Why your sweeping layoffs may hurt you after the pandemic is over

As the current crisis deepens and economies around the world brace for recession, COVID-19 continues to cripple people’s health and livelihoods.

Companies are racing to conserve cash, leading to some of the deepest staff cuts for decades.

But history suggests many will get it wrong: Cutting too deep and too wide, without a full appreciation of the long-term harm layoffs can do to the organizations they are designed to save. In other words, managers choosing a chain saw as their instrument of choice, when an expert’s scalpel is required.

Take these considerations into account before you start severing ties from your employees.

The cost of layoffs

Evidence suggests that the immediate savings from layoffs can be canceled out by the longer-term cost of lost talent and skills. According to the Work Institute, the cost of employee turnover is roughly 33% of the employee’s annual salary, and this is not mentioning initial restructuring charges.

But the impacts go further. When you lose an employee, you’re also losing the time you’ve invested in training that person, and their knowledge to get work done efficiently.

Following layoffs, companies typically see higher employee turnover, lower staff morale, and a decline in job performance. Those who remain often end up being overworked and demotivated by the way their colleagues have been treated.

There’s also material damage to the employer brand, as companies typically see a decline in reputation as measured by things like Glassdoor ratings. This then hurts their ability to recruit new staff when needed.

Critically, companies may lose their competitive edge. As an example, look at the events surrounding Kraft-Heinz. The company cut costs to improve operational efficiency but neglected to upskill workers in innovation, marketing, and merchandising. This left the organization without the ability to appeal to retailers and consumers and keep up with changing consumer demand. In 2019 sales were down by over $229 million, and the company’s forecasts for future profits dipped 25%.

With the cost of making layoffs so astronomically high, companies should navigate the goal of payroll reductions differently, and where possible they should instead consider reskilling and redeploying existing staff.

Nurture (and protect) your “talent equity”

Making smarter decisions relies on a more holistic and real-time view of your organization’s skills and potential.

The sum value of the skills in an organization, the rate an organization can upskill, and the value unlocked from higher-skilled talent in their business—all that combined—is what I define as “talent equity.”

It should be weighed against the net costs of layoffs and a business’s cash flow. When talent equity outweighs the net savings of a layoff, and cash flow permits, the time is right to lean into investing in the future skills of your organization. If cuts do still need to be made, those decisions need to be based on data on in-demand skill.

Few companies truly know what skills their workforce possesses, and where those skills reside, making it impossible for the average company to know when they have positive ROI options. More than a third (34%) of workers say their manager doesn’t know what skills they have, meaning leaders are flying blind in understanding the makeup of their team.

Part of the problem is the IT systems. Data is scattered across numerous unconnected systems. Supposedly sophisticated human capital management (HCM) systems almost universally measure employees as costs, without reporting on the ROI or inventory of their skills or contributions.

And most learning management systems are no better. They track courses taken, not skills developed. Moreover, they ignore the wide-ranging mediums for informal learning, which our data shows is now where a majority of people develop new skills.

Without capturing some of this crucial information, companies risk misunderstanding their talent equity and their own future.

A clearer view for decision-making

Businesses that have a holistic view of their talent equity can make faster and smarter decisions.

For example, rather than reach for the metaphorical layoff chainsaw, they might look for ways people can move horizontally and be rapidly redeployed.

American automakers have shown how valuable this can be during the pandemic. These companies maintain sophisticated inventories of staff skills, which allows them to continuously reskill and redeploy workers. This foresight and strategy allowed automakers to pivot when the pandemic hit the production of vehicles, resulting in the speedy redeployment of workers and assets in order to build lifesaving ventilators.

Similarly, redeployment makes it easier for a manager to move workers to the departments in the greatest need. When one of our clients saw a massive influx of calls to their contact center in response to the coronavirus crisis, they quickly redeployed staff with the right skills. They focused on other departments which specialized in customer service and communication, and then sent these trained workers to areas requiring talent.

With the complete picture of skills in your organization, it’s possible to identify a workforce with the skills for the future, as well as certain individuals who can quickly acquire them. Inevitably, you will save yourself the cost of unnecessary layoffs.

David Blake is cofounder and executive chairman of the workforce upskilling platform Degreed and CEO of the learning sabbatical platform Learn In.