Layoffs - Motivations, Effects and the Alternatives - Term Paper Example

Layoffs: Motivations, Effects and the Alternatives Introduction Discharging employees is considered an important strategy for company renewal and growth. However, some of the researchers question its viability due to the negative consequences that are associated with the process. Despite the on-going opposition, organizational restructuring is being practiced across the globe. Corporate downsizing is a common event in the United States and other developed economies. This paper examines the motivations of workforce reduction, its effects and the alternatives that could be adopted to mitigate its negative consequences. 2. Background Baumol, Blinder and Wolff (2003) define layoff as the reduction of the organization’s workforce in response to a temporary or permanent business strategy or economic condition. It could be motivated by many factors including lack of enough financial resources and lack of enough work. It is has been come a common phrase in today’s society and has personally, it has affected my close relatives as well as my parents. Employee lay-offs are not only happening in the developed economies but middle-eastern countries as well. In Saudi Arabia, my home country, the government passed the Nitaqat porgramme to create jobs for the locals, but in the process other workers from foreign countries were deeply affected. According to this new programme small and medium-sized businesses are required to set aside 10% of all jobs for Saudi nationals. The Nitaqat policy directly affects thousands of the Indians working in the country. The implementation of the new policy also affects those originating from Egypt, Yemen, Pakistan and Philippines. Remember, Saudi Arabia depends heavily on the human capital from foreign countries and consequently, the Nitaqat impact will significantly reduce their numbers in the country. The workers affected by this new policy, will no longer be able to provide for their families. According to the current statistics the number of the foreigners working in the country is about 9 million. The foreign workers provide the private companies with cheap labor and as a result, most of the locals are locked out. The government hopes to correct this anomaly by regulating the number of foreigners working in the country. . 3. Why lay offs? 3.1 Survival The tough economic environment has forced businesses to embrace alternative means of survival. In America, one of the hit areas is the financial sector, where thousands of employees have been discharged despite the massive government support. The players in this sector are also under pressure to comply with the new regulations and adhere to strict trading rules. Due to the tough operating environment, some of the financial institutions such as Citigroup, Goldman Sachs, JP Morgan Chase and Morgan Stanley have been forced to shed thousand of jobs. 3.2 Competition With liberalization and the abolition of the protectionist practices, businesses are finding it hard adapting to the new environment. Governments all over the world have deregulated the business environment, thus inviting foreign players in the market. The growing financial interdependency and market integration, is forcing firms to produce goods and services as efficiently as possible. Forming small but efficient organizations is the ‘in thing’ but such a strategy negatively affects the number of the available employment opportunities. The association between competition and the job opportunities can be examined further using relevant examples. In America, some of the companies are shifting their production facilities China where labor costs and natural resources are plenty. As a result, some of the companies such as IBM have been forced to lay off some workers due to foreign competition and imports. American companies are also opening up stores in emerging economies and de-investing in traditional markets hence affecting thousands of workers. Likewise, Saudi Basic Industries Corporation plans to lay off workers in Europe due to tough competition. 3.3. Pressure from the financial markets and shareholders Sometimes the shareholders influence the management to make the most viable financial decisions such as laying-off worker in order to create wealth. In response to pressure from the shareholders, companies are forced to lay-off some workers or reduce the revenue payable to the employees. This is already happening at the Goldman Sachs Group, where the company paid a only a small of part its revenue to employees in 2012, due to pressure from the stakeholders. Other players in the industry are too feeling the heat and intend to pay out a lower percentage of its revenues to employees, and increase lay-offs. 3.4 Shrinking demand The shrinking demand for product and services can encourage the management to adopt cost-saving measures. The decrease in demand maybe as a result of production overcapacity, failed commercial strategy or failure to compete effectively. In such circumstances, businesses are forced to balance their costs in anticipation to a decrease in profits. A decrease in demand, may also force companies to introduce efficient production processes, in which case, some of the employees end up loosing their jobs. 3.4 Re-organization and restructuring An organization can plan to enhance production in some areas and improve overall efficiency. For instance, a company may decide to improve the internal communication systems in order to shorten the decision-making processes and in the process, some of the jobs positions are lost. Workforce reduction could also happen as a result of strategic re-focusing. In the current tough economic environment, organizations are being forced to re-focus their activities in the most profitable sectors while closing down the less profitable subsidiaries. 3.5 Privatization In the past few decades, privatization of the state-owned enterprises has been undertaken in order to strengthen the private sector and increase the efficiency in the allocation of the country’s resources. As result of the privatization initiatives, governments in the developing economies have reduced their expenditure in the state-owned enterprises. In order to operate effectively, the state-owned enterprises have in turn been forced to reduce redundancies by laying off some workers. Governments have also cut down subsidies and social spending, increased interests rates and remove trade barriers in order to create a positive trading environment. At the same time, the governments have taken deliberate measures such as reducing import tariffs, eliminating all restrictions and harmonizing all tariffs. As a result of these initiatives, the competitive forces have increased forcing business entities in the affected economies to reduce the size of their workforce. The implementation of such programs in the developing economies has led to negative outcomes, often leaving people with no alternative employment or no other source of income. In some instances, some of the privatized enterprises were forced to close down while others needed more time to find an appropriate market for their products. The effect of privatization on the availability of the employment opportunities can be examined using the example of the Bangladesh. In 1990s, 13 state-owned enterprises were privatized, but a number of them were forced to shut down, as they could not compete effectively with the new market entrants. The enterprises were also inefficient forcing any of the jute factories to close down. The situation is similar in El Salvador where privatization of public services led to extensive job losses (Cascio, 200). The Saudi Arabian government established its national privatization campaign in May 2006, and already the key services including municipal water supply, electricity and telecommunications have fully been privatized. However, with the ongoing privatization job cuts have been eminent. Aware of the fact the Saudi government intends to preserve jobs by compensating the affected workers, through labor training and initiating relocation programs. 4. Effects of the employee lay-offs 4.1 Employees It is well established that employee lay-offs negatively affect the displaced workers as well as the local communities. While most of them are able to manage during the transition, a number of them experience serious economic and psychological challenges which are detailed in the sections below. 4.1.1 Experience of loss After loosing their jobs, workers’ lives are affected negatively. Indeed, the inability to make the ends meet affects their self-worth and dignity. The affected workers also loose the role of the provider and their future become uncertain. Under such circumstances, they could resort to drug abuse and other socially unacceptable behaviors. The laid off workers go through six stages of unemployment. The first stage is the pre-layoff period which is characterized by feelings of uncertainty and about. According to Cascio and Boudreau (2008) during this period the affected employees are likely to experience fatigue, headaches, general loss of energy and irritability. In the second stage, the actual lay-off occurs and this period is marked by feeling of self-blame and self-doubt. If unchecked the employee in this stage could resort to drug abuse and may develop suicidal tendencies. In the third stage, the laid off employees are forced to seek for additional skills in to achieve better employment prospects. Learning new skills could involve registering for new formal programs, and the very idea of going back to class maybe humiliating to many people. After acquiring the necessary skills, the laid off workers then move out in search of better employment opportunities. During this stage, the employees could develop feelings of rejection and isolation. Those who are lucky finding new jobs need to adjust and start all over again. 4.1.2 Psychological issues Once employees are displaced from their current work places, they are forced to look for alternative sources of livelihood. In addition, they are forced to start all over again, and this could be very difficult, especially if the affected persons do not receive the necessary support form the close relatives. The displaced employees react with anger to their current situations and they feel bitter towards their former employer, their fellow workers and the union. The affected persons may display anger outburst and engage in violent activities. In some instances, the workers may engage in self-blame even when their job loss was not their fault. 4.1.3 Family issues The discharged workers loose the ability to provide for their families. Lack of understanding from the members could aggravate the problem of job loss. The employee lay offs not only create familial problems but could lead to reversal of parental roles. Once one of the partners is laid off, the other one has to commit to care for the entire family. The children are also forced to assume new responsibilities such as helping their parents in the family business. However, single parents may not manage well compared to dual-income families. Once the single parent looses their jobs, they have to be helped out by the government and the relatives in making a transition to new jobs. 4.2 Organizations 4.2.1 Lost of productivity While business organizations insist on workforce reduction in order to improve profitability, such a move comes with hidden costs. One of the negative consequences of employee layoff is decrease in productivity due to loss of intellectual capital. Intellectual capital is a combination is the combination of the cognitive knowledge and the experience-related knowledge and it has four components: relationship capital, human capital and organizational capital (Cascio & Wynn, 2004). The relationship capital is formed by maintaining business relationships with the external stakeholders. Maintaining strong relationship with the suppliers, vendors and customer is a very vital in attaining organizational goals and creating wealth. However, once some of the employees are discharged, they will leave with them some vital contacts. The other component- the human capital- refers to the knowledge and competencies that the employees possess. Employees have extensive knowledge about their jobs, and business processes. Once they are discharged they leave with this knowledge, which then becomes resourceful to their subsequent employers. Needless, to say the organizational capital is too important in improving an organization’s competitive advantage. The organizational capital is made up of components such as information systems, policies and procedures and intellectual property. Just like human and relationship capital, the organizational capital is too affected by extensive lay-offs. Remember, organizations spend a lot of resources in training workers on how to use different equipment and process in the organizations. Once they leave the company is forced to spend more in training the new employees. Ultimately, the organization looses out as knowledge is hard to retain and vast resources are used for employee development. Loss of intellectual capital extensively deeply affects knowledge-based firms and those operating in the biotechnology industries, pharmaceuticals and software talents are also heavily affected by loss of talent. 4.2.2 Turn-over The available studies indicate that forced lay-off prompt demoralized survivors to quit. Consequently, the unexpected staff shortage negatively impacts on the organization’s ability o fulfill important obligations to its customers. At the same time, the company is forced to train new employees, and in the process spends resources that would have otherwise been put to better use. Several studies have examined the association between downsizing and voluntary turnover. Such one study conducted by Sahdev (2003) found out that layoffs targeting only 1% of the workforce led to a 31% increase in turnover. To mitigate the effects of downsizing, De Meuse, and Marks (2003) recommends the use of proper reward systems and establishment of effective complain and appeal processes and problem-solving avenues. 4.2.3 Impact on Survivors Lay-offs not only lead to deleterious psychological and physical health outcomes, but also affect the survivors. The impact of the lay-offs on the survivors is well captured in the article titled, downsizing effects on survivors: lay-offs, off-shoring and outsourcing. In this article, Maertz et al (2010) conducts a study involving 13,683 employees drawn from major American corporations. The article suggests that survivors of lay-offs perceive lower organizational performance, job security, affective attachment, calculative attachment and high turnover intentions (Maertz et al., 2010). Off-shoring and outsourcing survivors also experience negative emotions as a result of loosing their jobs. The article, well illustrates to us the negative outcomes that could affect the company for dismissing some workers. The section below, discusses in details how the survivors of lay-offs ultimately affect organizational performance Once some of the employees are discharged from workers, the surviving workers develop negative attitude towards the employer. The available literature suggests that affective commitment is very important as it psychologically binds the employees to the organization. Ehrenreich (2006) finds that employees develop affective commitment or attachment if they are satisfied with the content and context of their job. Affective commitment makes feel proud of their employers and develop a strong sense of belonging. The available literature has established a negative correlation between effective commitment and downsizing. Aware of this fact, it is important for the management to create perception of fairness during the downsizing process, in order to preserve the loyalty of the surviving employees. At the same time, the survivors of the lay-offs loose hope of ever achieving personal growth, under the current employer. As a result, they are forced to seek alternative employment opportunities and develop turnover intentions. When the survivors identify with the layoff victims the organizations stand to loose. In such circumstances, it is upon the management to convince the remaining workers that the reductions were fair and were carried out in a transparent manner. According to Kivimaki, Vahtera, Pentti, and Ferrie (2000) failure to do so diminishes the loyalty of the surviving workers and increases the feelings of the job insecurity. Just like the survivors, layoff instill fear in the management as they maybe unwilling to force their friends into the cold. Another key effect of employee lay-offs is the loss of motivation and morale. The available studies indicate that after workforce downsizing, the remaining workers become risk-averse and unproductive. To address the negative outcome of workforce downsizing, Klein, Becker, and Meyer (2009) emphasizes on the need to reach out to the employees and convince them why such a step was necessary. 4.2.4 Loyalty The available literature indicates that loyalty has both active and passive forms. It well acknowledged that employees should always remain loyalty and show support to their employers. Loyalty employees are likely to defend their employers from undue criticism, emphasize the positive aspect of the organization and refrain from complaining unnecessary about the current working environment. However, employee layoffs are likely to affect the loyalty of the surviving workers. According to Wayhan and Werner (2006) during the downsizing process, loyalty from the employees can be promoted through job enrichment and application of fair practices. 4.2.5 Innovation As Uchitelle (2006) suggests, when downsizing drags for a long time, the morale of the employees reduces and creativity capacity declines. Information exchange is also strained and workers are unwilling to cooperate with the management. The survivors of the layoffs may also experience high workloads and as a result they hardly get enough time to rest and brainstorm for new ideas. In any case, who would want to innovate for an organization, given that the chances of surviving there are very slim? The alternative would be to look for better organizations where talent is appreciated, job security is assured and workers are paid well. 4.3 Communities Downsizing not only affects the employees and the organization, but also the community. This was the case in Central and Eastern European countries where large- state-owned enterprises provided the local residents with employment opportunities. However, when the post-communist governments decided to restructure the public sector, most of the employees lost their jobs and the local communities were greatly affected. The laying down of employees has a ripple effect on all other business enterprises and service providers in the community. The employees who loose their jobs also loose their purchasing power and are forced to depend on the social welfare. Ultimately, employee lay-off increases the levels of poverty in the community and negatively impacts on the economic development of the surrounding areas. The ripple effects of downsizing also lead to the rise in crime rates, besides affecting the service-base industry. The laid of workers resort to criminal activities in order to support their families, and some may even to commit suicide which is detrimental to the country’s economic development. Due to downsizing, home foreclosures also rise, and many are forced to depend on their relatives hence further straining the economy. 5. The case against employee lay-offs 5.1 Associated costs While reduction of the workforce, is a key solutions to the tough economic environment, it may end being costly. For one, layoffs are associated with indirect costs that can paralyze a company’s long-term revenue-generating streams. In the course of the workforce reduction, the company looses experienced workers. Indirect costs also result from high turnover resulting from forced layoffs, bad company image, low morale, training of additional employees, and higher taxes. The companies are also forced to compensate the affected employees and the whole process exposes the company to litigation from the dissatisfied workers. Employee layoffs attract other direct costs such as supplemental unemployment benefits, accrued vacation and sick pay, outplacement, pension and benefit payments, administrative and legal costs. It is also worth noting that the whole process of compensating the employee is effort and time-intensive and my end up destroying the company’s image especially if the case ends up in court. 5.2 Financial performance The available literature suggests that profitability does not necessarily follow downsizing. In an exploratory study conducted by Zatzick, Marks and Iverson (2009) companies that did not resort to severe cutbacks performed better than their counterparts. The results of this study, clearly indicate that sharp cuts in headcount many not necessarily yield better financial outcomes. 6. Alternative strategies From the above literature it is apparent that workforce reduction is associated with numerous direct and indirect costs. To address this challenge there is need for organizations to come up with better alternatives that have limited effect on the employees. The engagement of the employees during the downsizing process sis very important in order to ensure knowledge is retained in the company and the negative effects of workforce reduction are minimized as much as possible. 6.1 Work sharing The available literature identifies work-sharing solution to the problem of unemployment. Work-sharing is known offer relief to persons who otherwise would have lost their jobs during the downsizing process. The strategy is already in use many states including Colorado, New Jersey, Oklahoma, Pennsylvania, and New Hampshire. But how do work-sharing programs work? The work sharing programs operate by reducing the number of hours and wages of all employees of particular group of workers. Such programs help the employee maintain their jobs, income, health and retirement benefits. To promote this strategy, the American government introduced the Layoff Prevention Act of 2011. Economists support the work-sharing programs because they have a capacity of reducing the economic costs associated with the loss of worker skills. At the same time, such programs helps the employers to deal well with tough economic times by reducing the work hours of their full-time employees, in addition, according to () working sharing programs helps organizations to reduce their payroll costs, retain knowledge capital, and avoid the expenses associated with recruiting, hiring and training new employees. Ultimately, be keeping most of the employees in their jobs, the community benefits through increased economic activity. 6.2 Re-deployment Instead of discharging some workers they could be re-deployed into other sectors. Indeed, a survey conducted by Cascio (2002) indicates that some of the organizations re-deploy their staff before implementing employment downsizing. Just to illustrate, some of the organizations are shifting the under-used staffers into customer-facing positions like sales. Good examples can be found at Southwest Airlines, where the management re-deployed 82 recruiters to other departments rather than discharging them from their jobs. This strategy helped the company to save $250,000 in direct and indirect costs. 6.3 Cutting discretionary spending A survey conducted among 513 U.S. based consulting firms; show that companies embraced various approaches as an alternative to workforce reduction (Zatzick, Marks & Iverson, 2009). One such measure is cutting the travel and entertainment allowances. Reducing the pay or raises also ensure the affected employees are retained at work. Another equally viable alternative to employee layoffs is scaling back employee events and unnecessary expenditure. This strategy is commonly used in the public sector, and the private sectors could learn from this experience. Some of the organizations also conduct targeted lay offs, as a way of minimizing the negative effects of massive layoffs. A classical example of how organizations can reduce their expenditure as an alternative to workforce reduction can be found at Ernest & Young. The management offered the workers a chance to take one month unpaid leaves, and many of the employees obliged helping the company to reduce the payroll costs by 17% (Zatzick, Marks & Iverson, 2009). Another example can be drawn from Pella, an Iowan company, where instead of laying of some workers, the management instituted a four-day workweek for a third of its employees. Such a move helped the company to protect its capital knowledge by keeping the talented employees and winning additional loyalty in the process. By furloughing employees or taking salary cuts, the employers are able to but time to make smart decisions. These two examples should encouraged other affected companies especially in the financial industry to retain talent instead of taking drastic workforce reduction measures. 6.4 Reducing real-estate costs and allowing teleworking In the current business world, it has become very important for organizations to adopt alternative working schedule. That way the productivity levels of the workers are sustained, besides improving the job satisfaction levels. This is already in reality in many organizations where workers are allowed to work from homes and whenever they want. According to Zatzick, Marks and Iverson (2009) this strategy is has already proved effective in the prevention of lay-offs. However, the adoption of teleworking arrangements could be hampered by lack of the trust in the employees and the safety of important documents. Despite these concerns, flexible working schedules are already in use in many organizations and a perfect example can be found at Capital One. By allowing the employees to telework, the company was able to reduce its real estate costs by fifth. 7. Conclusion In these tough economic times, organizations are looking for ways of cutting costs and reducing redundancies. Employee lay-offs are being used to reduce the pay-roll expenses and increase organizational profitability. Despite its popularity especially in the financial sectors, the downsizing process is associated with numerous direct and indirect costs. Downsizing not only causes deleterious effects to the employees, and the survivors but also the community. From the above literature two conclusions can be drawn: downsizers never outperform the non-downsizers and downsizing should be used strategically as tool to achieve long-term workforce management goals and should not be drastic. There are many alternatives available that organizations could use, and these options have proved effective in preventing lay-offs. Even then, it seems that the employees should always be ready to deal with any emergency situations by saving and investing in personal development. Such activities make them resourceful to the company, and their chances for being laid off reduce significantly. References Baumol, W. J., Blinder, A. S. & Wolff, E. N. (2003). Downsizing in America: Reality, Causes and Consequences. New York: Russell Sage Foundation Cascio, F.W. (2002). Strategies for responsible restructuring. Academy of Management Executive, 16, 80–91. Cascio, W. F., & Boudreau, J. W. (2008). Investing in people. Upper Saddle River, NJ: Pearson Cascio, W. F., & Wynn, P. (2004). Managing a downsizing process. Human Resource Management Journal, 43(4), 425-436 De Meuse, K. P., & Marks, M. L. (2003). Resizing the organization: Managing layoffs, divestitures, and closings. San Francisco: Jossey-Bass. Ehrenreich, B. (2006). Bait & switch: The (futile) pursuit of the American dream. New York, NY: Holt Kivimaki, M., Vahtera, J., Pentti, J., & Ferrie, J. E. (2000). Factors underlying the effect of organizational downsizing on health of employees: A longitudinal cohort study. British Medical Journal, 320, 971-975 Klein, H. J., Becker, T. E., & Meyer, J. P. (Eds.). (2009). Commitment in organizations: Accumulated wisdom and new directions. New York: Routledge Sahdev, K. 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