Business Layoffs

Layoffs, a Cost Cutting Strategy?

This last week was a tough time for one of the largest media companies in the world, announcing 28,000 layoffs in the United States.  In this post, we will analyze what layoffs do for a company and explore alternatives.

This will be an analytical look at mass layoffs, using the recently announced layoffs by The Wald Disney Company (TWDC) as a case study.  However, I do apologize if you sense some emotion behind the words as this particular topic hits a little close to home.  On a similar note, a major shout out goes to Mr. Josh D’Amaro, Chairman, Disney Parks, Experiences and Products.  He was seen at Disney Springs during the layoffs, speaking with cast members who were affected and generally being the kind of empathic leader needed in tough times.

Why a Layoff?

Most companies use layoffs as a means of cutting costs when their bottom line is starting to fail.  That is the case with Disney as the COVID-19 pandemic wrecks havoc on the tourism industry.  To get all of my readers caught up to this point in history, TWDC announced a mass furlough of cast members in both Disneyland and Disney World starting back in April due to the need to close most of their operations.  While this furlough meant that tens of thousands were now without a reliable source of income, Disney was able to still pay their medical benefits during this hardship.  While some of these individuals were called back as Florida began to reopen businesses, a majority of those people were not.

Fast forward six months and with no light at the end of the tunnel, TWDC decides that the cost of carrying a majority of those medical benefits is too much while also sliming down its currently working teams as well.  By all accounts, teams are down to approximately 40% of their pre-COVID numbers of currently operating case members.  The average number of hours worked by leaders is around 50-60 hours now compared to 40-45 hours before the pandemic.  To be sure, they did shed a significant amount of cost in some areas, but also limited their options for the future.

The Cost of a Layoff

Many of you have read my article, 5 Small Changes for Small Businesses that explored what businesses can do during this pandemic, and how they could actually reinvent themselves to thrive.  Part of that post calculated out the cost to Disney of that furlough, estimating the amount of money that will needed to be spent to bring their employment numbers back up to what they used to be.  This section will not place a direct number on the layoff ($112M), instead looking at the implicit costs that will need to be paid by the company now.

Morale

The Navy has a person whose entire job is to measure the morale of the ship and improve it as necessary.  Other branches have similar jobs, but why is that?  Because the military understands the extreme impact morale has on an organization.  I’m sure that many of my readers have had climate surveys before, measuring the office’s morale.  These surveys look at where the leadership needs to improve operations or where bad apples may be spoiling the office morale.  The military does essentially the same thing, but I have not seen an organization that quite measures its morale then actually implements change quite as quickly as the military.  While there will always be examples of leaders taking advantage of their power (see the USS Shiloh captain from 2017), a good majority of captains balance operational readiness with morale.

Now picture the most magical/happiest places on earth with friends and coworkers walking down the hallway crying.  People not knowing when the “axe” will drop and on who, treading lightly so as to try and not be the next “phone call”.  This is what it was like to work at the US-based Disney locations this last week.  For those still on furlough status, they were awarded some privacy, but those that were still at work, had to see people’s lives crushed.  This will have lasting impacts to the morale of all cast members for the coming months, months that the company will by trying to keep its head above waters and needing every cast member working at 150% their previous work capacity.

To those that are left after a layoff, you may think that they will feel relieved, that they will want to work twice as hard because the company has saved their job.  However, there is a very real negative impact of having to watch your team slimed to a fraction of their numbers, and watching individuals you may have called friend walk away with their heads down turned, wondering how they will carry on.  There is another term often used by the military called “survivor’s guilt” which perfectly describes this predicament.

To further compound poor decisions, leadership often institutes a raise to those who are left to “boost morale”.  This sends the wrong signals, saying that we needed to layoff many more people than we needed to so that we could also give those who are left a raise.  I am telling you this now, most people would prefer to have their coworkers back than than extra $30 a week.

Operational Readiness –  aka Value Generating Activities

The military uses the term “operational readiness”, but the civilian world would use the term “value generating activities.”  Essentially it means the same, how successful will we be in accomplishing our mission?  In the customer service industry, value generating activities are directly linked to your employees, since your customers are purchasing what your employees are generating.  There are many theme parks and resorts in both Orlando and Anaheim, but guests stay at the Disney resorts to go to the Disney parks because of one thing, the magical environment created by the cast members.  Take away the cast members and you have an overpriced product that customers will find alternatives to.  The value of your product or service is directly set by the customer, so do not think that the company has any means to set its own value, regardless of how strong a brand is.

The Profit Response

A layoff is a response to lowering revenue to keep the profits above a certain level.  I know most people know where profit comes from, but I find it is important to restate that profit is revenue minus cost.  The idea of a layoff is illustrated below:

Profit equation

Note that the above equation has revenue going down because of environmental factors, which in this case is a global pandemic and the response to lower revenue is to lower costs.  This is a classic example of what I call balance sheet leadership, making decisions with accounting and quarterly profits in mind.  However, lets look at what really happens when you factor in morale loss and lowering your ability to provide value to your customer.

Profit equation

Now that you factor in the implicit cost of layoffs, you see that revenue goes down due to the pandemic, you cut costs through layoffs in an attempted answer, but then the morale and operational readiness of your remaining workforce suffers, causing revenue to go down again, lowering profits.  I don’t think any person thinks that this is a reasonable response when your goal is to at the very least keep profit where it was.

LEAN and Mean

Traditionally, the phrase lean and mean refers to the process we described above.  The company goes through a massive layoff and this term is thrown around by management as a motivational slogan to get their people pumped.  Well, there have been countless examples throughout the history of business that the lean and mean strategy has failed time and time again.  By removing the one variable in your company that generates value, you essentially cripple yourself.  Its like trying to climb out of a hole and you volunteer to tie one arm tied behind your back, sure you can make it, but its a hell of a lot harder than the alternative.

Enter the LEAN and MEAN methodology.

LEAN is a continuous improvement system that has two aims, one reduce waste in a process and understand your customers to better fill their needs.  Return to that profit equation described above:  Waste = Cost and filling customer needs = revenue.

Profit equation

Odd how when you change your mindset away from traditionally poor decisions, what you can accomplish!  You may be asking yourself, sure you can put up equations with arrows, but how do we actually implement this strategy?  Through hard work, dedication, making difficult decisions, and reinventing yourself.

READ NEXT: The Benefits of Thinking LEAN

Manpower

In the military, if you do not progress in your career, you are forced out.  This prevents individuals from staying at the same position for decades and capping out their salary near the point of the next level’s.  I have heard this same justification before “why would I want all of that responsibility and I would only make $5-10k more?”  I’m sure you have heard that before, so don’t pretend not to have had.

A focus on the individuals that create value for your customers is a key tenet of LEAN and requires leaders to focus on their development, while placing these individuals in the correct spots for the biggest impact to the customer.  While I normally do not advocate layoffs, pushing for retraining or re-tasking instead, removing individuals who are unwilling to change to meet the new LEAN system may be needed.  The idea of waste is anything in the organization that does not provide value to the customer, be it a process, product, or person.

Side note: some waste cannot be removed and is necessary (see steps involving government regulations as an example), it is not an expectation to remove all waste, just as much as possible.  Also note this is a continuous process, not a single project.  LEAN is a journey, not a destination, so today’s necessary waste could be tomorrow’s cost cutting.

Focus on Process

How many times have you heard this “this is the way we have always done it!”  I heard the snickers and smiles all the way through the computer.  LEAN challenges the status quo and asks all individuals of an organization to look for process improvements.  Often this takes form through a suggestion board (note this is not a suggestion box that can hide the nature of the suggestion, this is visible to all in the team) displaying all of the ideas for process improvement.  Regularly, employees are asked to review all of the suggestions and rank them on four quadrants (again visual is a big element in LEAN) based on the cost of the improvement and the impact to the organization.  Low cost, high impact suggestions are implemented as quickly as possible, while high cost low impact suggestions are saved for wish list items.

By engaging all individuals in the process of improvement, the organization will see drastically more improvements as well as buy-in to this new process.  Gone are the days of top-down leadership, making decisions that come down from their ivory tower to be imposed on their peons.  One person simply cannot provide the same insight and ideas that an entire organization can.

Focus on Flow

Another big element of LEAN is a focus on flow.  Flow refers to how a product or service flows through a process.  Analysis of flow will almost invariably lead to your organization’s first big improvement projects.  Many people get caught up on the day-to-day grind of the operation, without ever taking a look at the process as a whole.  I have seen presidents who thought their process took three days from order taking to fulfillment of a fully customized order, only to find the order was a cookie cutter and it took thirty days to fulfill.

The emphasis is again on anything that does not provide value to the customer is minimized or eliminated.  Any wait times between steps, or machine changes overs should be removed if possible.  Also, the flow of the product or service must be unhindered, meaning the traditional batch and queue of past manufacturing is gone.  LEAN focuses on continuous flow to the customer, generating a faster, more customized option and therefore a greater value.

Bottom Line

If faced with those hard choices, the LEAN and mean strategy will increase your company’s value to your customers and therefore its revenue while removing unnecessary waste (aka costs).  This strategy has been proven to not only boost profits but also increase customer satisfaction and loyalty.  So instead of layoffs that will only hurt an already struggling company, turn towards a process that has been proven to save companies.  Remember one of my early statements of how much the layoffs cost the Disney Company?  I’ll tell you, it was $112M just for HR costs of rehiring, not to mention all of the implicit costs.  Well just this year a company posted $1.2M in cost savings just by training seven of their employees in Lean Six Sigma.  Now image an entire company geared towards this methodology and you can start to see the possibilities.

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