As organizations face increasing uncertainty in the economy, and the labour market continues to be red hot, we see an opportunity to take a longer view on talent and business outcomes. The pandemic taught us that people are still the most important asset in any organization, and how quickly the economy can rebound from disruption.
The long view on talent in our current market dynamic, requires organizations to look for cost savings in every area of their organization before considering head count reductions.
Why? For starters, employees are still on edge about work. Despite the economic outlook, they can still be quick to change jobs (especially if there is uncertainty around stability), which is an additional cost and disruption most organizations probably don’t need at this time.
The second reason? The real cost of layoffs is bigger than you think, and the business case for headcount reductions is flawed when we look at a 12 to 24-month view.
Here is a practical example:
ABC Co. (a fictional company) recently announced a 10% reduction of their staff, amidst a downward correction of their growth estimates. What is the cost savings of these moves?
A few assumptions:
| Assumptions | 2021 | 2022 | 2023 |
|---|---|---|---|
| Revenue | $100,000,000 | $90,000,000 | $100,000,000 |
| Profit | $10,000,000 | $9,000,000 | $10,000,000 |
| # Employees | 100 | 90 | 100 |
| Profit/Employee | $100,000 | $100,000 | $100,000 |
Now, let’s look at the costs of this headcount reduction, and the long-term cost to scale back up, compared to the $140M in short-term savings.
The first cost: Severance
This is easy to calculate, assuming 2 weeks at $140K/year x 100 employees = $53.8K
The second cost: Lost productivity
This is difficult to estimate. If we were conservative and said these were the least productive employees in the organization and only contributed 50% as much profit to the company, we would have a reduction of $500K: [Profit ($100,000 x 50% = 50,000) x Laid of Employees (100) = $500K)
The third cost: Talent reacquisition
There are many costs to consider here, like marketing, screening, internal vetting, and scheduling. To simplify, let’s use a modest external recruitment cost of 15% of salaries (we recently saw highs of 25% for tech talent). Assuming those same salaries keep up with inflation pressures [$1.4M * 1.05 = $1.47M], we have costs of $210K.
Let’s add all of that up:
| Cost Factors | Short-Term Savings | Long-Term Costs |
|---|---|---|
| Salary | $1,400,000 | |
| Severance | $53,846 | |
| Productivity | $500,000 | |
| Re-hiring | $210,000 | |
| Total | $1,400,000 | $763,846.15 |
So, what has the company really saved in the long-term? Potentially ~1% of profits for one year (~$630K).
But at what cost?
Not only will their brand reputation suffer as a result of these layoffs, but their internal teams will be asked to carry the burden (after already doing so for the pandemic). We can probably assume that like most companies who experienced rapid growth in 2020 and 2021, ABC was behind on hiring and their team is still feeling the effects of burnout.
The remaining talent will now be asked to pick up all the redistributed work from this layoff, a move that may push them to consider participating in the Great Resignation we hear so much about. Remember, there are still almost two jobs for every unemployed person out there and the headlines we are seeing about layoffs are a tiny fraction compared to the national number.
In times of uncertainty, we are all looking for ways to preserve business health. We are barely removed from one of the biggest shifts in the labour market, and we caution any organization to avoid staff reductions as their go-to solution for cost cutting. Labour shortages are here to stay, and workers may be harder to win back than employers anticipate.
Blog Author:
Michael Hoffmann
Director of Growth & Innovation
Blu Ivy Group
Blu Ivy Group is a global leader in employer branding, organizational culture, and recruitment marketing. We help organizations across the private, public, and not-for-profit sectors build extraordinary employee experiences, magnetic employer brands and high-performance cultures.
From C-Suite to Employer Brand and Talent Acquisition leadership, we partner with our clients to transform their organizations and design the most compelling workplaces of the future.
For inquiries, please contact sparker@bluivygroup.com.