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.