During financial meltdown, companies consider layoffs as the only panacea to profit and profitability without reckoning the short-term as well as long-term costs involved in such an exercise. If all the short-term and long-term costs involved are reckoned, layoffs may not be considered as the right step. And in the long run, the cost savings become less significant in comparison to what companies have to spend on staffing once their business volume surges again.

To get costs out, companies conducting a layoff have to pay a price in the short run. There are, however, other short-term costs to consider. To process people out, managers have to spend time in conveying the news to employees, doing paperwork, reallocating work to remaining employees, training those retained ones how to do the work they've assigned and in handling issues directly related to the layoff – all of these exercises consume sufficient time and, hence, money.

Further, the ramifications of layoffs on surviving employees have important short-term financial impact. Other indirect costs include lost knowledge, skills, contacts, and customers, which are difficult to quantify but are real factors in determining the short-term costs of laying people off.

In the long term, the company’s initial cost savings can be eliminated by the cost it incurs to hire people back at a later stage. The cost savings thus only last as long as the company doesn't need to retake employees. But the majority of companies that lay off employees find themselves back to pre-layoff employment stages within a year or so. And so, hardly any long-term benefit is discernible from employment reduction, except of course, attractive balance sheet in the short-term and the satisfaction that such number of employees have been laid off.

Looking at the implications of layoffs in the long term reveals some hefty costs to the company, especially when the organization decides to rehire employees. The employer pays a higher price for attracting potential replacements, including the cost of sourcing, screening and recruiting candidates. An employer also has to orient new employees and make managers or supervisors available to offer guidance and support while those employees get up to speed.

These apart, an economic-opportunity cost – the difference between the productivity the company would have made had they retained the laid-off employee and the productivity of the replacement while learning the job – is also incurred. This cost can run up to an amount equal to two or three times the annual compensation of the person laid-off and is an additional cost above the annual salary of the replacement.

Lastly, less tangible costs – low morale, lost innovation, fear of more layoffs, angry customers, and lost market share – are also there. Since lay-offs do not pay off in the long run, the same cannot be considered as a strategic initiative by the company.

Considering indirect and direct costs as well as short-term and long-term costs involved, lay-off is not a judicious organizational decision.

Arun Kanth

Sr. Manager (HR & Admn)