Why layoffs really happen

In 30 years of working for companies, I’ve seen a dozen layoffs. And I’ve observed dozens more at companies I was following closely. Why do companies choose to dump staff they’ve invested so much effort in hiring and training? The answer, more often than not, is an inevitable consequence of how companies plan for growth.

No matter what you call it, a layoff is hugely disruptive

A layoff is a corporate decision to end the employment of a significant portion of its workforce, all at once. And it’s a messy, awful thing to live through, for both those who leave and those who stay.

For employees who were dumped, there’s an immediate and unexpected need to find a new job. While companies typically provide severance pay and outplacement help, it’s rarely enough to avoid a financial hit for the person let go. And they may have to sign an additional contract with onerous noncompete or nondisparagement clauses to get the compensation.

But it’s a shock. Companies often botch the notifications, which are complex to manage because employees talk and rumors spread. I’ve known people who found out they were laid off because their elevator card keys stopped working or surprising lump sums appeared in their bank accounts. I’ve even known people who were laid off while pregnant.

For those who stay, there’s a need to do more work to make up for those who left — many of whom may have irreplaceable skills. And the remaining workers are often depressed about missing colleagues and doubtful about the future prospects of the company.

The experience of layoffs is so feared that every decade or so, people try to rename the experience. Euphemisms for layoffs include downsizing, RIF (reduction in force), rightsizing, and “workforce shaping.” The euphemisms don’t change the miserable experience.

Some layoffs are easy to understand, if not to experience

Layoffs happen because reducing personnel costs — salaries — is the easiest way for a company to save money. Selling off assets like plants or intellectual property takes time. Laying off workers happens quickly and, even if the company has to pay severance, can rapidly reduce the company’s overhead. It also signals to shareholders that expenses will go down, and therefore profits will increase (or losses will decrease). Layoff announcements acknowledge that there’s a problem, which tells investors that management is at least admitting it has to change something.

There are two kinds of layoffs that are easy to understand from a rational basis.

The first are mergers. When companies merge, they have redundancies. Imagine, for a moment, that a retailer merges with another retailer. It will now have two human resource departments and two accounting departments. And it may have stores so close to each other that they compete. It makes sense to the company to get rid of the excess and duplicated resources. In fact, when making the case to Wall Street that the merger will be profitable, management often has to promise efficiencies from reducing costs of duplicated resources. Result: people lose their jobs.

Another easily understood reason for a layoff is when a company has a significant and long-lasting downturn in business. Its costs get out of balance with its revenues, so its profits go down. If there are prospects to reverse the downtown, then the company may hold onto its staff, since letting them go and then hiring again is expensive. But if the downturn looks persistent, they will shed staff to cut expenses. You may ask, “Why not just take a hit in profit?” But ultimately, managers of public companies run companies for the benefit of shareholders, not employees. Sometimes there is just not enough cash to pay everyone on the payroll. Maintaining profitability means cutting people’s jobs.

I saw this happen at my first job, a software company. A competitor had destroyed much of the company’s market share and a new product had failed to take off. The company laid off half the staff. I kept my job, but the corporate morale sagged. I quit within a year of the layoff. And in the end, the company never recovered.

Explaining the inexplicable: layoffs in growing companies

Rapidly growing companies, including tech companies, often will announce layoffs even as they are succeeding. For example, Tesla just announced that it would dump 10% of its salaried workforce.

Why would a rapidly growing company cut staff?

Here’s a way to think about it. It can take months to hire staff, and more months to train them and make them productive. That means that a company is hiring for its projected needs at least six months from now. It’s as if you were driving a car and needed to have people building the road in front of you so you could drive on it. Given how long it takes to build that road, you’ve got to have people constructing it miles in advance of where you are driving.

At some point, the company may determine that growth is slowing. Perhaps a company that was growing revenue at 50% per year now looks ahead and determines that growth this year will be only 20%. But its workforce was growing based on the 50% growth scenario. A workforce hiring rate that looked essential a few months ago suddenly looks costly and extravagant. In terms of the road-building analogy, the company doesn’t need to build a road for miles ahead if it’s no longer racing down that highway, so it’s got too many expensive road-building workers.

A similar problem occurs when there is a strategic shift. If a software company was selling to consumers and changes to business-to-business sales, it has a whole set of people dedicated to the former model who are no longer able to contribute to the new model. There are many types of strategic shifts (also known as “pivots”), and most of them require a different workforce mix than what the company already hired. In the case of Tesla, for example, the company got rid of many of its people working on the full self-driving features, because it doesn’t look like they’re going to succeed.

Both of these scenarios may happen together. If management looks at the shape of the company’s workforce and determines that it’s got too many of the wrong kind of workers, a layoff is a chance to fix that. It’s also a chance to get rid of problem employees without complicated HR issues. You can’t fire someone for cause without carefully assembled evidence that they screwed up, and multiple warnings. But if you’re letting 500 people go, it’s easy to take the employees you feel are problematic and just fire them along with everyone else.

From the outside — or from the employees’ perspective — these layoffs may appear to make no sense. A bunch of workers doing productive work in a growing company suddenly find themselves out on the street. But if growth slows or strategy changes, maintaining workers based on an obsolete view of the future us costly. So companies send them packing.

How to avoid layoffs

One way to avoid layoffs is with a half-measure: the hiring freeze. It’s easier to stop hiring people than to get rid of them once they’re hired. So if a company is experiencing slower growth or a downturn in business, the first step is to stop hiring.

The larger problem is one of mindset. A company motivates its workers by projecting a bright future. Anyone doubting that bright future becomes known as a naysayer or someone whose faith is questionable, and that upsets the believers and the management that is stoking that belief. So instead of realistically assessing what might go wrong, everyone is in denial until there is a need for a catastrophic shift in belief — followed by a layoff.

As Adam Savage of the Mythbusters says, “Failure is always an option.” A smart company has strategists continually looking for ways that things could go wrong, signs that things are going wrong, and the consequences of things going wrong. A realistic perspective will allow management to take steps to deal with and correct serious problems well before a layoff might be necessary. The problem is, this flies right in the face of the suspension of disbelief that is required for a growth company. So most growth companies don’t do it.

Loyalty only goes one way

This is a hard truth for workers, especially those who are new and eager.

There is always a lot of talk about loyalty in companies. If your boss treats you well, the company is succeeding, and the management seems to know what it is doing, you feel loyal. And companies will tell you how important that loyalty is.

But companies are not human beings. People can be loyal to companies, but companies are not loyal to people. Your boss, an actual human, may really like you and want to help you, but the company answers to the shareholders and wants to maintain and grow profit. If your salary is an obstacle to that goal, your loyalty to the company won’t be returned. You’re going to be unemployed — or the poor sucker next to you is.

Loyalty feels great. But be prepared. Pay attention to the trends in your industry and your company’s financials. If you work for a publicly traded company, listen to quarterly shareholder announcements, or read the transcripts. It’s better to be prepared for changes that may be coming than to be unexpectedly out on the street.

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  1. Layoffs are always the result of poor management and lack of leadership. And always a bad sign.
    Good employees are so rare that every effort has to be made to keep them; great employees are even more important. There never is an excuse for letting them go. Rarely can one justify allowing them to leave, although that is beyond the scope of even leaders.
    To those laid off, it is rarely your fault; best of luck.

  2. I’ve been downsized 4 times due to merger/acquisition. In each case, my employer pre-acquisition was growing and profitable, producing a quality product that there was a demand for. The acquiring companies took on debt to make the acquisition, then did layoffs to cut expenses, eliminating viable product lines in the process. In each case I had high performance ratings (at one of them I actually doubled my division’s sales). One of them had received a big city tax incentive for creating jobs, and then turned around and downsized significantly almost immediately. The 4th layoff occurred while I was on parental leave without much access to the rumor mill. I favor a stakeholder, not just shareholder model. These mergers were not about profitability, productivity, or efficiency, and very likely didn’t generate much value for shareholders. They made millions for M&A lawyers and investment bankers though. I’ve also known people who were “laid off,” retained as consultants, and rehired as many as 4 times by the same employer (a big bank). That’s just playing with the numbers to fool shareholders. A company that’s laying people off is is a company that isn’t doing well. Its stock should drop.

  3. I hate reading the term “reengineering” when I come upon it, as it is a euphemism for downsizing, piling the work of two onto one person and expecting them to do it as quickly and efficiently as when you had two. As a degreed Engineer, I know what engineering is, and reengineering is far from it. It’s what happens when companies are run by bean counters. At the last company I worked for, a succession of buyouts were offered to long-term employees- most with 35 or more years of experience behind them. When their replacements were later hired at lower salaries, there was nobody left to mentor or train them how to do their jobs. I knew several people who had planned to retire in six months anyway, so the buyout was a sweet bonus. Those who lost were the new hires, the customers who couldn’t get answers, and ultimately- the company as a whole.

  4. You forgot one category – when a new manager or division head is hired and then lays off the entire team so they can bring aboard their own staff. This has happened to me twice. The first time the new heads said, “We’re not planning to change this into our old company.” They lied – within a year most of the team had been replaced with people from the old company, including me. I had asked for more staff and budget and they told me they couldn’t afford it. Then they let me go, hired the person from the old company at a salary higher than my own and gave them their own parking spot. Within two years that part of the company was spun off and the new management team was gone. A complete disaster.

    I was with my most recent company for ten years. In February 2021 a new director was hired. We working remotely and I never met her, and had one conversation with her. In May 2021 she laid off almost half the team in the U.S. and Asia, including me, my manager, the entire internal marketing team and half the Europe team. In January she laid off the India team that did our data analysis. I suppose the good news is everyone who’s left there hates her and many have left proactively.

    It’s fair to say most people are laid off through no fault of their own. It’s also fair to say nobody doing layoffs, including HR, bothers to look through performance reviews because mine were stellar and so were the others who were let go. You mention knowing finances, but both companies were doing fine. As for loyalty, I can’t tell you how many times management at both places lied to us and said they cared about our employees, work/life balance, we’re a big family, blah blah blah.