INNOVATE

6 Reasons Layoffs Are Really Dumb

It seems like smart just-in-time staffing: You hire for big projects and then let people go when they wrap up. But here's why it hurts more than it helps.
Advertisement

For the most part, there aren't many parallels between the cutting-edge software and the gaming industry and old-school automotive manufacturing. But they do share one practice: planned layoffs.

As Andrew Groen at Wired reports, Lionhead Studios, an arm of Microsoft, just laid off 10% of its staff. The reason is that the software giant released the newest Kinect version of Fable, one of its most popular Xbox 360 console games. This isn't an unusual practice, according the article:

It's just business as usual in the game industry. Developers staff up to make a huge game, then shed members once it ships because they no longer have anything for them to do. It happens again and again, whether the game is successful or not: Take-Two had a huge hit with Red Dead Redemption in 2010, then immediately canned 40 workers from its Rockstar San Diego studio, calling the layoffs "typical."

Groen makes the point that the hire-em-fire-em approach to staffing up for a new game is quickly becoming common in the industry. (It's worth noting that Zynga's 5% workforce reduction announced Tuesday was a reaction to growing problems in the business, not part of a planned layoff approach.) Any kind of layoff can be harmful to a business, but repeated layoffs can devastate creativity.

And they can do a lot more than that. There are at least six consequences to regular hiring and firing patterns:

Innovation loss.

Start with Groen's point. When creating a product or service requires a group effort, then the group needs to be able to communicate and work together effectively. But even if you're not developing the latest title to slay zombies, you still have trouble with regular layoffs because creativity is one of the fundamental requirements for innovation. According to researchers, innovation is the product of groups working together, not of a few remarkable individuals. When you break the working relationships, you force employees to start from zero, which hampers ongoing competition.

Intellectual property loss.

Most companies depend on intellectual property--not just copyrights, trademarks, patents, and trade secrets, but all the know-how of making business processes work. Every time you send people out the door, you lose the knowledge they have of the business.

Business relationships.

Business also runs on relationships with partners and customers. Technically the relationships are with the company, often detailed in contracts. But the real relationships are with the people the customers and partners do business with. When you send those people out the door, your organization has to start rebuilding the interpersonal aspect of business all over again.

Cost.

This is an ironic one. When a company lays people off, it thinks it is saving itself money. And it does in one sense. But every time you have to staff up again for that next big project, you have the costs of finding and hiring new people and then getting them up to speed, which means lost productivity and all sorts of soft costs that can be hidden--and significant.

Trust.

When people are often sent on their way, you undermine any sense of trust that the remaining employees might have. How long before they're in the next batch? That affects morale, employee effectiveness, and productivity.

Turnover of important talent.

When employees don't trust the employer, they start looking for other opportunities. The ones most likely to leave are the ones that will have the easiest time finding something else. In other words, you chase your top talent off to your competitors.

It may be that you really have to lay people off at times. But if so, better take some time to reevaluate your business model and strategy and all the stacks of hidden costs of doing so. It may be that there's a better and more predictable way of doing business that ultimately increases the bottom line.

Last updated: Oct 24, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: