“Why aren’t layoffs taught as a subject at business school?” Robin Astrigo asked himself. “Boards expect executives to do them well, but nobody knows how.”
A version of this article appeared in the March 2009 issue of Harvard Business Review.
The Layoff
If Astrigo Holdings is to remain competitive, 10% of its workforce must be cut. Who goes, and who stays?
Summary.
Reprint: R0903A
Astrigo is in trouble. The home improvement chain has missed its earnings forecast badly and sales are falling. A 10% reduction in staff looks like the only choice. Layoffs, however, would undermine the retailer’s longtime commitment to employees and the ability to provide its famed customer service. But tapping cash reserved for strategic acquisitions goes against the firm’s values, too. What should the CEO do?
Board advisers Laurence J. Stybel and Maryanne Peabody, of Stybel Peabody Lincolnshire, suggest that the company borrow a page from McDonald’s and declare Astrigo’s intention to focus on the interests of long-term shareholders. This move would establish a framework that would help management make tactical decisions with more clarity and flexibility. The company could then use its cash to buy a little time to study the options. If Astrigo can’t avoid layoffs, a last-in, first-out approach would be the least costly.
Former CEO Jürgen Dormann understands the challenge Astrigo faces. When he took over ABB, the company was in deep distress. After shaking up his executive committee, Dormann personally reached out to all 180,000 employees to enlist their help. They came back with ideas that saved $1.6 billion—and rescued the company.
Management professor Robert I. Sutton thinks too many executives assume that layoffs are the best way to reduce costs. They don’t factor in how long it takes to realize the savings from job cuts, the costs to hire and train people once business picks up, or the damage to morale and productivity. Astrigo’s executives should consider alternatives such as pay cuts, reduced benefits, unpaid time off, and incentives for departure. If layoffs are inevitable, Astrigo should do them quickly, and firing the bottom 10% of employees would be the worst approach.