Corporate tips: To lay off or not to lay off

Corporate tips: To lay off or not to lay off

Judith Wirawan, Consultant, Accenture

As we know, many parts of the world, including Indonesia, are
currently in dire economic straits. Business is suffering in
almost every sector. For example, the Indonesian footwear
industry expects a 10 percent decline in exports in 2002 and the
textile industry is also foreseeing a 20 percent drop in revenue
in 2002, following the 25 percent revenue decline for 2001.

With such bleak picture, corporate executives moved quickly
over the past couple of years to cut costs, and one of the things
many of them did was to lay off workers.

Some people would argue that layoffs are not the best
strategy. One of the arguments to convey the detriments of
layoffs is societal conditions. Research shows that members of
society, especially those who believe that organizations should
play a social as well as an economic role, find downsizing in
general to be unfair to workers (Watson, Shepard & Stephens,
1999).

Other arguments focus on the effects on the organization
itself. Layoffs sometimes do not help a company's financial
situation to a great degree. Second, a 2000 decree in Indonesia
stipulating handsome severance payments for fired employees could
make layoffs more expensive than keeping the employees around for
a certain period of time.

Even employees who escape the axe during a round of layoffs
are affected. Their morale and productivity decline together with
workforce cutbacks. Despite keeping their jobs, these employees
experience less job satisfaction, organizational trust and
organizational commitment.

Moreover, firing too many employees can be detrimental to the
organization when the economy bounces back. It could face a
potential shortage of critical skills and it would not be easy to
recover those quickly.

So what should a company do? Layoffs are not the only option
available to cut human resource costs. Companies can introduce
less generous salary increases, cut or reduce overtime, or reduce
business travel, among other steps.

However, it must be said that the above strategies might not
work well in Indonesia. One of the main reasons is that most of
the companies in Indonesia are labor-intensive. For example, in
the garment industry labor costs eat up 80 percent of overhead.
With productivity at factories plunging to 35 percent of
capacity, it is easy to conclude that keeping all the workers
will only kill the factories, which will result in an even higher
unemployment rate.

The situation is only made worse by the Indonesian
government's decision to raise the minimum wage, as this pushes
companies to lay off more employees. Therefore, when the choice
for a struggling company is to be nice and retain surplus labor
or lay off workers and survive, the latter of course will be
given priority.

If layoffs are unavoidable, the next question should be how to
minimize the impact. Disgruntled ex-employees could, for example,
spread "bad talk" about the company or even sue the company for
unfair treatment.

Several strategies to avoid such things from occurring include
communicating early and honestly with employees about what is
going to happen, using objective criteria to choose who should be
terminated, such as absenteeism and productivity, and providing
training and counseling for affected employees. In conclusion, if
lay off you must, do it correctly and with tact.