While many companies have managed to increase their bottom lines of late much of it has come as a result of finding greater efficiencies rather than through true growth (i.e. an increase in revenue).  For many, the top line hasn’t moved much.  As a result, firms have failed to hire back workers let go in the aftermath of the 2008 market crash.  The rush to downsize after the fall of Lehman Brothers is certainly understandable, as many firms were merely trying to survive month to month, quarter to quarter, and with a lack of cashflow the bleeding had to be stopped somehow.

However, the degree to which firms downsized their staff in those days of panic may have dramatic longterm implications for their performance, so says Professor Wayne Cascio of the University of Colorado at Denver:

What we find with extreme downsizes is that in the long term, they really do suffer relative to competitors in the same industry facing the same sets of economic conditions.

A lot of this is done for short-term profitability, or to send a signal to the market that a CEO is taking strong action to try to reassure shareholders.

And what happens is No. 1, they tend to cut out some of the very things that made them successful in the first place, for example research and development.  (via NPR)

Extreme downsizing is defined by Cascio as the elimination of a firm’s workforce by more than 20%, and it appears that 40 of the largest companies in the United States chose to eliminate at least that many workers from its books.

This makes a great deal of intuitive sense to me.  While any firm should welcome a trimming of waste, it is unlikely that 20% of their workforce is truly expendable.  A massive loss of human capital can have any number of negative effects in the long run, including:

  • As Cascio notes in a recent study (PDF), knowledge-based organizations are likely to feel the impact the most, as their strength lies in their people and in a purge of >20% of a company’s workforce you are bound to lose quite a bit of institutional knowledge.  Removing people from company-wide social networks is likely to disrupt learning, problem-solving, and knowledge transfer.
  • Survivors of the layoff are likely to lose focus and this can eat into productivity.  Besides the loss of close colleagues they are likely to become preoccupied with their own fate–with layoffs so large it is hard to imagine that you are bullet proof.  It is easy to say workers should keep their head down in such a situation, but it is impractical.
  • Burnout by survivors.  With massive layoffs, remaining employees are asked to pick up the slack from their departed colleagues.  The evidence suggests that firms do pretty well with this at first, but over the long term (especially once growth returns) the failure to backfill open positions will eventually lead to a breakdown.  There is some evidence we are hitting that point now.

It is going to be very interesting to see what happens to the extreme downsizers in the long term, especially given the number of firms that relied heavily on the pink slip to survive the Great Recession.