Labor is often the most costly expense category for businesses, accounting for up to 70% of total operational costs (according to Paycor and data from the US Bureau of Labor Statistics).
So when times get tough, employee layoffs are widely used as an early cost-cutting move.
In theory, this sounds like it should solve your company’s problems. Rising expenses? Find your biggest expense category, and slash it.
But the latest research suggests that employee layoffs aren’t the answer when it comes to saving businesses money. And they often have an adverse effect on costs:
- Layoffs as a cost-cutting strategy are ineffective 90% of the time after 3 years.
- 30% of businesses that lay off employees see their expenses rise instead of fall.
- 75% of companies have to rehire for the same positions within a year of layoffs.
For most businesses, layoffs aren’t the answer. They may provide some short-term relief, but end up being more costly than you might realize.
So before you reduce your headcount, I urge you to consider some proven alternatives to layoffs that will actually save you money. Start with these five:
1. Identify Other Rapidly-Rising Costs
Instead of looking at the largest expense category on your books by total dollar amount, try looking at your costs in terms of year-over-year percentage increase.
And if you zoom out even further and compare over three or five years, you’d be surprised to see that costs associated with certain expenses have doubled or tripled over that period.
Common examples that we find when performing audits for our clients include:
- Trash hauling and recycling
- Merchant processing
- Shipping and fulfillment
- SaaS and IT
- Insurance
- Telecom
In isolation, the total amount you’re spending in one of these categories may not jump off the page at you when compared to your total labor costs. But rate creep is a real problem when you combine these expenses, especially when you’ve neglected them for years.
Instead of firing a tenured employee who can actually help your business grow, you can take a hard look at other costs that, when cut, will save you more money over time.
2. Conduct a Formal Audit of High-Spend Categories
Once you’ve identified non-labor expense categories, you need to take things one step further than just looking at the bottom-line spend for each.
Pull out your statements and conduct a full audit on each line item.
What are you actually spending money on? How do these costs compare to statements from the same vendor last year or the year before that?
The goal here is to figure out exactly why your costs in these other categories have grown so much over the years.
Sometimes it’s due to auto-renewal clauses in your contracts that allow vendors to increase your rates every year. Other times it’s new fees, surcharges, and “hidden” costs. We even find businesses paying for services they no longer need or use.
But usually, it’s a combination of all of these things.
Just be forewarned that audits take time to do properly. So if you need help, try working with a cost reduction consultant.
3. Consider a Hiring Freeze
Businesses will lay off entire departments or people who have been performing well for decades, while still hiring for other positions.
Most companies doing this end up having to re-hire the same positions they laid off. And when you factor in training and productivity drops, that churn is far more expensive than simply continuing to pay the person who was there originally.
It doesn’t even need to be a permanent hiring freeze. Even just three months, six months, or a year can save millions of dollars. Because it’s not just the salary of new hires. You also have to factor in all of the recruiting, interviewing, onboarding, and other HR costs that go into hiring a single new role.
According to the Society for Human Resource Management, the actual cost of hiring a new employee is up to 3-4x that person’s salary.
This means that it costs your business $225k to $300k to hire someone paid a $75,000 salary.
So if you’re thinking about laying off an employee with a $225,000 salary to hire someone for $75,000, think again. The data proves it’s cheaper to keep your existing staff.
4. Cross-Training and Upskilling
You probably aren’t wrong in thinking that your entire staff is currently working at maximum efficiency. Whether you’re using data or just a managerial hunch, I’m sure you can identify people on your team who aren’t getting the most out of their days.
Rather than laying these people off, train them to do something else in addition to their current role.
Let’s use some round numbers here to illustrate my point.
- You identified 15 employees only doing 30 hours of real work in a 40 hour week.
- Train each of them to spend just 5 hours per week (1 hour per day) doing something else.
- That’s 75 new hours per week on other tasks, without hiring any new employees or laying anyone off.
You can even give these previously lower-performing employees a raise, promotion, or title change to account for their new responsibilities and it would still be cheaper than laying them off.
This helps recognize those employees for their contributions and make them feel valued.
And 69% of employees who feel recognized for their efforts will work harder. Additionally, companies with employees who feel valued can increase revenue by 682%.
5. Negotiate Elsewhere
Let’s pretend for a moment that layoffs were not on the table. What would you do to save money?
For some reason businesses don’t have a problem laying off someone who shows up every day and works hard for the last five years (or 20). But they do nothing when a vendor attaches a 40% rate increase notice to the bottom of a monthly statement.
That’s where you should be negotiating.
- Fuel surcharge fees on your shipping costs.
- Annual rate increases to your merchant discount rate.
- 50% increase on your CRM software.
- 200% increase on your phone bill.
- New environmental surcharge fees on your waste hauling statements.
Why do businesses let these types of costs slide for years? Yet they’re so comfortable letting employees go.
Why Layoffs Can Be Surprisingly Expensive
In addition to the data we’ve cited throughout this guide, there are other non-tangible reasons why employee layoffs just don’t work for saving money over the long run.
They Don’t Tackle the Root Cause
If your business is bleeding cash, layoffs don’t actually address mismanagement in expenses and cash flow. You likely have other big-picture issues with operations, vendors, and strategy that should be looked at first.
It Only Provides Temporary Relief
Layoffs only cut expenses instantly (as in day one or month one). But over time, it’s going to cost you more money to fill the gaps associated with the people you let go. And your other expenses will still be high.
Productivity and Quality Slips
Who is going to complete the work done by the staff you lay off? Either nobody, or other employees who will inevitably feel overworked. That’s when output decreases and quality starts to slack, creating a snowball effect that can become the downfall of your business.
Other Unaddressed Costs Continue
Employee layoffs give leadership the illusion that problems are solved because they instantly freed up $500k or $1MM in monthly costs. But this doesn’t address rate creep in other expense categories. And eventually, those costs will catch up and surpass the salaries you cut.
Final Thoughts
Employee layoffs should be the last resort for businesses looking to save money. They rarely work as intended, and can actually cause your expenses to increase both short-term and over the long run.
Try looking to cut costs in other expense categories first.
And if you need help identifying them, reach out, and I’ll be happy to chat with you about where to start.