There's a better way to do layoffs: What Nokia learned, the hard way

Layoffs have become our default answer to workforce change, and that has shattered trust in business. As someone who has studied trust for over fifteen years, it’s clear what businesses need to do if they want to regain employee’s faith: They should do a better job of handling layoffs.

In January, I was speaking at a panel on trust in business, discussing the 2019 Edelman Trust Barometer. The moderator wanted to know the one thing companies could do to improve trust in business — which, according to Edelman, has ranged from 43 to 56 percent over the past decade. Employees’ biggest fear across the globe, according to Edelman? Job loss.

According to a McKinsey study, 65% of U.S. companies used layoffs between 2008 to 2011 to handle the pressures of the Great Recession. Meanwhile, the rapid development of technologies such as artificial intelligence and automation might mean better products produced more efficiently. But on the flipside, it means fewer jobs requiring more specialized skills.

McKinsey estimates that by 2030, 400 million to 800 million workers could be laid off and need to find new jobs. However, the way businesses currently conduct workforce restructurings is detrimental to employees, the company itself, and surrounding society. The overall result? We end up with very little reason to trust business.

Layoffs are often conducted to improve profitability, but they cause tremendous suffering while also hurting a company’s bottom line. Deepak Datta at the University of Austin Texas conducted a 2012 review of 20 studies of companies that had engaged in layoffs and found that such actions had a neutral to negative effect on stock prices in the days following the workforce change. Even worse, the majority of companies that conducted layoffs were less profitable for up to three years after the layoff, a related study found.. Another study conducted by researchers from Auburn University, Baylor University, and University of Texas found that companies that conduct layoffs are twice as likely to file for bankruptcy in the next five years than companies that had found other ways to bolster profitability.

A layoff means companies lose the time and resources they’ve invested in training employees and must reinvest in new employees once sales come back. Meanwhile, layoff survivors in the company are also impacted. Researchers at University of Wisconsin-Madison found that a 1% layoff results in 31% turnover the next year. Another study conducted by researchers at Stockholm University found that job satisfaction for survivors declines by 41%, organizational commitment drops by 36%, and job performance drops by 21%.

Ultimately, layoffs can damage a company’s reputation. A University of Illinois at Urbana-Champagne study found that after a layoff, companies saw their ranking on Fortune’s Most Admired Companies tank.

On the employee side, layoffs are devastating. A layoff can have a blighting effect on someone’s career. According to research conducted by Wayne Cascio at the University of Colorado, in a study of workers laid off in 1997 and 1998, a year later only 41% of the laid off workers had found jobs at equal or higher pay, 26% had found jobs at lower pay, and 21% were still unemployed. These effects continue for the duration of an employee’s life. According to a 2008 UCLA study, employees who were laid off during the 1981 recession were earning 20% less than peers who had not been laid off twenty years afterwards. In other words, the effects of layoffs can permanently impair someone’s financial prospects, yet companies still believe layoffs are an acceptable solution.

Of course, sometimes a layoff is necessary for strategic reasons. Markets change, products and services evolve, and, to remain viable, firms have to restructure. In those cases, what can companies do to combat the ill effects of layoffs?

In 2011, Nokia, the Finnish telecom maker, developed a better way to do layoffs. At the time, Nokia’s mobile phone business was under attack and failing in the marketplace. To remain competitive, Nokia needed to undergo a massive restructuring, which would involve laying off 18,000 employees in 13 countries.

While Nokia couldn’t avoid the layoff, its leaders decided to work to help employees find a softer landing. A group of senior leaders developed the Bridge program.

Bridge’s objective — and the metric they would use to gauge success — was the percent of employees who knew their next step the day they left the firm. Nokia crafted a new philosophy of workforce change, beginning with the acknowledgement that, as a large employer, the company had a responsibility to their employees and the surrounding communities where they worked. This required Nokia to be more transparent than they had ever been before, letting employees and local communities know months and, in some cases, over a year before that they would be losing their jobs.

Bridge was led locally by carefully selected managers who were also going to lose their jobs. One Nokia executive put the logic behind Bridge this way: We are going to trust you to continue to work as hard and as well for us as you can for as long as we have work for you. In return, we will show you that you can trust us to do everything in our power to help you get a new job.

In the Bridge program, employees could follow one of five different paths:

Find another job at Nokia. Nokia sites that were remaining open wrote up the skills required for each job. In order to avoid favoritism from local managers, selection committees identified and nominated candidates for these jobs. Meanwhile, Nokia implemented retention programs for areas such as R&D where they wanted to keep star performers.

Find another job outside of Nokia. Bridge offered employees job search support — including career coaching, resume clinics, and job fairs — and built networking groups on LinkedIn and Facebook to help job hunters.

Start a new business. Bridge offered grants to employees who wanted to start their own business. Plans could be for any industry, and Nokia evaluated the plans based on how viable they thought the business would be. Employees received coaching on their grants, as well as mentorship, training, and networking support with local incubators. All plans that were dependent on the use of Nokia intellectual property were reviewed at headquarters; the remainder were assessed and approved by local panels of business people and other experts.

Learn something new. Bridge provided grants and financial support for employees who wanted to learn a new profession, or brush up on current skills.

Create your own path. Bridge also offered financial support for employees who had a different plan in mind, such as volunteering.

Employees could access Bridge resources throughout their time at the company. In addition, employees could change their mind at any time about which path they wanted to follow, allowing them to focus on what they wanted going forward. 

Thanks to Bridge, 60% of the 18,000 employees who were laid off in 13 countries knew their next step the day after their job ended. And 1,000 new businesses were started by employees using Bridge start-up grants. Meanwhile, 85% of Finnish Bridge participants said they were satisfied with the program, and 67% of global participants said they were satisfied. And in several communities where Nokia was the dominant employer, it helped local officials find new companies to take over Nokia’s plants.

In total, Nokia’s costs for Bridge came to 50 million euro, or about 2,800 euro per person. In other words, just 4% of the total Nokia spent on restructuring between 2011 and 2013 was related to Bridge.

Bridge also helped Nokia avoid many of the negative effects of layoffs. Nokia did not see its productivity drop. Employee engagement scores remained the same, and Nokia saw the effects of this in their bottom line. During the restructuring, Nokia’s quality levels stayed the same or improved. Meanwhile, employees at the layoff sites created 3.4 billion euros in new product revenues, one-third of new products sales, which was on par with what they’d brought in before.

In 2014, Microsoft purchased Nokia’s devices and services business. In 2015, Microsoft had to lay off many of these employees. It used a program similar to Bridge called Polku (“path” in Finnish). Nokia, itself, implemented Bridge again in Finland in 2017.

The Finnish government commissioned a working group in 2015 to study programs to help laid off workers. The working group cited Nokia’s Bridge program as a best practice, and Finnish layoff policy now requires that employers with over twenty employees that are considering layoffs discuss alternatives as well as “the possibility of retraining and repositioning the employee.”

Nokia’s Bridge program was partly inspired by a previous, painful experience at the company. In 2008, Nokia decided to close its Bochum factory in Germany. While the price of mobile phones had sunk by 35%, German labor costs climbed 20%. From a business standpoint, the decision to shutter the plant was a no-brainer. But Bochum’s shutdown came on the heels of Nokia’s celebration of a 167% increase in profits. When Nokia delivered the news of the shutdown to Bochum’s employees, the crowd was so angry that the executive delivering the news wondered why the company’s security officers were outside the venue, instead of inside where he needed them.

The outrage over the Bochum layoffs spread to the rest of Germany. A week later, about 15,000 people demonstrated at the Bochum plant. Unions called for a boycott of Nokia’s products, the German Finance minister denounced Nokia, and the government launched an investigation to see if the company had abused subsidies it was given with the expectation that it would create jobs in the region. Nokia’s final exit payment was 200 million euro, an average of 80,000 euro per employee, one of the largest exit settlements in German history. (Contrast that to Bridge’s 50 million euro cost!)

Nokia’s Bochum closing destroyed trust on several levels. The firm’s employees had trusted that Nokia would provide them with a livelihood. The government believed that Nokia would use subsidies to create more jobs, and German society believed Nokia would be a good corporate partner. By contrast, with Bridge, Nokia kept the trust of its employees and its surrounding communities.

Nokia learned the hard way that there is indeed a better solution to layoffs, an approach that has benefited others, including Microsoft as well as the rest of Finland.

As the future of work looms, companies will face difficult decisions to remain competitive. They risk facing the outrage Nokia faced, damaging productivity, innovation and their ability to attract new talent. They also risk hurting their bottom line and shattering the trust of communities they rely on. Or they could learn from Nokia’s example and sidestep the typical after-effects of a layoff, by learning to do them better.

Sandra J. Sucher is the MBA Class of 1966 Professor of Management Practice at Harvard Business School.