When the 2008 financial crisis hit its peak, Toyota was experiencing one of the worst markets in the history of the company and was expecting its first operating loss in 70 years. Our office in Singapore was the only regional headquarters in the world that was in the black. I was leading a team of ten people implementing customer experience projects across the region. As the situation worsened, VPs in leadership meetings repeatedly made clear that the future of Toyota as a company depended on its success in Asian markets. There was no small amount of pressure.
Layoffs in manufacturing were an inevitable part of the conversation and expected to occur. And then they didn’t. Toyota announced that instead of laying off assembly line workers, they would decrease vehicle production output, cut production hours, retrain employees to work on other lines, and use downtime to clean the plant but not cut pay. The result? Loyalty.
A McKinsey survey of 2,000 U.S. companies found that from 2008 to 2011 (during the recession and its aftermath), 65% resorted to layoffs.
In a 2012 review by the University of Texas at Arlington, they found that layoffs had a neutral to negative effect on stock prices in the days following their announcement. They also discovered that after layoffs a majority of companies suffered declines in profitability, and a related study showed that the drop in profits persisted for three years. Another study found that companies that have layoffs are twice as likely to file for bankruptcy as companies that don’t have them.
Layoffs are so embedded in business as a short-term solution for lowering costs that managers ignore the fact that they create more problems than they solve. Today, again, with the coronavirus in full swing, layoffs are an inevitable part of the conversation, but they may not be a necessary one.
This week, Marc Cuban was quoted saying, “How companies respond to (their workers) is going to define their brand for decades.”
You don’t need to be a big company and you don’t need to have hoards of cash reserves to avoid layoffs. Ignore the banks — It’s easier for them to avoid layoffs so paying attention to what they do doesn’t matter for the rest of us.
Even if you are not a bank, you are not a large corporation, you do not have extensive cash reserves, and you have less than 500 employees, there are ways to avoid layoffs and that in fact, there is a great deal of reason to avoid them.
Utilize the stimulus bill
The stimulus is encouraging companies to retain jobs. Two-year deferment on payroll taxes to 2022, a 50% federal payroll tax credit, two SBA loan options (one with loan forgiveness!), and an increase in interest deduction from 30% to 50% are just a few of the ways that the Care Act passed this week will help small businesses. In fact, $350B is expressly marked for businesses with fewer than 500 employees.
Using the tools below to reduce expenses and increase margin, coupled with the stimulus options to retain staff may make for a more compelling case than layoffs – in fact, it’s exactly what the Care Act is intending to do,
Forbes sums up the entirety of the Care Act in an easy to read article published on Wednesday.
Begin process improvement initiatives with your team members
You may have heard of Dan Price, CEO of gravity payments, that went viral a few years back for increasing all of his employees’ base salary to $70,000. Despite being attacked as a socialist, his virality continues. This week, he shared that the payment company’s revenue from credit card processing dropped by 50% since consumers are spending less right now. Instead of doing the obvious — laying off staff — he began scheduling meetings with ten team members at a time to solicit their ideas for how to improve operations that would increase revenues or decrease costs so as to make up for the lost revenues. Instead of laying people off, Gravity Payments is making their business more effective and preparing themselves for the future.
Now is the time to look inward and understand where operational waste may occur in your organization. I’m amazed at what I see when I walk into some high performing organizations using the most expensive ERP and CRM software run by the most elite A-Player talent with disjointed operations that result in rework, work errors, duplication of work and endless other examples of waste. They are chasing the next buck rather than looking right in front of them. In one example, a client’s management team generated $2 million worth of ideas that would cut costs in a 30-minute exercise. All it takes is one ask to your people. They are full of ideas.
Reduce leadership pay
A small e-commerce company called Wholesome that does $10 million in annual revenues decided their well trained and well-positioned employees were worth more than the short term gains of mass layoffs. Instead of firing them, the COO, Rachyl Neidecker, cut her annual salary by $100,000 to keep them on the payroll. Not only did they keep the three team members on the payroll but they were able to use their experience and new found energy in the company to come up with new ways to cut costs and improve efficiency.
PROTIP: In times of crisis, stop using Gross revenue/full-time employee and start using Gross margin/full-time employee because you’ll start to notice the fruit of your cost-cutting measures in real-time.
Just in case you’ve never heard of Wholesome and might think that it is only a one-off example, just yesterday the CEO of Hilton, Christopher Nassetta, announced that he will forgo his entire salary for the rest entire year and the company’s executive committee will take a 50% pay cut “for the duration of the crisis.” It’s not just companies that have the cash reserves or are doing well that can afford to keep good team members, in fact, Hilton’s bookings right now are down over 90%, it’s also the companies and industries that are not.
Retrain and Restructure Roles
In 2013, AT&T concluded that 100,000 of its 240,000 employees were working in jobs that would no longer be relevant in a decade. Instead of letting these employees go and hiring new talent, AT&T decided to retrain all 100,000 workers. At first glance, this crisis 7 years ago may not look similar to the crisis we face today, but if you remember in 2013, smartphones were brand new and AT&T was still selling landlines as its primary business.
Knowing what you know today about the adoption of mobile phones, it may be safe to say that 7 years ago, AT&T was in a very similar existential crisis as we face today. AT&T knew that as a company, preserving its employees’ knowledge and the training that was invested into it was paramount to its long term financial success.
- Restructure roles so that they are focused inward
- Develop new ways to create value for the current client base
- Become customer-obsessed
- Go all hands on deck with customer success across departments
- Show customers your unique value and de-commoditize your business
In times of crisis, your customers are trying to look at every partner they have as simply a transaction. Who can they not pay? Who can they cut? Who can they defer, shrink, or reduce? If you’re merely a transaction, you’re last. Don’t be last. Be first – show your customer your indispensability starting with the indispensability of your employees.
Reduce Pay Rates, Fringe Benefits, or Work Hours
Often times, these options are a middle path to a better outcome for both parties. Although not ideal, they are a compromise to what otherwise could be a lose-lose situation. If you must consider reducing employee pay, benefits, or hours, deeply outline the quantitative and qualitative impacts of this decision.
Your biggest asset here is honesty. Both parties will receive a better outcome if the company involves the employees in the conversation towards the middle path rather than just telling them after the decision is done. The employees will offer honest feedback that will provide you with an idea of what they are willing to sacrifice in order to maintain their job. In fact, you might be surprised by their ideas and commitment.
Full-time employees may jump at the idea of going to part-time status for a set amount of time. Continue to offer them benefits and fair pay. When business does pick up, you will have a number of skilled employees ready to return to full time. The stimulus plan just passed also includes additional benefits for a plan such as this.
Ensure that every team member feels as though they are being heard individually not just as a group. Otherwise, it could be interpreted as what’s good for the company rather than looking after the individual, which, let’s be honest, is how companies will ultimately be judged.
The bottom line:
One of the myths in operations that I have to indoctrinate new consulting customers is the reality that in order to grow, pivot or change, the first step is always to add a body. In fact, the first step is almost always not to add a body. Similarly, in times of crisis like today, the first step to the long term health of your business is very likely to keep your entire staff.
There may be much more for your company to gain from keeping your employees than from letting them go. The value created — like gratitude, goodwill, and loyalty — will most likely forever outweigh the short term gains of letting them go. When the economy starts rebounding, I expect you will be incredibly grateful to have kept your valuable, experienced employees under your roof.
While every business wants to avoid layoffs, it is sometimes inevitable. If all of the options have been aggressively considered, maybe even tried and failed, and a workforce reduction is still necessary, you will have to plan carefully for how to best implement layoffs.
These decisions are hard to communicate to employees but at least you can show them that you considered every other possible option. If you do find yourself in a position where layoffs are the only option, don’t forget to stay on the right side of federal and state WARN and mini-WARN legislation.
If you’re struggling with this, I’m happy to offer a block of my time to discuss how to not lay your team off or mitigate the risk you’re experiencing right now.
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Hilary Corna is the founder and CEO of Corna Partners, an operations consulting agency. Hilary is an award-winning keynote speaker and bestselling Author. Her clients have included State Farm, General Motor, and the United Nations. Hilary has been featured in the Fortune, The New York Time, NBC, and Forbeswoman.