Retrench? Take heed of long-term costs

Retrench? Take heed of long-term costs

Retrenchment is the preferred method for employers to make sharp short-term cost reductions to regain a competitive edge ("Take charge of one's career" by Mr Paul Heng; last Thursday).

However, forced layoffs may actually cause companies to suffer higher long-term costs.

Many employers hire consultants to downsize their workforce. The high consultancy fees may negate any short-term savings.

Employers also often overlook the organisational costs of retrenching a substantial number of workers in one fell swoop.

Staff reductions result in knowledge gaps, as experienced personnel depart. Some companies re-contract these employees at higher hourly rates.

Many companies often do not take into consideration the employees' years of experience, rapport with important customers, and knowledge about key accounts.

Hence, they are unable to adequately replace key employees, resulting in a decrease in revenue as well as productivity.

Extensive restructuring may briefly lift the company's performance in the stock market but, in the long term, most companies do not realise improved overall financial performance.

Downsizing affects three main parties.

First, older staff who lose their livelihood. They now have to worry about the sudden change in their finances, and they face uncertainty about finding new employment. They are likely to face depression, isolation, anxiety and poor health.

Second, employees who are spared. They suffer increased stress as they have to pick up the slack, and may end up with increased workloads or experience a job misfit. Their sense of loyalty to the company is also diminished, and their lack of job security may lead them to look elsewhere for work.

Third, managers who carry out retrenchments. They sometimes end up emotionally distressed, as they are portrayed as the "executioners", even though the order may have been passed down from a higher level.

There are better strategies to control costs more effectively while increasing productivity and profitability.

For instance, companies can implement across-the-board wage reductions, voluntary layoffs, a reduced work week, or unpaid leave.

Employers must explore these options instead of simply downsizing.

Edmund Khoo Kim Hock

This article was first published on June 8, 2015.
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