Weighing Layoffs? Cut Costs, Not Capabilities

Before pursuing layoffs, ensure budget holders have exhausted non-personnel cost-savings ideas and are steeped in a structured approach to cost management. This ensures that the organization is always looking to shift spend to protect value and prevents the need to ring the alarm when budgets are stressed.

This type of strategic cost optimization is the surest way to reduce costs without jeopardizing value and growth drivers. It can also help mitigate upfront expenses associated with layoffs (such as severance and legal costs). 

Not all workforce expenses are created equal. Making across-the-board reductions overlooks the critical capabilities some functions hold, unfairly penalizes the more efficient parts of the business and weakens value overall.

Instead of applying headcount cuts evenly across functions, focus on how to meet expense goals while minimizing business disruption. Assess factors such as:

• Strategic importance. Weigh the extent to which a function or team enables corporate strategy.

• Opportunity to relocate roles. Hybrid and remote work create opportunities to source labor from alternative, lower-cost locations when rehiring.

• Cost and headcount benchmarks. Functions or teams that are more costly or less efficient compared to industry peers may bounce back better from workforce reduction — but be cautious about reducing the size of already lean teams.

• Ability to automate roles. Technologies like robotics process automation and AI create opportunities for functional leaders to temporarily eliminate specific roles in a downturn and then replace them with automated technology solutions as budget permits.

Some leaders default to one-size-fits-all policies (such as last-in-first-out and highest-paid-first-out) when planning a layoff. This approach can do more harm than good. Gartner research shows that employees who exceeded expectations in recent performance reviews were (counterintuitively) 24% more likely to be made redundant than those who only met expectations — likely because they were also the most expensive talent.

Work cross functionally to equip and empower budgetholders with the tools and guidance they need to make financially and strategically informed layoff decisions. For example, HR often has access to detailed headcount and operational data, and legal often has access to industrial relations data that finance teams can only access in aggregate form.

 A viable shortlist should: 

• Organize candidates according to how they align with future business strategy and their direct impact on revenue or performance.

• Quantify the short-term costs (such as severance), ongoing cost savings and number and configuration of employees required to be laid off to meet cost-savings targets.

Poorly planned layoffs can result in contractor hiring, overtime and aggressive rehiring, which erodes cost savings and derails the best-laid optimization plans. A sustainable cost optimization strategy should include baseline tracking and governance of ongoing spend. 

Work with HR leadership to develop a list of practical tactics that budgetholders can use to proactively minimize the risk of cost reemergence after a layoff.

Without clear communication, workforce reductions can lead to fear, “survivor” guilt and damaging workplace rumors.

Partner with senior HR leadership, communications and industrial relations to develop and execute a communication strategy in two phases:

• Pre-layoff communications to prepare management 

• Post-layoff communications to keep retained employees, especially top performers, engaged, focused and motivated 

Be sure to convey both the financial rationale and the importance of continuity to maintain organizational performance and retain critical talent.