Layoffs Are The Obvious But Wrong Answer To Company Problems

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One big topic of conversation recently has been the big mass layoffs Tesla made this week. Some people woke up on Monday morning only to find out that they didn’t have a job by the end of the day. If this is the first you’ve heard of the layoffs, I’d recommend starting with this piece we published when it was breaking.

In short, Tesla laid off 10% of its workforce. Obviously, layoffs are seen as a sign of trouble, and seeing it that way isn’t wrong. While EV sales aren’t reducing, the rate of growth is slowing down. So, hires made assuming a certain growth rate end up being unaffordable when the company can’t sell as many cars as it had hoped or planned for. For Tesla itself, though, deliveries declined a little year over year. Ouch.

Zach concludes that Tesla has been neglected by Elon Musk, who has been busy with other projects, like spreading conspiracy theories and propping up sentiment for the social right online. So, instead of coming out with new models to keep the growth up and capture more market segments, the automaker is still struggling with Cybertruck issues, almost five years after it was first announced. Again, ouch.

But, while everyone is asking about the causes of the layoffs, I’ve seen very few people ask a more fundamental question: are layoffs the answer at all?

Common Thinking About Layoffs

Whatever you think the causes of the low performance are (the overall market, interest rates, a need to “trim the fat”), one thing seems like it’s almost universally assumed: that a company facing trouble needs to make layoffs. Some people assume that all companies should do a round of layoffs every few years just to keep the company healthy and drop low-performing workers even if the company is doing well.

I’ve even seen people assert that Tesla had the choice of layoffs or bankruptcy, so there was basically no choice on this.

But this kind of thinking wasn’t invented by Elon Musk, or his fans who are eager to justify the layoffs. It’s been around for decades in corporate America, and has become such a norm that some laid off workers will even tell you that they thought it was the right call, despite their personal suffering. More than 17 million people were laid off in 2022 alone, making for around 10% of the whole workforce!

When you’re talking about 10% of workers getting laid off under the theory that layoffs are not only good for the company but essential, you’re starting to go beyond the health of the individual company and you start getting into the realm of a whole country’s economy. When enough companies decide a recession is coming and then literally decimate the economy, it could even be a self-fulfilling prophecy.

So, why are we not questioning the doctrine of layoffs more?

The Downsides To Layoffs, For Both Company & The Newly Unemployed

I know I’m just a lowly automotive writer (among other things I write about and do) who has never run a multi-billion-dollar company. I’ve also never landed a rocket on its ass. And I’ve never run a company that bores machines into the ground like Shredder and Krang. So, clearly I’m an idiot and we should all listen to Elon Musk the way the Heaven’s Gate people listened to Marshall Applewhite, right?

But, before we all eat our pudding and put the bag on our heads, we might want to see if there are any other reputable voices with other ideas; you know, just in case there isn’t a spaceship hiding behind that comet waiting to rapture us or something.

When I started asking questions about layoffs, I did come across a decent article at Harvard Business Review. While Harvard hasn’t built any reusable rockets, I think the business school there is reputable enough to be worth at least hearing out.

When studied in 2009, it was found that the short-term savings a company gets through layoffs is overshadowed by the bad publicity, the loss of institutional knowledge, lower engagement among the remaining employees, more turnover, and lower innovation. These factors end up hurting the company more in the long run.

But, since the issue was studied in 2009, the problem has only gotten worse. Not only does word travel faster when layoffs are happening or about to happen, but word of the layoffs travels faster to the wider industry and the outside world. Bad press happens faster than ever now. So, the bad effects found in the 2009 study happen faster and last for longer.

The biggest downer for a company post layoff is destroyed trust. While it’s perfectly legal to do layoffs, and they’re also often explicitly allowed in employment contracts, the unwritten psychological contract with employees has still been violated. Remaining workers end up feeling less loyal and less willing to go the extra mile for an employer that treats its workers like numbers in a spreadsheet.

And new employees that the company needs later? They’re less likely to roll the dice with a “hardcore” company that is seen doing layoffs that are in any way not based on performance.

But, because things like morale and public sentiment are difficult to measure and plug into a spreadsheet, many people in business don’t even bother to factor them in. Nonetheless, studies have consistently shown that companies conducting layoffs don’t get any long-term benefit, and often don’t see a short-term benefit, either.

Economic historian Stephen Mihm, when looking at big tech’s “innovative” layoff strategies, put it this way: “Far from cutting-edge, these layoffs mark a revival of long-discredited corporate strategies. If the trend continues, history suggests these tech leaders will leave their companies severely crippled, at best.”

Layoffs Aren’t Always Avoidable, Though

While I think HBR did a good job of taking down the idea of layoffs as a standard business practice, not all companies are facing standard situations. Sometimes a company really is up against major problems and really does need to cut back the workforce to stay afloat.

When that happens, how a company conducts a layoff is still very important. Simply offering that the company is “trimming the fat” and hoping people will understand just isn’t enough. If there really are no other options, HBR recommends several key things to do:

  • Make decisions as fair as possible so as to not betray the trust of remaining high performers.
  • Make sure there’s a soft landing for those who get cut.
  • Make sure to take good care of remaining staff who might feel the need to move on in case they’re next.
  • Don’t be afraid to apologize instead of pretending layoffs are normal or ignoring the problem entirely.

One thing seems certain, though. Doing things like laughing at someone who wasn’t sure if they were laid off isn’t the right approach. In the most recent case, spending the day on Twitter talking politics and acting like everything is cool instead of making a public apology for the layoffs probably isn’t the right way, either.

Featured image by CleanTechnica.


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Jennifer Sensiba

Jennifer Sensiba is a long time efficient vehicle enthusiast, writer, and photographer. She grew up around a transmission shop, and has been experimenting with vehicle efficiency since she was 16 and drove a Pontiac Fiero. She likes to get off the beaten path in her "Bolt EAV" and any other EVs she can get behind the wheel or handlebars of with her wife and kids. You can find her on Twitter here, Facebook here, and YouTube here.

Jennifer Sensiba has 1983 posts and counting. See all posts by Jennifer Sensiba