a program that sought to ensure that employees felt the procedure was equitable and those who were laid off had a soft landing.

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One of us, Sandra, has spent eight years researching best practices for workforce change in global multinational companies. She has seen that all too frequently companies practice bad layoffs, practise layoffs for the wrong reason, or worse, practice both. By "bad," we mean layoffs that aren't fair or perceived as fair by employees and that accept lasting negative knock-on effects. The task cuts in Bochum ignited outrage because Nokia had generated and then much profit the year before. Consequently, they were seen as unjust and took a steep toll on Nokia'due south reputation and sales. And when we say "wrong reasons," we mean done to achieve short-term toll cuts instead of long-term strategic change. In 2008, Nokia did accept the right reasons, just it still suffered considering of its process.

Some governments, recognizing the massive damage layoffs create, have written laws protecting employees against them. For example, a number of European countries crave companies to provide a social or economic justification earlier they can deport layoffs. France, all the same, recently eliminated the requirement to provide an economic justification, and in the United States companies tin behave layoffs at will. Regardless of how like shooting fish in a barrel it might exist to cut personnel, executives should call back that doing then will accept consequences.

The inquiry clearly shows that bad layoffs and layoffs for the incorrect reasons rarely help senior leaders attain their goals. In this article, we'll present a better arroyo to workforce transitions—one that makes sparing employ of staff reductions and ensures that when they do happen, the procedure feels fair and the company and the affected parties are set for success.

Why Layoffs Are Ineffective

If Nokia's story sounds familiar, albeit a little more colorful than usual, that'south because it is. In the United States lone, the Bureau of Labor Statistics reports, 880,000 to i.five one thousand thousand people were laid off annually from 2000 to 2008 and from 2010 to 2013 (the last year information was compiled). This happened even when the economy was expanding. During 2009, the height of the Cracking Recession, 2.1 meg Americans were laid off. Globally, unemployment rose by 34 meg from 2007 to 2010, data from the International Labour Organization shows.

Layoffs have been increasing steadily since the 1970s. In 1979 fewer than 5% of Fortune 100 companies announced layoffs, co-ordinate to McMaster University sociology professor Fine art Budros, but in 1994 almost 45% did. A McKinsey survey of 2,000 U.Due south. companies plant that from 2008 to 2011 (during the recession and its backwash), 65% resorted to layoffs. Today layoffs have become a default response to an uncertain time to come marked by rapid advances in technology, tumultuous markets, and intense competition.

Yet other information on layoffs should give companies break. In a 2012 review of xx studies of companies that had gone through layoffs, Deepak Datta at the Academy of Texas at Arlington found that layoffs had a neutral to negative effect on stock prices in the days post-obit their declaration. Datta besides discovered that after layoffs a majority of companies suffered declines in profitability, and a related study showed that the drop in profits persisted for three years. And a team of researchers from Auburn University, Baylor University, and the University of Tennessee found that companies that have layoffs are twice as probable to file for bankruptcy equally companies that don't take them.

After a layoff, survivors experienced a 20% decline in task functioning.

All too frequently, senior managers dismiss such findings. Some argue that since companies exercise layoffs considering they're already in bad shape, information technology's no surprise that their financial performance may not meliorate. Layoffs are so embedded in business as a brusk-term solution for lowering costs that managers ignore the fact that they create more than bug than they solve.

Companies that shed workers lose the time invested in training them besides equally their networks of relationships and knowledge about how to get piece of work done. Fifty-fifty more meaning are the blighting effects on survivors. Charlie Trevor of University of Wisconsin–Madison and Anthony Nyberg of University of South Carolina institute that downsizing a workforce by 1% leads to a 31% increase in voluntary turnover the next twelvemonth. Meanwhile, low morale weakens engagement. Layoffs can cause employees to feel they've lost control: The fate of their peers sends a message that hard work and good functioning practice not guarantee their jobs. A 2002 written report past Magnus Sverke and Johnny Hellgren of Stockholm University and Katharina Näswall of Academy of Canterbury found that after a layoff, survivors experienced a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a twenty% pass up in job performance.

While short-term productivity may ascension considering fewer workers have to comprehend the same amount of work, that increment comes with costs—and not only to the workers. Quality and safety suffer, co-ordinate to enquiry by Michael Quinlan at the Academy of New South Wales, who also found higher rates of employee exhaustion and turnover. Meanwhile, innovation declines. For instance, a study of one Fortune 500 tech firm done by Teresa Amabile at Harvard Business School discovered that subsequently the firm cut its staff past xv%, the number of new inventions information technology produced roughshod 24%. In addition, layoffs tin rupture ties between salespeople and customers. Researchers Paul Williams, M. Sajid Khan, and Earl Naumann accept found that customers are more likely to defect later a company conducts layoffs. Then there's the effect on a company'due south reputation: East. Geoffrey Honey and Matthew Due south. Kraatz of University of Illinois at Urbana–Champaign found that companies that did layoffs saw a decline in their ranking on Fortune's list of most admired companies.

Employees who are downsized pay a price beyond the immediate loss of their jobs. Wayne Cascio, a professor at the Academy of Colorado, points to the Labor Section'southward survey of workers who were laid off during 1997 and 1998, an economic upswing. Most were worse off a yr afterwards: Only 41% had found work at equal or college pay, 26% had establish jobs at lower pay, and another 21% were nevertheless unemployed or had left the workforce entirely. The effects follow people throughout their lives. A 2009 Columbia University study that looked at employees who had been laid off during the 1982 recession showed that xx years later they were still earning 20% less than peers who had kept their jobs. The aftershocks aren't express just to earnings: According to a study by Kate Strully, an assistant professor at SUNY, laid-off employees have an 83% higher take a chance of developing a new health condition in the yr later their termination and are six times more likely to commit a violent human activity.

The Search for Alternatives

A few companies take been experimenting with better ways to handle their changing workforce needs. Take AT&T. In 2013 the company'south leaders concluded that 100,000 of its 240,000 employees were working in jobs that would no longer be relevant in a decade. Instead of letting these employees go and hiring new talent, AT&T decided to retrain all 100,000 workers past 2020. That style, the company wouldn't lose the noesis the employees had developed and wouldn't undermine the trust in senior direction that was necessary to engagement, innovation, and performance. Then far, the results seem very positive. In a 2016 HBR commodity, AT&T's master strategy officer, John Donovan (at present CEO of AT&T Communications), noted that 18 months after the program's inception, the company had decreased its product evolution cycle time by forty% and accelerated its fourth dimension to acquirement by 32%. Since 2013, its acquirement has increased by 27%, and in 2017 AT&T fifty-fifty made Fortune'south 100 All-time Companies to Piece of work For listing for the beginning time.

In her work, Sandra has studied 7 companies that, like AT&T, take successfully pursued alternatives to traditional layoffs. An analysis of their experiences reveals that an effective workforce change strategy has 3 main components: a philosophy, a method, and options for a diversity of economic atmospheric condition.

A philosophy.

A workforce change philosophy serves as a compass for senior leaders. It builds on a company's values and spells out the commitments and priorities the company will abide by as it implements change. A philosophy helps leaders answer the following questions:

• What value do we believe employees contribute to our business and its success?
• What expectations do we accept for employees' engagement, loyalty, flexibility, and ability to adjust and abound?
• What do we owe employees equally a fair exchange for what they accept given us?
• How tin employees assistance united states develop and implement workforce alter?

The philosophy of the French tire maker Michelin, for case, includes hiring people for their potential rather than for the chore. In its labor relations policy, the visitor describes its delivery to employees' long-term growth. Each employee is assigned a career manager who oversees his or her development and helps make sure it aligns with Michelin'south needs.

A workforce modify strategy should conceptualize three different scenarios.

The visitor also has a divers approach to workforce alter and restructuring. Michelin's labor relations policy described it like this in 2013:

Restructures are inevitable in certain circumstances in social club to maintain the company'southward global competitiveness. These restructures must, as far as possible, take place at times when the company's health allows mobilization of adequate resources to attenuate the social consequences. Whenever possible, staff at the entities concerned and their representatives are invited to piece of work together to seek and advise solutions for restoring competitiveness and reducing overcapacity, which may open an alternative to closing an activity or site. When restructuring is unavoidable, it must be announced as soon equally possible and carried out according to the procedures negotiated with the staff representatives. The ensuing changes on a personal level must be supported for as long equally is necessary to ensure that the reclassified employees observe a satisfactory solution in terms of standard of living, stability, family life and cocky-esteem.

When Nokia was contemplating that massive workforce reduction in 2011, its senior leaders articulated a philosophy with four core values:

1. We will accept our responsibility as the driver of the local economies and aim for the highest of aspirations in supporting our previous and electric current employees.
2. We will have an activist role and lead the program with our brand, expertise, and resources in the key areas that matter most.
3. We volition involve all of the relevant parties in the program blueprint and operations.
4. We will communicate openly towards all stakeholders, including employees, unions, government, and local stakeholders, even when we do not know the full answers.

As Nokia'southward philosophy highlights, workforce change can affect many people beyond employees. A company must communicate its intent directly without leaving any of them in the dark or piecing together scraps of information to effigy out what the future holds.

A method.

Having a clear methodology will permit companies to explore alternatives to layoffs, and if they cannot be avoided, minimize the harm they cause. To establish one, firms demand to address three questions:

• How will we plan for workforce change on an ongoing footing?
• Who will exist accountable for managing and supervising it?
• What metrics should we use to make up one's mind whether our actions are constructive?

In 2013, Michelin's CEO, Jean-Dominique Senard, asked the members of his squad to turn the insights they'd gathered from the previous decade'south restructuring efforts into a formal process for workforce change. As a effect, Michelin integrated 3 planning processes—production planning, territory planning, and restructuring planning—into one. The production-planning groups project their anticipated production for the next five years, and then the territories identify which regions will have besides much or too little production chapters and what technologies each factory will need. The restructuring plans come out of the dialogue between the product and territory heads. For example, in October 2013, Michelin adamant that information technology would take overcapacity for truck tire product in its Budapest factory and decided to close it in mid-2015. By making that call early, Michelin's squad had time to carefully programme objectives for the shutdown and create a way to reduce the touch on on the affected employees (something we'll talk over more than later).

Michelin has gear up upwardly an accountability construction that conspicuously delineates who is responsible for what. The visitor'due south executive committee, led past the CEO, oversees workforce modify globally. Because more 50% of Michelin's factories and nearly of its workforce reductions are in Europe, a European restructuring committee supports the executive commission. Information technology identifies factories that should be airtight or downsized and direct oversees all European restructurings. Finally, Michelin establishes a committee for each factory that will be affected, consisting of regional and state executives who are responsible for implementing the restructuring plan. 2 senior executives at headquarters—a director of restructuring and a director of product planning—coordinate the entire process.

Like any other good strategy, an effective workforce change strategy includes goals against which success can be measured. An instance of these comes from Honeywell. In the 2001 recession, right before Dave Cote became its CEO, the company laid off 25,000 employees, or almost 20% of its staff. Sales barbarous by 11% from 2000 to 2002. When the recession hit in 2008, and it looked equally if more workforce changes might be required, Cote set two goals: to improve on Honeywell'southward poor performance during the 2001 recession, and to be in a stronger position than its competitors when the recovery came.

To measure the first goal, Cote decided to compare the visitor'southward sales, net income, and free cash flow figures for the 2 recessions. As information technology turns out, the business firm was able to improve essentially on all three measures. In 2009 Honeywell'southward sales were 39% higher than its 2002 sales, its free cash flow was 94% higher, and its internet income was more than than six times higher. To monitor progress on the second goal, operation confronting competitors, financial data providers developed ii measures: the percentage change in operating income from the 2007–2008 pinnacle to 2011, and total stock returns in 2012. At +one.8%, Honeywell had the highest postrecession increase in operating margins (versus -4.v% to +ane% among its peers). And at 75.28, Honeywell also had the highest three-twelvemonth full stock return in 2012, l% better than its closest competitor's render and four times ameliorate than the everyman-performing competitor'southward.

Options for a variety of economical weather.

A workforce change strategy should conceptualize three different scenarios: a healthy present, short-term economic volatility, and an uncertain future.

A healthy present. In the immediate term, senior leaders should practise disciplined hiring and use stringent performance metrics to build a strong system that can weather change. A lean approach to staffing will help companies avoid yo-yoing between overexuberant hiring during growth and damaging staff reductions when demand falls.

Before Cote began his turnaround in 2002, Honeywell had a policy of hiring freely during expert times and then cutting jobs in downturns. The desperate head count reduction of 2001 was too much for Cote, who responded by introducing hiring controls. Senior leaders had to justify how staff additions would assistance new-product or market development, and if they couldn't, had to trim costs elsewhere to fund the hires.

Too often managers use layoffs as an alibi to avoid difficult discussions well-nigh operation. Many companies practice "rank and yank" layoffs to thin out weaker employees, oftentimes on an annual ground, simply it's more productive to use meaningful performance reviews and employee development plans to cultivate a base of high performers. Lincoln Electrical, an arc-welding products and consumables manufacturer headquartered in Cleveland, Ohio, has had a no-layoff policy in its U.S. operations since 1958. Role of the reason information technology maintains that policy is that information technology has a reputation for loftier-quality and efficient staff, thanks to very strict performance standards and a rigorous evaluation process. Employees are assessed twice a year in v areas. Operation is competitive inside departments, and performance ratings are tied to a merit-based bounty system. Employees who autumn in the bottom 10% receive an improvement programme and, if they remain at that place consistently, are eventually allow go.

Short-term volatility. Experienced managers develop a range of ways to reduce costs without resorting to destructive layoffs. Three approaches implemented by Honeywell, Lincoln Electric, and Recruit Holdings, a Japanese man resources and advertising media conglomerate, demonstrate how much room in that location is for artistic management during downturns.

During the Great Recession, Cote used furloughs instead of layoffs at Honeywell. Having weathered three recessions when he was at GE, he had adult a sense for when a business organisation cycle might run its course. Two years before any sign that the economy was in problem, he began to pull back on hiring. In one case the recession hit, Honeywell furloughed employees for ane to v weeks, providing unpaid or partially compensated leaves, depending on local labor regulations. According to an commodity by Tom Starner in Man Resource Executive, the company's finance section estimated that furloughs saved Honeywell the equivalent of twenty,000 jobs.

In a 2013 article he wrote for HBR, Cote explained, "I've never heard a management team talk about how the choices they make during a downturn will impact operation during a recovery….I kept reiterating that bespeak: There will be a recovery, and we need to be prepared for it." Furloughs allowed Honeywell to retain the talent it needed when demand resurged and helped it stay profitable throughout the recession and achieve stiff growth during the five years after the recovery.

In 2000, Recruit Holdings adult an innovative system, Career View, through which information technology hires employees with nontraditional backgrounds as 3-year contractors. The system helps Recruit reach two goals: expand its accomplish outside Japan's major cities and increase workforce flexibility—a real feat given that Japanese companies traditionally don't practice layoffs. The program targets rural employees who lack the education and feel to country a job at a major Japanese corporation, hiring them every bit sales associates for regional offices near their hometowns. Half dozen months later on joining Recruit, these contractors meet with career counselors to discuss their goals. They also receive detailed operation reviews that lay out the skills they're developing, the skills they need to get their adjacent job—generally at another company—and what they tin can do to bridge the gap between the two. Approximately ninety% of Career View employees are able to become some other job at the end of their three-year stints, and Recruit is able to expand its regional presence and adjust its sales staffing up or downwardly according to the economical cycle.

Too often managers use layoffs as an alibi to avoid hard discussions.

Lincoln tin avert layoffs because it requires employees to accept flexible assignments. Employees are expected to work actress hours when demand ramps upwards, and they empathize that they'll work shorter hours when it ramps down. In improver, they can be reassigned to any other job, including ane with a lower bacon, for the elapsing of a downturn. When orders fell during the Great Recession, for instance, Lincoln moved some factory workers into sales. Those employees adult a deeper understanding of Lincoln, and customers benefited because the manufactory workers had a thorough cognition of the firm's products. In addition, during economical lulls, Lincoln's leaders automatically shift their priorities to initiatives they aren't able to fully nourish to when business is booming, such as developing quality improvements, bit-reduction programs, research and development projects, and maintenance tasks—all enabled by the availability of skilled employees who accept more time to help out when need falls.

An uncertain future. Market shifts, new technologies, and new competition can require companies to exercise major restructuring. Before considering a layoff, they should see if they can accept a cue from AT&T's transformation.

Michelin, for one, has embraced transformations as part of its workforce strategy. When Bertrand Ballarin joined the company, in 2003, i of his first jobs was to manage a manufacturing plant in Bourges, France, that was going to be close downwards. He gathered its managers and union reps, explained the situation, and gave them a twelvemonth to come up with a plan to save the found. After analyzing how other Michelin plants were producing airplane tires, one of three product lines handled in the factory, the team ended that the Bourges facility had a meliorate, more than consistent industrial process for making them than the other plants did. The team successfully argued that Bourges should specialize in airplane tires and go a new inquiry center to assist product development.

In 2013, Michelin began applying the lessons from Bourges to a mill in Roanne, France, that was at risk of being shut down. From October 2014 to March 2015, more 70 individuals, including leaders from headquarters, spousal relationship representatives, found managers, and employees, met to develop a transformation strategy for Roanne. Rather than endmost the facility and laying off its employees, Michelin agreed to put €80 million into creating a new line of premium tires there; the caput count would autumn from 850 to 720 employees through natural attrition. Instead of the traditional 4 teams working Monday to midday Saturday, the establish would reorganize into five teams that kept operations running vii days a calendar week effectually the clock, and all employees would work six boosted days a yr. These changes immune the institute to flex production up or down past 12% co-ordinate to market conditions. In add-on, Michelin defended €2 meg to programs for improving the quality of management and work-life balance—issues that had emerged during the transformation strategy planning—for the plants' employees.

However, there are times when a transformation isn't possible or the transformation itself results in layoffs. In these cases, companies have to ensure that employees are treated adequately. This isn't just about being a good Samaritan. Datta found that companies tended to get meliorate fiscal results after a layoff when employees thought it was handled equitably and washed for strategic reasons rather than price cutting.

Allow's wait again at what happened at Nokia in 2011, when its senior leaders realized the visitor needed another restructuring. Then-chairman Jorma Ollila was determined to avoid another Bochum. To help the company do so, a small squad of senior leaders developed Nokia'southward Bridge programme, which aimed to meet that as many employees as possible had a new opportunity lined up the day their electric current job ended. Nokia opened Bridge centers in the 13 countries where the layoffs would take place. The plan outlined 5 paths employees could choose from:

1. Notice some other job at Nokia.

In club to avoid favoritism, selection committees were formed to decide which employees to retain, instead of having local managers choose.

two. Find another job outside Nokia.

The centers offered outplacement services, including career coaching, résumé workshops, career fairs, and networking events.

3. First a new business.

Private employees or teams could present concern proposals to win grants of up to €25,000. Employees were given two months to develop their plans, too as support such as coaching and mentoring, networking introductions, and preparation. Nokia took no pale in any of the funded businesses.

4. Learn something new.

Nokia offered preparation grants for business-management and trade-school courses in many areas, including restaurant management, cosmetology, construction, and firefighting.

v. Build a new path.

The company offered fiscal support to employees who had personal goals they wanted to achieve, such as volunteering.

Nokia spent €l 1000000 on Span, or about €2,800 per employee. That accounted for just 4% of the €ane.35 billion information technology spent on restructuring from 2011 to 2013. Equally a issue of the plan, 60% of the 18,000 affected workers knew their side by side stride the day their jobs concluded. Overall, 85% of the Finnish Bridge participants said they were satisfied with the program, while 67% of global employees said they were. Furthermore, the layoff candidates and the remaining employees maintained or improved quality levels throughout the restructuring. Employees at the sites that were targeted for downsizing achieved €3.4 billion in new-product revenues, one-third of new-product sales—the same proportion they had brought in before. Employee date scores in all areas of the company held steady throughout the restructuring. And, unlike the state of affairs in Bochum, at that place were no labor actions of whatsoever kind in the xiii countries where the layoffs happened. By all accounts Nokia had indeed found a better approach to workforce modify.

In 2017, three years afterwards selling its devices and services business organization to Microsoft, Nokia used an enhanced version of the Bridge program to handle its latest restructuring. Microsoft Republic of finland has rolled out a like plan. And Finland'due south government has even taken cues from Span and incorporated ideas from it into legislation outlining what companies that conduct layoffs are required to provide for afflicted employees.

Conclusion

One of the biggest questions organizations face every bit they grapple with a constantly shifting economic landscape is whether their electric current workforce can assistance them make the transitions necessary to their success. While companies tend to prioritize short-term fiscal results over the long-term well-being of their employees, employees are the lifeblood that enables a company to keep delivering the products and services that ultimately generate shareholder benefits. Michelin'south and Nokia'south experiences show that employees can and should be trusted to perform well, fifty-fifty when they know they might lose their jobs. For all companies, planning thoughtful workforce change instead of automatically resorting to layoffs is a ameliorate manner to address the vicissitudes of technological transformation and intensifying competition.

A version of this article appeared in the May–June 2018 issue (pp.122–129) of Harvard Business Review.

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Source: https://hbr.org/2018/05/layoffs-that-dont-break-your-company

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