It’s surprisingly common for companies to make mistakes in their layoff decisions — and those mistakes can be expensive. Fortunately, businesses can do better.
Over the last three decades, organizations have eliminated millions of jobs in an effort to increase efficiencies and ensure survival. As the economy has emerged from the last economic downturn, managers are once again reflecting on how they managed downsizing during the downturn. Recently, we asked 30 North American human resource executives about their experiences conducting white-collar layoffs not based on seniority — and found that many believed their organizations had made some serious mistakes. More than one-third of the executives we interviewed thought that their companies should have let more people go, and almost one-third thought they should have laid off fewer people. In addition, nearly one-third of the executives thought their companies terminated the wrong person at least 20% of the time, and approximately an additional quarter indicated that their companies made the wrong decision 10% of the time. More than one-quarter of the respondents indicated that their biggest error was terminating someone who should have been retained, while more than 70% reported that their biggest error was retaining someone who should have been terminated. Such errors can be extremely expensive for the individuals affected and for the organization. The cost of terminating an employee can be as much as $100,000 — and that’s not counting the cost of hiring a replacement if, during the recovery, managers discover that the person who was let go had critical skills. Fortunately, these kinds of expensive mistakes are not necessary. Simply by avoiding five common decision-related problems, companies could conduct much more productive layoffs.
Social and political pressures frequently result in undue weight being given to recommendations made by a subset of decision makers who don’t have all the information they need. Similarly, a “false consensus effect” can lead individuals to believe that everyone is on board with a specific layoff decision. Done well, downsizing decisions include a variety of independent perspectives. If that is not the case, the decisions are likely to be characterized by overconfidence, because the available information will be reinforcing rather than discordant.