Imagine you had a dog. You got the dog when it was young, trained and raised it. This animal was a part of your family and you gave it little collars and cute little clothes with your family name on it. The dog came to special events and soon thought of this place as its home and you all as loved ones. Then one day with no warning, you locked the dog out of the house. You and the other adults in the house had decided getting rid of any random dog was important to the bank that owned your self, so you locked the door. Eventually it wandered off, unsure of why you had done this, still wearing the sad little collar and t-shirt with your name.
If Americans saw this in a movie, people would be warning each other that it was "too hard to watch". In real life, this is an experience that a huge percentage of people working in tech will go through. It is a jarring thing to watch, seeing former coworkers told they don't work there anymore by deactivating their badges and watching them try to swipe through the door. I had an older coworker who we'll call Bob, upon learning it was layoffs, took off for home. "I can't watch this again" he said as he quickly shoved stuff into his bag and ran out the door.
In that moment all illusion vanishes. This place isn't your home, these people aren't your friends and your executive leadership would run you over with their cars if you stood between them and revenue growth. Your relationship to work changes forever. You will never again believe that you are "critical" to the company or that the company is interested in you as a person. I used to think before the layoffs that Bob was a cynic, never volunteering for things, always double-checking the fine print of any promise made by leadership. I was wrong and he was right.
Layoffs don't work
Let us set aside the morality of layoffs for a moment. Do layoffs work? Are these companies better positioned after they terminate some large percentage of people to compete? The answer appears to be no:
The current study investigated the financial effects of downsizing in Fortune 1000 Companies during a five-year period characterized by continuous economic growth. Return on assets, profit margin, earnings per share, revenue growth, and market capitalization were measured each year between 2003 and 2007. In general, the study found that both downsized and nondownsized companies reported positive financial outcomes during this period. The downsized companies, however, were outperformed consistently by the nondownsized ones during the initial two years following the downsizing. By the third year, these differences became statistically nonsignificant. Consequently, although many companies appear to conduct downsizing because the firm is in dire financial trouble, the results of this study clearly indicated that downsizing does not enhance companies' financial competitiveness in the near-term. The authors discuss the theoretical and practical implications of these findings.
In all my searching I wasn't able to find any hard data which suggests layoffs either enable a company to better compete or improve earnings in the long term. The logic executives employ seems to make sense on its face. You eliminate employees and departments which enable you to use that revenue to invest in more profitable areas of the business. You are scaling to meet demand, so you don't have employees churning away at something they don't need to be working on. Finally you are eliminating low performance employees.
It’s about the triumph of short-termism, says Wharton management professor Adam Cobb. “For most firms, labor represents a fairly significant cost. So, if you think profit is not where you want it to be, you say, ‘I can pull this lever and the costs will go down.’ There was a time when social norms around laying off workers when the firm is performing relatively well would have made it harder. Now it’s fairly normal activity.”
This all tracks until you start getting into the details. Think about it strictly from a financial perspective. Firms hire during boom periods, paying a premium for talent. Then they layoff people, incurring the institutional hit of losing all of that knowledge and experience. Next time they need to hire, they're paying that premium again. It is classic buying high and selling low. In retail and customer facing channels, this results in a worse customer experience, meaning the move designed to save you money costs you more in the long term. Investors don't even always reward you for doing it, even though they ask for them.
Among the current tech companies this logic makes even less sense. Meta, Alphabet, PayPal and others are profitable companies, so this isn't even a desperate bid to stay alive. These companies are laying people off in response to investor demand and imitative behavior. After decades of research, executive know layoffs don't do what it says on the box, but their board is asking why they aren't considering layoffs and so they proceed anyway.
Low-performing Employees
A common argument I've heard is "well ok, maybe layoffs don't help the company directly, but it is an opportunity to get rid of dead weight". Sure, except presumably at-will employers could have done that at any time if they had hard data that suggested this pool of employees weren't working out.
Recently, we asked 30 North American human resource executives about their experiences conducting white-collar layoffs not based on seniority — and found that many believed their organizations had made some serious mistakes. More than one-third of the executives we interviewed thought that their companies should have let more people go, and almost one-third thought they should have laid off fewer people. In addition, nearly one-third of the executives thought their companies terminated the wrong person at least 20% of the time, and approximately an additional quarter indicated that their companies made the wrong decision 10% of the time. More than one-quarter of the respondents indicated that their biggest error was terminating someone who should have been retained, while more than 70% reported that their biggest error was retaining someone who should have been terminated.
Coming up with a scientific way of determining who is doing a good job and who is doing a bad job is extremely hard. If your organization wasn't able to identify those people before layoffs, you can't do it at layoff time. My experience with layoffs is it is less a measure of quality and more an opportunity for leadership to purge employees who are expensive, sick or aren't friends with their bosses.
All in all we know layoffs don't do the following:
- They don't reliably increase stock price (American Express post layoffs)
- Layoffs don't increase productivity or employee engagement (link)
- It doesn't keep the people you have.
For example, layoffs targeting just 1% of the workforce preceded, on average, a 31% increase in turnover.Source - It doesn't help you innovate or reliably get rid of low-performance employees.
Human Cost
Layoffs also kill people. Not in the spiritual sense, but in the real physical sense. In the light beach book "MORTALITY, MASS-LAYOFFS, AND CAREER OUTCOMES:
AN ANALYSIS USING ADMINISTRATIVE DATA" which you can download here we see some heavy human costs for this process.
We find that job displacement leads to a 15-20%
increase in death rates during the following 20 years. If such increases were sustained beyond this period, they would imply a loss in life expectancy of about 1.5 years for a worker displaced at age 40.
The impact isn't just on the people you lay-off, but on the people who have to lay them off and the employee who remain. It is a massive trickle-down effect which destroys morale at a critical juncture in your company. Your middle management is going to be more stressed and less capable. The employees you have are going to be less efficient and capable as well.
This isn't a trivial amount of damage being done here. Whatever goodwill an employer has built with their employees is burned to the ground. The people you have left are going to trust you less, not work as hard, be more stressed and resent you more. This is at a time when you are asking more of the remaining teams, feeding into that increase in turnover.
If you were having trouble executing before, there is no way in hell it gets better after this.
Alternatives
“Companies often attempt to move out of an unattractive game and into an attractive one through acquisition. Unfortunately, it rarely works. A company that is unable to strategize its way out of a current challenging game will not necessarily excel at a different one—not without a thoughtful approach to building a strategy in both industries. Most often, an acquisition adds complexity to an already scattered and fragmented strategy, making it even harder to win overall.”
So if layoffs don't work, what are the options? SAS Institute has always been presented as a fascinating outlier in this area as a software company that bucks the trends. One example I kept seeing was SAS Institute has never done layoffs, instead hiring during downturns as a way to pick up talent for cheap. You can read about it here.
Now in reality the SAS Institute has done small rounds of layoffs, so this often-repeated story isn't as true as it sounds. Here they are laying off 100 people. These folks were in charge of a lot of office operations during a time when nobody was going to the office but it still counts. However the logic behind not doing mass layoffs still holds true despite the lie being repeated that SAS Institute never ever does them.
Steve Jobs also bucked this trend somewhat famously.
"We've had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren't going to lay off people, that we'd taken a tremendous amount of effort to get them into Apple in the first place -- the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time."
If you truly measure the amount of work it takes to onboard employees, get them familiar with your procedures and expectations and retain them during the boom times, it really stops making sense to jettison them during survivable downturns. These panic layoffs that aren't based in any sort of hard science or logic are amazing opportunities for company who are willing to weather some bad times and emerge intact with a motivated workforce.
It's not altruism at work. Rather, executives at no-layoff companies argue that maintaining their ranks even in terrible times breeds fierce loyalty, higher productivity, and the innovation needed to enable them to snap back once the economy recovers.
So if you work for any company, especially in tech, and leadership starts discussing layoffs, you should know a few things. They know it doesn't do what they say it does. They don't care that it is going to cause actual physical harm to some of the people they are doing it to. These execs are also aware it isn't going to be a reliable way of getting rid of low-performing employees or retaining high performing ones.
If you choose to stay after a round of layoffs, you are going to be asked to do more with less. The people you work with are going to be disinterested in their jobs or careers and likely less helpful and productive than ever before. Any loyalty or allegiance to the company is dead and buried, so expect to see more politics and manipulations as managers attempt to give leadership what they want in order to survive.
On the plus side you'll never have the same attitude towards work again.