Layoffs can inadvertently reduce shareholder returns when taking actions to protect them, as companies tend to underestimate the organisational drag created by large-scale workforce reductions, a recent report has revealed.
Given the fact that personnel constitute the key cost driver category for most organisations, it’s not surprising that business leaders look for job cuts while trying to contain costs in an uncertain economic environment.
Now, a Gartner analysis has suggested that forecasted savings tend to become offset by the unforeseen consequences of layoffs within three years and in many cases can be detrimental to long-term shareholder returns.
“Given a higher cost of capital, renewed investor focus on profitable growth and widespread forecasts of a global recession, CEOs are asking their CFOs to reduce costs,” said Vaughan Archer, senior director, research and advisory in the Gartner Finance practice, in a statement.
“In many notable bellwether companies, particularly in the technology, retail and financial services industries, this is taking the form of layoffs,” Vaughan Archer added.
“The first thing to recognize is that there is an immediate upfront cost to layoffs as a business will need to reorganize itself around a smaller group of employees and typically incur costly upfront severance payments,” he said, while adding, “And what will follow is an increased need for contractor hiring, which can be costly, and remaining employees have a ton of more work and more demands for increased compensation.”
“Thereafter, a business is likely to see an increase in both costly contractor hiring and demands for increased compensation from remaining employees who are now under a greater burden,” Vaughan Archer explained further.
“Within three years, the forecasted savings from layoffs tend to become offset by the unforeseen consequences,” the Gartner report said.
“Even if a business avoids a vicious cycle of employee turnover driven by overworked staff and low morale, any cost savings from layoffs will likely be lost. And when businesses start to rehire at some point, it will likely be at higher rates than the employees who were laid off,” it stated further.
“In the more negative scenarios, the factors detailed here are also going to harm growth in existing and new business, and ultimately a firm will start losing its customers,” Vaughan Archer said.
Image Credits: Vaughan Archer LinkedIn