The Hidden Costs of Layoffs

RAMSEY KHABBAZ: Welcome to HBR on Leadership, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock the best in those around you. I’m Ramsey Khabbaz, an editor here at HBR. This month, we’re highlighting four of the best HBR podcast episodes on strategy from 2023, curated by me. From Microsoft to Google to Meta, many of the world’s biggest tech companies announced layoffs in 2023, often as part of cost cutting. But Harvard Business School professor Sandra Sucher, who studies layoffs, says that companies often overlook their hidden costs. Like the loss of institutional knowledge, weakened employee engagement, higher turnover, and lower innovation. She says that it can take years for companies to bounce back from these setbacks.  — with real world examples from Twitter, Nokia, and Airbnb, and Fidelity Investments. You’ll also learn how to regain your employees’ trust in the aftermath.  This episode originally aired on HBR IdeaCast in February 2023. I hope you enjoy it.

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch. Lately, it’s a regular occurrence to hear about a big company, usually a tech firm, making sizable layoffs. Microsoft laid off 10,000 workers. That’s less than 5% of its workforce. Snap is laying off 20%, Meta, 13%, Salesforce, 10%, and the list goes on. The usual explanation is, “We hired too many people and the current economic climate can’t sustain the growth path we thought we were on.” However, this wave of layoffs is somewhat unusual compared to how companies usually cut their workforces, and it may well be counterproductive, according to our guest today. Sandra Sucher is a professor of Harvard Business School and has been studying layoffs for 15 years. She says they often don’t prove to be the savings that companies imagine. The short-term cost cut is often overshadowed by loss of knowledge, weaker engagement, higher turnover, and lower innovation, not to mention bad publicity. She’s a co-author of the HBR article “What Companies Still Get Wrong About Layoffs,” and she’s here to lay out a better approach. Hi, Sandra.

SANDRA SUCHER: Hey, there.

CURT NICKISCH: So what is different about this current wave of layoffs?

SANDRA SUCHER: It’s actually somewhat unusual to have over hiring be quite so prominent a reason for the layoffs. Usually there’s a mismatch between what’s going on in the economy and the size of my workforce, but the level of hiring that went on preceding this was huge. Meta grew 80% since the pandemic. Amazon doubled. There is a sort of prudent person argument to be said that if you grow your business that fast, it’s not sustainable. So historically we’ve looked at layoffs and we’ve seen there’s a mismatch between the number of people I have and the work that we have to do. This is different. This is kind of taking a bet on the future being somewhat wrong about that, and now having a number of people have to pay the price for your bad decision-making. The other phenomenon that’s going on much more publicly than historically is the companies are hiring at the same time that they’re letting people go. Almost every single one of those companies, with the exception of Twitter, is investing in new parts of their business. That means that your employees in the workforce who work for you now are kind of whipsawed. On the one hand, they see people leaving who they know. On the other hand, they’ve seen new people who don’t know much coming in. That’s not a recipe for building a great corporate culture or a very productive and engaged workforce.

CURT NICKISCH: Even though there may be good reasons for it?

SANDRA SUCHER: There may be good reasons for it, and you may have skills that are uniquely suited to the businesses that you’re investing in. But because these are tech layoffs where there’s a lot of fungibility in who can do what, it kind of begs the question about why it is that we haven’t seen more creative opportunities for reassignment and people actually being able to go and get jobs in the parts of the business that are growing and to maintain the knowledge that they have of what’s going on in the company and do it from a different chair. That goes on all the time in companies routinely. I don’t know why it is, given the size of these layoffs, which relative to the scale of the workforces that we’re talking about are actually not that big, why it is that we can’t see more creativity from the tech companies as they deploy these new investments that they want to make.

CURT NICKISCH: On the other hand, if they did really over hire, maybe that is just such a clear mistake that they have to correct at this point.

SANDRA SUCHER: Yeah, I think that that’s right and the scale of the over-hiring was dramatic. In most businesses, you couldn’t imagine an 80% growth in two years. It just doesn’t economically make sense. The bet that you’re making on where your products are, where your markets are is huge. So that is at a level that actually has been tremendous. But what’s interesting is that the cuts that are being taken aren’t actually proportional to the hiring increases that they had.

CURT NICKISCH: Let’s just lay out the basics. How effective are layoffs at cutting costs quickly?

SANDRA SUCHER: The data is not actually very persuasive. Conventional wisdom says that payroll is a huge source of your costs. That may or may not be as true and a tech company, which is making huge bets and investments in technology itself. I think that if we’re talking about a manufacturing business, retail for sure, then you’d be sort of saying, “Well, of course.” Here, I think the argument may be a little bit harder to come by. Not so sure, and I don’t actually have the numbers on that, but the data suggests that layoffs are not particularly effective financially. This was the biggest surprise I had when I started studying this. What you find is that there are two kinds of costs. There are direct costs, and so for example, in the Microsoft layoff, they’re going to take about a 1.2 billion charge in restructuring. Now, that’s not insignificant for a company that made something like $15 billion in profit, for a company that also gave a $60 billion stock per repurchase program to its investors. When you start to look at sort of are you actually cutting costs at a material level, it really does make you start to wonder why it is that this is being done, at least in the context that we’re talking about. Historically, what we would say is that all the research suggests that there are both direct costs like severance and continuing of healthcare benefits for a while, and then there’s a huge literature around the hidden cost of layoffs. This is actually where most companies lose money. You’re worried about the people who you let go and a bigger concern actually is the attitude and engagement that people are still there. Layoffs are a huge trust killer. They just are and we from the research that they cut down on engagement, as you said at the beginning, they actually in manufacturing environments have you try to speed up and be more productive, but care less about quality and safety, which end up hurting your business. They can reduce levels of innovation because people are less willing to take a risk. Then there are all things being equal, would you go to work someplace that you knew actually had a layoff compared to one that didn’t? All of that starts to add up, and that’s these hidden costs, which actually account for the reason that over a period of one very good study that looked in a growth period in the economy, what they found was that companies that had layoffs underperformed companies that didn’t for the first two years following the layoff. They started to recover and then did recover in year three, but they said that for companies with huge innovation ambitions, that period of recovery could be even longer. I think we really tend to underestimate the contribution that people make to the success of businesses, and that allows us to treat them as if they’re widgets, as if they’re things that we can get rid of some and then bring in others without understanding that each project actually depends on particular people doing it well with each other, delivering it on time and to a high quality. You start to disrupt that ecosystem in your business and I think you’re kidding yourself if you think that that’s an efficient way to go about things. You may have to do some things, but it really does sort of challenge the basic notion that this is a great way to go after cost savings.

CURT NICKISCH: Let’s go into some of those downsides. What’s an example of a situation where companies cut workers to save money and did not really appreciate the unintended costs of doing so?

SANDRA SUCHER: Well, look, it’s a little bit of a cheap shot, but I have to sort of say Twitter is a very good example of this. As you know, Elan Musk took the company private, and as part of that, he was focused very much on profitability and he imposed a 50% layoff on the company. He did this in a way that made it very hard to actually credit the business thinking that might have gone into the decision that he made. Twitter had not been profitable so there is a point where you have to say, “If we’re a going concern, we have to be a going concern, and how long should we invest after that?” But if you imagine a 50% cut, that’s one out of every two people, and then you imagine the work that needs to go on in a company, you’re hard pressed to think that all of that work was kind of extra, that you had 50% more work than you actually had people to do. The way the companies get into trouble is they don’t actually picture the post layoff world. They’re not imagining, “Okay, I used to have seven engineers on this project, now I’ve got three. Do we have less work for them to do? I think that they can work twice as fast as they did before, or is there some way that we need to actually recalibrate the amount of staff that we need and the work that we have for them?

CURT NICKISCH: There are lots of horror stories of companies that lay a lot of people off and then … Twitter was one, but this is not unique to Twitter. There are many that just end up calling people back and saying, “Actually, we laid off too many people. Will you come back?”

SANDRA SUCHER: I had to do that at Fidelity Investments.

CURT NICKISCH: Oh, really?

SANDRA SUCHER: It was not good. I worked at Fidelity for a little over a decade, and in the market correction 1990, 1991, we imposed a 10% cut across the board in all the parts of the business and literally six weeks later, I was on the phone with people I had let go asking them if they would like to come back because it turns out that the market had recovered and that we needed them. I did not get many people taking me up on that offer.

CURT NICKISCH: I suppose, right?

SANDRA SUCHER: If you look at this from the standpoint of what’s the human interaction here? It’s not just that it feels funny to do it, it’s incongruous in a really remarkable way to be saying that, “We made this mistake. We know that you had to go through feeling like you no longer have a means of supporting yourself and your family and now we’re going to offer that back to you.” So trust is a willingness to be vulnerable to other people’s actions and intentions.

CURT NICKISCH: Did you still reach people within a severance or soft-landing period?

SANDRA SUCHER: I think that that’s different, and I’m glad you raised … that was one of the things I really wanted to talk about in terms of what I think we could be doing much better. The data’s very clear that if you lose your job, it’s harder to get another job. Tech may be particularly somewhat immune to that, but people nonetheless have to go through all the disruption that’s involved in leaving one employer and joining another. If you actually set a different target for a layoff, and the target would be if I could lay people off so well that they would be willing to come back to my company, that raises the question of what would you do that’s different? I think one of the first things you would do is you would provide the proverbial soft landing. The fact that you can get away with 60 days of severance and then add on some additional weeks for every year that you worked, but if you actually invested more in helping people find their next job, you would actually win quite a lot of their support and trust. There’s a very good example of Nokia, which at the time it was being out competed by Apple and Android phones, had to engage in an 18,000 person layoff across 13 countries, and they had a two-year runway for this because it needed time to dial back their business. What they decided was that they were going to have one metric that they used to establish how good the layoff was, and this was the percent of people who knew their next job the day they left the firm. That was the goal, which is that we’re going to commit resources, time, five different ways to either get a new job in Nokia, studying something new, they gave funding to teams who want to start new businesses. That’s the kind of mentality that you need to have in terms of building this kind of soft landing for people. You really do need to commit that you took their job away and you want to do some things to try to help them get the next job. If you commit like that to your workforce, that’s a very different bargain.

CURT NICKISCH: So when are layoffs justified?

SANDRA SUCHER: There are many reasons why companies need to even involuntarily terminate people. The first reason is M&A. When people do merger and acquisitions, what you will find is there are redundancies, which is a lousy way to talk about people. But nonetheless, there are two people roughly doing the same thing. In order to benefit from the advantage, the cost savings that the merger was supposed to produce, there is in fact a need to have a very serious look at the staffing levels and understand where you’ve got too many people doing the same work and how it is that you can become more efficient. The second is just a major restructuring where you say, “I was in this line of business, I’m actually not going to pursue that line of business. This division is no longer part of our path to the future.” So that’s another reason. A third, quite honestly, is in the search for productivity efficiencies where you have tried to engage in some sort of a good faith effort to become more efficient as a business. Now, that gets a little bit trickier because I’m not going to cooperate in your efficiency drive if I think I’m going to lose my job at the end of it. That’s a good example of wanting to use something more like natural attrition where if you’ve become more efficient, you actually would need fewer people and so then the answer to the manager who’s asking, “Can I hire this person to replace the person who’s left?” is, “Well think about all that work that we just did to try to make this more efficient. Can we take a look at the staffing and make sure you actually need it? I’m not sure you do.”

CURT NICKISCH: Your article also mentioned how a lot of companies go about deciding who to let go in these sort of broad, sweeping layoffs and it was kind of shocking that some decisions about somebody’s career and future were made with maybe kind of an hour of consideration per person and your article pointed out that a lot of companies just need to spend more time being deliberate and thoughtful and intentional about their decisions.

SANDRA SUCHER: In addition to what you said, some best practices are to build kind of real-time trackers, technology that supports the decision, the slates of people who are being recommended for layoff. What you actually want to do is to be building some oversight of that from both a HR and a company-wide perspective, because one of the unintended consequences of layoffs is that they tend to hurt people who are underrepresented in the workforce. It can be women, it can be people out on sick leave, and if you’re not actually paying attention to that, you will end up … and so many companies have sort of tried to move into the DEI space. Tech is trying to so hard to hire people of color and women and create environment. Layoffs are a time where actually the manager’s inclinations start to show up as to who it is that they recommend to be let go. You’re going to want to have some oversight of that. On the one hand, you want people to be able to retain the people that they believe in, and on the other hand, we know too much about bias to suggest that these person by person decisions, if they’re not made carefully with scrutiny and engagement, then actually you’re going to make some mistakes. In that study that you’ve referenced, the HR people who were surveyed on that, they said that they thought at least 20% of the decisions that they made were wrong.

CURT NICKISCH: Wow. What are some better ways to go about it?

SANDRA SUCHER: One thing that companies are reluctant to do, and that is complex in a world that’s as technologically intense as our is, and that has many financial issues at stake, nonetheless is to give people advanced notice. But you have to – the reason it worked at Nokia is because they paired that with an extremely robust program of support for finding your next job. So just telling people in advance is not a good idea if you’re not going to do anything for them because that’s like an invitation to leave.

CURT NICKISCH: Or mail it in or whatever.

SANDRA SUCHER: Correct, and so these two kind of actions go hand in hand and the reason why Nokia was confident that they could do it was because the deal that they were cutting was that, “We’re going to tell you in advance, get your things in order, and we’re going to help you get a new job. Now under those conditions, will you stay with us and keep working with us?”

CURT NICKISCH: Just a very kind of crass economic question, but how much did that support cost versus what the company gained from doing so?

SANDRA SUCHER: The best measure of that was that the company received sales from new products at about 33% of their average revenues, turnover. That was the same percent of sales from new products that they had before the restructuring. If you want to say, “Did this work for them?”, what they were able to do was actually maintain the business, keep investing in the business’s products and services that people wanted. They also found that the quality metrics that they had and the assembly side of the business actually stayed stable and in some cases, the factories actually were better at quality because they wanted to show Nokia that they were wrong in closing them down. The program that they put in place, that was 4% of their restructuring charges. It was entirely managed sort of in-house with the exception of some support for people resume writing and things like that, and the managers who managed this program of employee support were themselves being let go.

CURT NICKISCH: Let’s talk a little bit about communication. There have been a few companies recently that have announced layoffs and been praised for how they handled it. One was Airbnb. During the pandemic, the company was praised for their support for workers, their advocacy for some of those workers finding other jobs and just how they handled it. Stripe also recently, I think they announced a 14% cut to workforce. This is sort of a digital payments firm. Patrick Collison, the CEO, was praised. Talk a little bit about that communication and how you’d grade it, I guess.

SANDRA SUCHER: There’s actually quite a lot of literature on how you recover lost trust, and there’s a kind of formula for what you need to do to recover lost trust, and it helps you actually in situations like that. The first thing you need to do is you need to acknowledge harm and say you’re sorry. One of the things that Patrick Collison did so clearly was he said, “We over hired for the conditions that we’re in. This is a mistake that we made and really good people at Stripe are going to lose their job because of a mistake that I made.” So that personal accountability actually is the first thing that matters. The second is you have to explain why you did what you did. In his case, he said that, “We hired because we thought conditions were going to continue,” and the reason why the explanation’s so important for people is that that gives them confidence that you know what you did that led to this bad event. That builds my trust. It’s like, “okay, you get it, you know what you did.” Then there’s the third step of that, which is called an offer of repair and that’s where you sort of try to do one of two things. You try to make the other party whole and so what he did in his case is he really set the template for what good support looked like in terms of the things that he offered, the support for people’s vesting in terms of shares that they had and other things that he did to try to support them in many visa related ways. The other thing that you do is you do try to commit to understanding what led to the breach of trust and that you’re going to try to prevent that from happening again. I’m hoping that at the other side of this is some thinking about is there any lesson that he personally takes out of what it was that would say, “Would I make different decisions going forward than what I did?” You can see how each one of those steps actually starts to rebuild trust in a moment when it’s lost. Someone’s apologized for the harm they’ve created, they give me an explanation about why it is that they did what they did, and they made some kind of an attempt to keep me whole and to explain how it is that they’re going to do things differently in the future.

CURT NICKISCH: What does the research say about what kind of difference that makes for the person who’s laid off?

SANDRA SUCHER: Let me be clear about this. Being laid off is an assault to your identity because not everyone was laid off. The first thing you have to try to figure out is, “Well, why was I on the list?” Even being told that, “We over hired” or “This is for economic conditions,” you still were chosen and other people were not. So it’s easy to underestimate that personal assault on your sense of competence and yourself as a professional. That’s why they’re not really equivalence. You feel better if someone’s apologized in a way that you actually feel makes sense, but some of the things that we know about the psychological effects of losing your job involuntarily is that it really does take a great personal toll on people. The people who do particularly well are ones who actually don’t blame themselves for the layoff, which is hard to do if you’ve been selected in a group of 10 and you’re one of the two that got let go. Nonetheless, the people that research finds do a better job is they take advantage, they actually have a more positive attitude to losing their job. They do, and you see this in some of the press coverage of the tech layoffs is that a lot of people are going to healthcare, some to financial services, meaning that there are lots of different businesses that really need tech talent in a very dramatic way because of how they’re digitizing and how it is that they’re changing how they do things. For some people, those shifts are toward a business that’s more aspirational. This is a business whose purpose and mission I can believe in and so for some people, it’s an opportunity to actually go and see, “Well, what else interests me?” That’s one of the better ways to go after this. The first rule is try not to blame yourself because the definition of a layoff is an involuntary termination for economic reasons.

CURT NICKISCH: Where does that positivity come from? I wonder if the company has any role in that or is that just very, very individual?

SANDRA SUCHER: When you look at Patrick Collison’s apology, he praises the people who are let go. He makes it very clear how talented he thinks they are and when the boss of the company-

CURT NICKISCH: Brian Chesky at Airbnb, he said, “Please hire these people. They’re great.”

SANDRA SUCHER: Exactly. If you want to help people have a more positive sense about themselves after they’ve been terminated, you obviously would want to praise them, talk about their performance, talk about the fact that this isn’t on them. It actually is on you.

CURT NICKISCH: It’s not you, it’s me.

SANDRA SUCHER: That helps sort of sustain … because if that’s the spin that other people understand about the business, then when I go to interview for my next job, there’s this … it’s not a halo effect, but at least it helps me because people know that there’s a trail around this. On the other hand, if you sort of proceed your layoff as some companies have done, like Meta. With a lot of, “We are not productive here. We need to really knuckle down. We’re not doing as well as we could be doing,” when those people go to get a new job, there’s a path that’s been built here that says that they’re not as productive as they need to be. Companies actually can shape the perception that other people have with their employees by these public statements that they make in ways that makes it easier or harder.

CURT NICKISCH: Some of the people listening to this episode are going to be decision makers at firms. Other people are going to be managers who are implementing some of these decisions. Other people are going to be affected by it on teams that are affected by it. Layoffs are a fraught thing. There’s a lot of emotion, there’s a lot of just past behavior that influences how we think about them. What’s your message to somebody just on an individual level about approaching layoffs at a company? Do you try to change people’s mindset at all?

SANDRA SUCHER: I did a project at one point where we interviewed people who’d been laid off, did video interviews of them just to kind of hear how they talked about it. There was one woman who worked in a very manual labor kind of business. It was print publishing, and she was actually setting type. She got laid off because, as she’s put it, a $15,000 machine replaced the work that she’d been doing. But when she talked about what it was that she wanted to do next, she talked about the fact that she … it was quite moving. She said, “My hands can always hold a broom. I can sweep floors. I could go to a McDonald’s to work, but I don’t want to do that because I have a sense of stewardship for my own skills. I know I’m capable of doing more than that, and I will look for a job that actually allows me to do that.” I was so moved by this and this notion of being a steward of your own skills and having a sense of who it is that you want to be, what you value and how you want to grow. In this case, she actually went and got training to fix computers. She said quite funnily that because they had put her out of her job, she thought maybe she could fix them and use her manual dexterity to kind of go after that industry and join it. Then she described herself as someone … because she’s having done a hard time getting a job in that industry and she said, “Well, it’s because I don’t have experience.” She said, “I’ve been trained, but I’m really actually been trained to be trained. I know I’m going to have to learn what I need to know when I actually join a company and I don’t blame people for wondering why they should hire a middle-aged woman to go and do this stuff when they can have someone who might be able to do that job better than I could do at this stage in my career.” When you talk to people who’ve been through this, they’re quite thoughtful and some of them actually have found ways to maintain a sense of who they are in the midst of all of this. She, to me, is a complete role model for how you think about how to conduct yourself and how to take care of yourself psychologically so that actually if something like this happens to you, you can come out whole on the other side.

CURT NICKISCH: What do you say to a manager who’s making some of these decisions?

SANDRA SUCHER: I would say take care of yourself. There is quite a lot of research on the negative effects of being the person who delivers the bad news and who has to make the decision on who gets let go. Lots of people end up actually becoming depressed. They have health problems as a result of this. It’s not just the person who is let go who has some of these negative consequences. The managers who do this, first line supervisors, actually suffer as well. The things that you can do are some of the things we’ve talked about, about trying to separate out the role that you played from the imperative to do it. This was not your call, and if you did the best that you could for the people that you could, that’s sort of the best you can hope for. But I think it’s kind of to not be surprised if you find yourself having difficulty sleeping and needing possibly to talk to someone, to kind of work through your feelings about what it was like to do this to another human being. That’s kind of a known fault line in this. It’s another one of these hidden costs of layoffs, which is the toll that they take on the managers who actually conduct them.

CURT NICKISCH: Thanks so much for coming on the show to talk about it.

SANDRA SUCHER: Great. Thanks so much.

RAMSEY KHABBAZ: That was Harvard Business School professor Sandra Sucher in conversation with Curt Nickisch on HBR IdeaCast. We’ll be back next Wednesday with another hand-picked conversation about leadership from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. And while you’re there, be sure to leave us a review. We’re a production of Harvard Business Review. If you want more articles, case studies, books, and videos like this, find it all at HBR dot org. This episode was produced by Mary Dooe, Anne Saini, and Hannah Bates. Ian Fox is our editor. Music by Coma Media. And I’m your guest host, Ramsey Khabbaz.  Special thanks to Rob Eckhardt, Maureen Hoch, Adi Ignatius, Karen Player, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.