Are there hidden costs in downsizing?

As companies increasingly turn to retrenchments in response to pressures on their bottom line, they should beware the unintended but very real consequences that are likely to flow from a reduced staff complement, an expert warns.

In many instances, the reduced profit due to staff disengagement could very well outweigh the intended savings on salaries and employee operating costs.

If a company is under pressure and then reduces its workforce to reduce costs, yet it doesn’t take proactive measures to ensure that the staff who remain are engaged and productive, chances are that it is still going to see lower profitability leading to a zero-sum, or even negative-sum, game.

According to a recent study on the subject by Gallup, disengaged employees have 37% higher absenteeism, 18% lower productivity and 15% lower profitability. When that translates into money, you’re looking at the cost of 34% of a disengaged employee’s annual salary, it was found.

And while the study looked specifically at USA workplaces, the findings are undoubtedly relevant locally.

It is clear that as companies find themselves under pressure to deliver growth to shareholders while buckling under a myriad of negative external pressures, one of the few ways to do this is to cut resources. But this short-term strategy can and often does have the reverse effect because the people left behind can’t simply double or triple up on their workloads to cover for those who have faced the chop.

And while retrenchments and layoffs for the purposes of cost-cutting are nothing new, this is increasingly taking place at management levels.

As a result, we are now regularly seeing mid-to-senior executives being expected to take on extraordinary workloads due to much leaner management structures than ever before.  It is, therefore, no surprise that they are straining as a result of fatigue and burnout. And the impact of this on companies comes in the form of disengagement – a benign-enough sounding term – but one which has real and potentially devastating commercial consequences for an organisation.

The ones left behind still need to take care of the same amount of work but with fewer hands on deck, being milked for all they are worth, resulting in them suffering from burnout, fatigue, resentment, reduced engagement, and reduced productivity.

What we’re seeing is a global repositioning and drive for cost-cutting – we are not just talking about the South African market and its unique challenges. Businesses are looking at different ways of managing operations, they are moving offshore or outsourcing to low-cost markets, and then there are the not-insignificant pressures introduced by robotics and AI.

So with this trend set to continue, companies need to take a more holistic view of the impact of downsizing and reducing their workforces. While a significantly lower salary bill may please shareholders, the long-term effect on productivity will undoubtedly have a negative impact on the bottom line in due course.

What we’re also seeing is that the up-and-coming millennial managers are unwilling to tolerate work environments that are so under-resourced that burnout, stress and depression are commonplace. As a result, top millennial professionals are just opting out and making alternative career choices.

If you are going to look only at the bottom line, without looking at how you can nurture and keep your remaining workforce engaged, you are most likely to see an impact on your topline.

Retrenchments may be a necessary measure for a company to take – and we are not saying they should not go down this road if it is warranted – but it is crucial that companies then take care to focus on those who are left behind, because not doing so may have far-reaching and long-term consequences on the health and prosperity of the organisation as a whole.

Debbie Goodman-Bhyat is a leadership strategist and founder of Jack Hammer, Africa’s largest executive search firm which recently expanded its footprint to the USA.

Read Previous

Is it conflict of interest or relationships?

Read Next

Why could dismissing sick employees be dangerous?

Select your currency
ZAR South African rand