The Perils of Redundancy: A Quick Fix with Long-Term Consequences

Redundancy, often viewed as an immediate solution to economic pressure, can bring long-term consequences if not approached with caution. Businesses, especially during downturns, may find themselves leaning toward layoffs as a quick fix to cut costs. However, while layoffs may provide temporary relief, they can significantly weaken a company's foundations, leaving long-lasting scars.

This article explores the risks of reactive redundancy and offers insights into alternative approaches that provide more sustainable long-term value. Although the data and case studies are mainly drawn from the US, New Zealand has also experienced similar challenges, especially in the post-Covid era, as many industries grapple with economic uncertainty. Understanding the underlying pitfalls of redundancy is crucial, whether you're managing a small business or a large enterprise.

The Short-Term Appeal of Redundancy

Facing economic turbulence, businesses often turn to redundancy as the most obvious choice for cost reduction. It's an easy, quantifiable way to trim expenses, helping the bottom line. In the aftermath of the COVID-19 pandemic, this option became even more tempting for many industries.

However, it's vital to understand that this approach typically addresses only surface-level symptoms rather than resolving deeper, structural issues. For example, during the pandemic, New Zealand businesses, from retail to tourism, resorted to mass layoffs to stay afloat. This short-term relief, however, quickly turned into a long-term dilemma as demand slowly returned.

In essence, businesses often underestimate the costs associated with layoffs. On the surface, headcount reduction lowers operational expenses, but it also exposes the company to several risks, such as decreased morale, diminished productivity, and the loss of key institutional knowledge.

The "Rehire Cycle": A Costly Consequence

One common and costly side effect of poorly planned layoffs is the "rehire cycle." Companies that cut too deeply or too quickly often find themselves in a bind a few months later when demand picks up or when they realise that remaining employees cannot maintain productivity levels.

In New Zealand, as in the US, we’ve seen this happen repeatedly. For instance, during post-lockdown recovery, many sectors, including hospitality and healthcare, had to scramble to rehire staff after laying off workers. Those rehiring efforts were often more expensive due to higher wages, recruitment costs, and lost time.

The rehire cycle highlights the false economy of layoffs. Rather than realising sustainable savings, companies are left facing additional costs associated with finding and training new employees. In today’s competitive labour market, rehiring also means potentially offering better terms to attract top talent, eroding whatever savings the initial redundancy may have created.

The Unintended Consequences of Redundancy

Layoffs don't just have immediate cost implications; they often lead to long-term damage in ways that are harder to measure but deeply impactful.

1. Reduced Productivity and Burnout: When a company reduces its workforce, the remaining employees are left to manage a greater workload. This can lead to higher levels of stress and burnout, which inevitably reduce productivity. Overworked employees may become disengaged, leading to higher turnover as they seek less stressful environments elsewhere.
2. Loss of Institutional Knowledge: Redundant employees often take with them invaluable institutional knowledge, making it harder for companies to maintain continuity and adapt to new challenges. In industries like manufacturing and IT, where specialised expertise is critical, this loss can be particularly detrimental.
3. Erosion of Company Culture: Redundancies can severely impact the culture of an organisation. Fear of further layoffs creates a culture of distrust and disengagement, where employees are less likely to take risks or innovate. In New Zealand’s relatively small labour market, reputational damage can linger, making it harder for businesses to rebuild morale.
4. Difficulty Attracting Talent: Companies known for frequent layoffs face a reputational challenge. Talented professionals often avoid joining organisations that have a reputation for instability, making it harder for the company to fill critical roles. In smaller economies like New Zealand, word travels quickly, and companies seen as unstable often struggle to attract the right talent.

A More Strategic Approach to Restructuring

While redundancies may sometimes be unavoidable, they should always be part of a carefully considered strategy. Organisations that view layoffs as a last resort tend to fare better during and after downturns. Strategic restructuring offers an opportunity to rethink the business model, improve processes, and invest in the future rather than just cutting costs.

1. Re-Evaluate the Business Model

Before resorting to layoffs, companies should examine their business model in light of changing market conditions. Are there operational inefficiencies that could be addressed? Could technology improve productivity? Are there alternative revenue streams that haven’t been explored? Many organisations rely on outdated assumptions about their markets, and economic challenges can be a useful catalyst for change.

In the New Zealand context, industries like tourism and retail, which were hit hardest by Covid, have used this time to reimagine their service offerings. Many have embraced digital transformation to remain relevant and competitive without needing to rely solely on cutting costs through layoffs.

2. Prioritise Process Improvement

Instead of slashing headcount, companies should focus on streamlining processes and improving operational efficiency. Lean methodologies, for instance, can be employed to identify waste and improve productivity. Often, significant savings can be realised by rethinking processes rather than cutting jobs.

For example, instead of laying off staff in customer service roles, companies could invest in automation tools to help reduce the workload while improving the customer experience. The key is to look for long-term operational improvements rather than short-term cost reductions.

3. Invest in Employee Development

A well-trained workforce is a company's most valuable asset, especially during periods of uncertainty. Investing in employee development not only increases morale but also ensures that teams are equipped to navigate change. Upskilling employees can help companies shift resources into areas of growth without the need for redundancies.

Many New Zealand businesses, especially in the tech sector, have turned to employee development to navigate talent shortages, focusing on internal mobility and upskilling to remain competitive.

4. Explore Alternative Cost-Saving Measures

Cost-cutting doesn’t always have to mean job cuts. Renegotiating supplier contracts, reducing energy consumption, outsourcing non-core activities, or improving digital infrastructure are just a few of the ways companies can save money without laying off employees.

A Metaphor: Your Company as a Car

Consider your company as a well-oiled car. Your employees are the drivers, mechanics, and engineers keeping it running smoothly. When you lay off key staff, it’s akin to removing crucial parts from the vehicle. Fewer mechanics mean slower repairs, while fewer drivers result in less output. Over time, this car will break down, costing more in the long run than keeping it well-maintained.

As Peter Drucker famously noted, "When the economic environment changes, you should review your theory of the business." This means regularly reassessing the underlying assumptions that drive your strategy. Are your current practices aligned with long-term success? Can you adapt to changes in the environment without sacrificing your company's future?

Case Studies: Lessons from the Rehire Cycle

Many industries and companies have learned these lessons the hard way. From retail to technology, the impacts of poorly planned layoffs have been felt across the board.

• Retail Giants: In the aftermath of Covid-19, retail companies such as Target and Walmart in the US laid off workers, only to rehire them months later as consumer demand increased. In New Zealand, the retail sector saw similar challenges, as businesses grappled with fluctuating demand and staff shortages.
• Airlines: Globally, airlines were one of the hardest-hit sectors during the pandemic. Companies like Air New Zealand had to make tough decisions on layoffs. However, with the return of travel, these airlines had to ramp up recruitment, often paying higher wages and offering incentives to attract staff.
• Tech Companies: Even tech giants aren’t immune. Companies like Google and Amazon laid off thousands of workers only to find themselves rehiring in competitive markets. This cycle underscores the importance of strategic workforce planning, particularly in an industry where talent is a crucial differentiator.

Conclusion: Redundancy as a Last Resort

Redundancy should never be a reflexive response to economic challenges. Instead, businesses must take a broader, strategic view, considering the long-term impacts of layoffs on culture, productivity, and reputation. By prioritising process improvement, employee development, and alternative cost-saving measures, companies can weather economic storms more effectively.

The goal isn’t just survival—it’s positioning your company to thrive in the long term. With a thoughtful approach, organisations can navigate downturns while preserving their most valuable resource: their people.

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