When efficiency isn’t efficient

I’m always surprised when a healthy business announces mass redundancies.

According to my friends in banking, this is because I’m naïve.

‘The best time to make cuts is when you’re doing well’, they say. ‘It reassures the city that your growth will be sustained, because you’re operating efficiently.’

And, if you judge a business purely in spreadsheet terms, I can see why this would make sense.

The problem is that it doesn’t work like this in real life.

On a spreadsheet, taking 10,000 salaries out of your business is efficient, because it reduces your cost base without reducing your revenue.

Whereas, in real life, taking 10,000 people out of your business means the people who are left feel demotivated, because they know they’re going to have to do more work.

It means all the effort you put into building your ‘employer brand’ will be undermined, because the people who work for you no longer trust you.

And it means the experience your customers have is likely to feel less good, which means they’re less likely to come back, which means your revenue will go down.

In 2008, American academics Charlie Trevor and Anthony Nyberg carried out a massive global study into the effects of downsizing. They found that, on average, a 1% reduction in workforce had the following effects on the employees left behind:

  • 31% increase in people choosing to leave
  • 41% reduction in job satisfaction
  • 36% reduction in commitment

In other words, any cost saving from the downsizing is massively outweighed by the loss of skills, goodwill and productivity that result from it.

The only businesses where it worked were the ones that managed the downsizing in a way that preserved the trust of their employees. By acting fairly, by communicating openly, and by showing them why it was the right thing to do.

In other words, by behaving like human beings.

There’s no function for this on a spreadsheet. But it’s the only way you’ll grow your business sustainably in the long term.

This blog has been adapted from a chapter in Matt’s new book; tribe: 66 ideas for building a winning culture. The book explores the characteristics that contribute to a winning workplace culture. He’s also written inside: the 10 communication secrets that will transform your business.

If you’d like a free copy of either book, pop in to The Forge (we might even make you a coffee…)

 

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