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Cost-Saving Measures to Consider Before Resorting to Layoffs

Author: R Stell Date: July 06, 2007

Layoffs are a fact of life. Few things in business remain stable for long periods; customer preferences change, markets expand or contract, some companies grow while others shrink, and product life cycles get shorter. With this endless fluidity of business, cutting back workers has become nearly as common as acquiring them. 

Common as they are, layoffs are always stressful. For most people in the workforce, being involuntarily severed from employment is traumatic. Even the rumored possibility of a layoff can be unnerving and demotivating for many employees.

Layoffs are also stressful for management. Some managers are uneasy terminating someone without cause, and most dread their role in releasing employees who have simply been caught up in a necessary adjustment for the company. 
We hear much about reengineering, restructuring and repositioning. Regardless of what these exercises in reorganizing are called, they mean one thing to most employees: layoffs are ahead. It can't be denied that a principal goal of most reorganizing efforts is reducing labor costs.

Layoffs are inevitable, but they should usually be reserved as a last resort to reduce costs. If layoffs must occur, you should give employees every opportunity to understand why the cutbacks are needed.  Also, once a layoff is under consideration, you should make every effort to minimize it or avoid it altogether by addressing other cost-saving measures first. Some of these other measures can be almost—but not quite—as stressful as a layoff itself, but the results are invariably more acceptable to all concerned.

An initial step that's easiest on most people but usually least productive in terms of savings involves examining supply costs and implementing commonsense controls on purchasing and dispensing them. This approach (sometimes scornfully referred to as “paper-clip counting”) rarely makes enough difference to affect staffing, but it usually yields nominal savings.

A logical next step applicable in many firms is reducing material and supply inventories to the lowest practical level. While you might feel comfortable having more than enough of everything on hand at all times, excess inventory costs money to acquire and maintain. You can consider a few steps—for example, a computerized inventory control system or special arrangements with suppliers, for example—to reduce the amount of money tied up in inventory.

Here are other steps to consider before actually releasing employees:

  • Freeze hiring and close down open positions; stop the influx of all new employees, except those possessing essential skills presently needed.
  • Reduce staff through attrition; don't fill most positions opened up by resignations.
  • In the absence of active hiring, transfer employees internally to areas of most need. This may require some retraining, and while some people won't be pleased about moving to different jobs, doing so sure beats unemployment.
  • Curtail the use of temporary help, restricting its approval to one or two key people.
  • Curtail overtime, reserving it for genuine emergencies; narrow the overtime approval process so that only a select few can approve it.
  • Closely monitor all requests for overtime and temporary help; in the presence of a hiring freeze, the use of overtime and temporary help can increase, if not carefully controlled.

If you've tried all of the above, and you still must release people, consider voluntary departures if company size and practices allow. Some firms reduce staff sufficiently by offering financial incentives for voluntary termination, while some businesses with viable pension plans have offered early retirement incentives. These steps can be risky because it's considered discriminatory to target specific individuals, so there's always the chance that essential skills will be lost.

Finally, when it's necessary to actually lay off workers, plan on doing so according to some rational scheme that you can apply consistently. The safest and most often used practice is last-in, first-out, which boils down to straight seniority. It may be tempting to weed out certain individuals based on personality or behavior, but this can readily be perceived as discriminatory.

And when a layoff has been accomplished, don't forget the survivors—the employees who remain after the terminations are history. Stress among the survivors is common, as some experience relief or guilt about remaining, and some wonder if more layoffs will follow. Keeping these survivors motivated should be your No. 1 concern following a layoff.

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