The Effects of Layoffs on a Business

A recent mass layoff at my company has given me a fresh perspective on layoffs. Normally, as an investor, we see layoffs as a courageous way to drive profits forward by shaking off some areas of weakness. I have personally invested in companies shortly after a mass layoff if I believe that such changes will benefit the profitability of the business. From a purely financial perspective viewing a company as a machine is an easy thing to catch one’s self doing. However there are some soft costs involved in layoffs to a company culture that I wasn’t really aware of until the week after I witnessed fellow employees walking out the door for the last time:

• The Straw that breaks the Camels back. Employees remaining after a layoff will fear that this is the first of many layoffs- this is only to be expected. This fear will most assuredly drive them to explore other opportunities and possibly accept them. Everyone would rather leave on their terms rather than finding a box on their desk in the morning. The intent of a layoff is to keep your best; unfortunately it can have the opposite effect of driving your best into the arms of a competitor.

• Showing a company’s financial health. If you work at a private company getting a gauge on the overall health of a business is a difficult task. There is no clearer message about health than to see a layoff in action. If employees are already feeling under appreciated or under paid the message “no pay raises in the foreseeable future” will come through loud and clear during a layoff, again driving your best talent to explore other options outside the company.
• The belt tightening turns into a corset. No one really likes to work in a company doing belt tightening- belt tightening usually means there is a better way to do things and we are going to choose the cheaper way. Anyone with pride in their work will not thrive under this environment and innovation is often stunted.
• Dad kicks your sibling out of the house. Creating a family atmosphere is critical in getting people to go above and beyond. If you expect employees to take a panicked call from you at 2AM when your servers crash then family is key. When a company does a layoff it shows how that the family dynamic is vulnerable and the trust that both parties share for one another can be broken.

What makes a company successful in the long term is its service, innovation, management, and products. All of these do not happen without good people. From a short term perspective layoffs make the company more viable but from a long term perspective it can seriously damage the culture and effect the good people who you need to run the business in the future.