Which is preferable, Layoffs or Alternatives to Layoffs?

by cv harquail on May 4, 2009

My esteemed colleague and fellow Michigan PhD alum, Aneil Mishra, is a well-known expert on the ‘softer’ organizational affects of downsizing and layoffs: morale, commitment and trust. Writing today about furloughs at GM on his blog Total Trust, Aneil mentions that

"In our research on downsizing, we’ve found that across-the-board cost cutting like this (specifically, pay reductions) rarely achieves its intended goal of actually reducing costs. That’s because such measures have a significant negative impact on employee morale, among other negative outcomes."

For reasons that became clear to me a little later, this comment stopped me in my tracks. I wondered: Have I been advocating alternatives to layoffs, like voluntary pay reductions, that actually don’t reduce costs any better than layoffs themselves?

Are we really stuck between two options, Layoffs and Alternatives to Layoffs, where both options fail to reduce costs and instead depress morale and commitment — and thus obstruct productivity and innovation? What’s a leader to do? What have we missed?

Then, reflecting on Paul Levy at Beth Israel Hospital, Diane Hessen’s post about "Return on Openness" and my own experience in the Ivorydale Soap Plant with high-commitment/high-involvement work systems, I remembered:

It’s not what you do, but how you do it. More specifically, it may not be ‘layoffs’ or ‘pay reductions’ per se that fail to reduce costs, or depress morale. Rather, it may be how these decisions are made and implemented in each organization that generates these less-than-desirable outcomes.

Said another way– Which is preferable: Layoffs or Alternatives to Layoffs ?

Neither?! W hat’s preferable is a democratic, transparent, high-involvement, decision-making process for creating a cost-cutting, ‘right-sizing’ strategy.

Because I think of Aneil’s research as being focused on situations where layoffs and downsizing were inevitable , I hadn’t considered how Aneil and his colleagues’ findings might offer insights about getting the cost and commitment benefits that alternatives to layoffs are supposed to bring. Although their research doesn’t address situations where alternatives to layoffs are chosen, the steps for increasing commitment while reducing costs are the same:

Consider: Mishra & Spreitzer (1998) argue that if employees:
chart.jpg

1.  Feel they can can trust top management,

2.  See the outcomes of the process as being just (i.e., using a fair process, sharing the burden fairly, having a reasonable rationale), and

3.  Feel empowered to address the additional problems created by the solution they agree to (such as adding new roles to current jobs, or managing different work schedules),

=> Employees will respond to downsizing/layoffs in a "hopeful" way.

"Hopeful Responses" are active (not passive) and constructive (not destructive).

When members respond in a hopeful way, they are excited about the future in spite of the present difficulty, they are optimistic, they focus on solving problems rather than complaining, they take initiative, and they become "active advocates" within the organization. They are more able to cope with the complexities of downsizing (both psychologically and operationally), because they experience a sense of ownership and take responsibility for making the plan work.

It’s all about "cost plus…"

… A focus on cost PLUS a process that centers on democracy, transparency and involvement. Whether the choice is layoffs, pay reductions, furloughs or reduced work weeks, it is the process that cuts costs while sustaining morale and commitment– or not.

So a little reminder to myself

— I need to advocate strategic alternatives to layoffs decided upon through transparent, democratic organizational processes.
— Advocate both a goal and a process. Don’t assume that a goal that seems to disrespect employees (e.g., layoffs) is always achieved through process that disrespect employees.

Layoffs chosen through democratic, transparent processes, rather than by executive fiat, can actually sustain morale and generate commitment.

Similarly, don’t assume that goals that appear to respect employees are always achieved through process that respect employees.

Alternatives to layoffs decided by executive fiat may save jobs, but alternatives to layoffs chosen though transparent and democratic processes preserve and sustain organizations.

Success depends not only on desirable, humane goals (avoiding layoffs) but also on desirable and humane strategies (transparency and democracy) for choosing these alternatives.

The takeaway?

It’s not just alternatives to layoffs, but also cost cutting strategies that involve, empower, and trust organization members, that lead to increased productivity and innovation, and to cost-savings in times of crisis.

For more detail, see : Explaining How Survivors Respond to Downsizing: The Roles of Trust, Empowerment, Justice, and Work Redesign, Academy of Management Review (1998) Aneil Mishra and Gretchen Spreitzer

{ 6 comments }

Joseph Logan May 5, 2009 at 3:35 am

I imagine an employee with a job would prefer the alternatives to the layoff, but that might be a mistake. The security of a guaranteed job is attractive, and yet it is disruptive events that usually produce creative insight and innovation (at least in my own humble experience).

Failing certainty, I think openness is something much desired and often missing when layoffs are on the table. Absent some depiction of the linkage between talent, resources, strategy, etc., there’s almost no way to make a decision that does not produce unintended consequences. If the thinking behind these decisions isn’t made explicit, the reaction from employees is often the same as if the thinking were not there at all.

Aneil Mishra May 5, 2009 at 2:51 pm

CV:

Thanks so much for highlighting some of our research on layoffs. In some of our other research, we do investigate how organizations can postpone and sometimes even avoid the inevitability of layoffs during periods of cost-cutting and retrenchment. In that research, we concur that HOW you go about reducing costs matters as much as WHAT you do. We recently published a ten-year retrospective and update on our downsizing research in the latest issue of Sloan Management Review, entitled “Downsizing the Company without Downsizing Morale:

http://sloanreview.mit.edu/the-magazine/articles/2009/spring/50310/downsizing-the-company-without-downsizing-morale/

Aneil Mishra

CV Harquail May 5, 2009 at 7:56 pm

I suspect that knowing the reasoning behind an executive fiat — and believing that this reasoning is reasonable — would make a layoff by fiat somewhat less damaging than a layoff with no explicit effort to share the reasoning behind it. … Although both are situations where executives decide and employees only react. It would be interesting to do a study to assess the variance in responses to (1) Alternatives + participation, (2) Alternatives by fiat + explanation, (3) layoffs + participation, (4) Layoffs by fiat + explanation, and (5) Layoffs by fiat without explanation. How much does democratic process meliorate the other downsides of either layoffs or alternatives….[ I’ll get out my calculator and consult the 3rd grade math class… we can gin up a convincing number …. Either that, or commission a doctoral student!}

Natalie Hanson, PhD May 8, 2009 at 8:54 am

Thanks for this article, including the self-reflection on your original assumptions.

I currently work in an organization that has made a decision that – in addition to other cost-cutting measures – layoffs are required to ensure the long term health of the company. The messaging from our executive team has focused is on operating margins specifically. In addition to looking at benefits packages, temporarily reducing salaries & compensation was discussed as an alternative to layoffs. However, the executive team seemed to feel that such an approach would create a degree of uncertainty across the entire organization “when will we be back to full salary?”, etc. The decision was made that it was preferable to let a small number of people go (5-6%), and to impact to the bottom line in a sustainable way. Based on my experience, in the end, fairly handled and consistently communicated layoffs seemed like a preferable decision.

The executive team has been very open about the difficult choices they faced, and how they have come to their decisions. While the process has been unpleasant (even for those of us left behind), I would agree that how the process has been handled has made a big difference in terms of employee perception and morale.

CV Harquail May 8, 2009 at 9:41 pm

Hi Natalie,

Thanks so much for your thoughtful comment and for sharing what’s been happening in your organization.

As much as I have been railing against layoffs as a concept, I do understand that sometimes they are necessary. I’m realizing that my concerns center on when layoffs are chosen in a cavalier manner, and/or when the decision-making process is closed and/or unfair.

When layoffs must be done (and sometimes they must) a caring, open, fair, approach that spreads out the pain (rather than concentrating it on the folks at the bottom) really makes a difference. Not only does the research support this, but also we know in our hearts as managers that caring about how organization members are involved in decisions that affect the organization can make even the hardest decisions easier to bear.

It’s good to hear that in your organization was able to handle the decisions around layoffs in a way that feels fair to you and others. Just knowing that managers considered other options helps … which reminds me that some folks have overlooked how Paul Levy & the employees of Beth Israel have in fact laid off around 150 people…. even in that ‘model’ process, layoffs were chosen. The good part is that the number of layoffs went way down from the 600 that were initially expected.

On a different angle, you raise the question of how/when/if to return to the way things worked before ‘alternatives to layoffs’ were chosen. This is important because I bet most folks don’t want to trade off sick days, vacation time, overtime pay, pension benefits, etc. forever. We don’t want a situation where compensation and experience are voluntarily reduced to ‘help out’ and then become institutionalized. I’ll keep my eyes open for some research & examples on that.

Surely, hopefully, we’ll need to talk about going back to full-staffing, full-compensation *soon*. ….

Graeme Martin May 16, 2009 at 2:52 am

This has been a really helpful thread and insights into layoffs and corporate reputations. I’m going to use your ideas and those of Aneil’s (suitably acknowledged) in a talk I’m giving to managers over here in Glasgow on Tuesday, I’ve just read their updated article.

It will be interesting to see how far the ideas travel across the pond. Quite a few years ago I worked in industrial relations and was responsible for acting as the hatchet man. Few organizations and employees then expected to be involved. However, the UK government introduced legislation on consultation over layoffs way back in 1970s, which has had an impact. In the UK I think there has been a sea change in the way in which organizations are approaching layoffs/ alternatives in this current recession, at least as reported in the press and in surveys by organizations such as the CIPD.

Well done of the recognition of your blog – it is thoroughly deserved

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