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The high, hidden costs of layoffs and one bad way to do them

Robert Sutton, a Stanford professor of management science and engineering, offers his advice on a case study in the Harv. Bus. Rev., Vol. 86, March 2009 at 40. His comments enlightened me about the insidious, under-estimated costs of large-scale terminations and the knee-jerk reaction to lop off the lowest 10 percent based on performance evaluations.

Citing a Bain study of layoffs at S&P 500 firms during the 2001 downturn, Sutton writes that “it took them six to 18 months to realize savings from job cuts. And, when calculating savings, most executives fail to account for the cost of recruiting, hiring, and training new people who will be needed when good times return — let alone consider the damaged morale and productivity. Those costs are often much higher than people imagine, which helps explain why the study also found that firms that made layoffs their last resort and cut the fewest employees performed better than their competitors did.” All general counsel try to protect their valued employees, and the study cited gives additional support for the effort.

Sutton continues about ways to fire staff: ‘[C]utting the bottom 10% based on performance evaluations is the worst. Most companies do performance evaluations badly; ratings often vary wildly depending on the effort put into the process, whether the evaluator likes or dislikes the person evaluated, and whether the manager is tough for lenient.” His final criticism is that “the most leanly staffed group in a law department suffers the most.” Sutton does not mention a better method for making cuts, but one is to look at the lowest value work and cut the people who do that, even if they are highly evaluated.

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