The COVID-19 crisis has resulted in layoffs on a scale that the U.S. has never seen before. In just 17 weeks, nearly 51 million Americans have filed for unemployment insurance — that’s more than the number of claims filed during the Great Recession. We recently surveyed more than 100 C-suite leaders at large enterprises – over one-third said they were implementing cost-cutting measures, including redundancy, due to the pressures of COVID-19.
In the United States, companies can conduct layoffs at will, which has created an environment where redundancy and layoff programs have become more commonplace over the years as part of the business strategy for dealing with downturns.
Suzanne McGee wrote for The Guardian, “Being lean and mean is clearly the way corporate America wants to present itself to the world.” The latest surveys show that even before the current crisis, nearly three in four CEOs were looking to lay off workers in the next three to five years. But what many CFOs and CEOs involved in these decisions don’t always take into account are the impacts redundancy programs have on their businesses. The numbers speak for themselves.
A Choice of Two Evils
With an economy in freefall and pressure on the P&L as customer demand rapidly shifts, widespread redundancy can feel like the only choice. The company needs to conserve cash and runway. However, by reducing its size to protect cash flow a company can irrevocably harm itself in the process. Deepak Datta’s research found that in the days following, layoffs had a neutral to negative effect on stock prices. Not surprising. But what happens later is what organizations should consider. Following layoffs, a majority of companies suffered declines in profitability, with the drop in profits continuing for three years. Researchers from Auburn University, Baylor University, and the University of Tennessee found that companies that have layoffs are twice as likely to file for bankruptcy as companies that don’t have them.
When faced with a seemingly impossible dilemma, the answer must be to think and act innovatively. Find a third choice. This is exactly what Nokia did 10 years ago, when it was faced with making more than 40,000 job cuts. It opened centers in the U.S., Europe, and India to help those faced with redundancy to find a new job, either inside or outside the company.
However, it also formed “Bridge,” an entrepreneurial stream for employees that had an idea for a startup. Since its inception, Bridge has helped more than 1,000 start-ups get their beginning. Out of the companies started, nearly 20% entered into commercial agreements with Nokia as they were solving key challenges facing the business. They actually helped accelerate Nokia’s innovation.
A Lever for Growth
Adding this additional outplacement pathway can provide the business with a huge array of benefits, as well as help prevent many of the issues that arise from standard layoff programs. The budget is taken from the redundancy package, and the staff member that is being exited is offered an opportunity to take company-sponsored training on how to build their own startup.
By giving staff access to the tools to develop their idea into a revenue-driving business, the company is taking an active role in driving the local economy and creating future jobs. Many CFOs also consider running an investment program for the most promising startups, which gives the business the opportunity to benefit from future growth and partnership opportunities.
Reducing Productivity Drop
Layoff programs don’t just impact those who are made redundant but can have a significant effect on those who stay. Research from Magnus Sverke and Johnny Hellgren of Stockholm University and Katharina Näswall of University of Canterbury showed that those who survived a layoff experienced a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a 20% decline in job performance. The impact of this is an increase in voluntary turnover. Replacing this talent is time–consuming and expensive, not to mention the increased pressure it puts on being able to make sales targets, maintain levels of customer service, and ensure efficient operational delivery.
Protecting Brand Equity
One of the biggest problems that arise from a redundancy program is a breakdown in brand equity. Where layoffs are perceived to be unfair, and most of them are, it creates critical challenges for a company. The Glassdoor effect, where departing employees leave negative reviews about the company and its leadership, impacts a company’s ability to attract talent when the market returns. According to a study by staffing provider Randstad USA, 57% of job candidates avoid companies with negative online reviews. The negative headlines about the business also weaken brand loyalty with existing customers, which can impact sales.
Offering a future-focused scheme is a way for the company to clearly demonstrate how it is living its people values by empowering its talent to help them build their own future. It shows it cares by keeping the fundamentals of trust, which is critical for sustainability at a time like this.
The Startup Opportunity
Many CFOs will be worried that the current economic climate is not conducive for startup success. They couldn’t be more wrong. It is no coincidence when you look back across history some of the largest companies started during times of economic downturns. This is not just the most recent examples of Uber and Airbnb — companies such as Microsoft, Disney, and IBM were all founded during deep recessions.
Times of rapid disruption provide ample opportunities for startups to take advantage. The coronavirus pandemic is reshaping every industry, lowering barriers to entry and providing huge opportunities for startups to address new consumer demands. This provides an opportunity for companies to work with their departing talent and see if they are able to solve some of these challenges for the company and the wider industry. It also helps the newly formed company secure an anchor client and drive faster innovation in a capital-efficient way.
How to Get Started
For CFOs that want to pioneer this alternative pathway, there are a number of key factors to make this a success:
1.Collaboration. The best startups are those founded with teams that have complementary skillsets — but in a corporate environment the chances are people who work in tech development don’t know sales colleagues, operations doesn’t know finance, etc., because they work in different locations or for some other reason. This means you need to create a space for employees to meet, make connections and potentially form teams around common problems they want to solve. This can be done virtually during COVID-19 — the key is just to ensure that people correctly identify their skillset and areas of interest.
2.Involvement. You need to be clear on the degree of your involvement — are you prepared to offer access to unused intellectual property, assets, or data? Are you just offering the opportunity to develop the skills and mindset for ex-staff to create a startup, or are you willing to invest in ideas that could help solve your challenges? Nokia allocated a fund and its program enabled ex-staff to pitch for seed capital. This requires having a system for clear governance and measurement, but it also means that the corporate can reap the reward for startup successes.
3.Partnership. If you are investing in startups you need to make sure that the program is supported with a partnership that will provide the best experience for your people to maximize success. Having an hour’s discussion with a startup coach from an outplacement firm isn’t really going to move the needle. Those wanting to build new startups need access to the right training, coaching, and mentoring to develop the right skillsets. They also need the right introductions, where appropriate, to early-stage venture capitalists and angel investors.
4.Communications. This is a great initiative and can be used to attract new talent and build stronger relations with the communities and customers. Therefore, you need to have a comms plan to share the impact of this scheme with key internal and external stakeholders, showing that you live the people–first values when an employee leaves the company as much as when they join.
5.Objectives. Don’t forget, this is not about unicorn building, but empowering your people to create their future. From the Nokia program, a third of the participants were focused on building high–growth startups but two-thirds used it to launch their freelance career or pivot into a new industry altogether.
They say the most important factor in success is timing. While that might feel counterintuitive right now, COVID-19 is providing the perfect timing. CFOs have the opportunity to play a leading role in reshaping this future, not only through the people the company retains but also in the people it has to let go.
Chris Locke, is the CEO, UK and Europe, of Rainmaking and head of Startupbootcamp ASPIRE.