Layoff Warning Signs: II

As I suggested last time, there are two sets of indicators that layoffs will be or might be occurring soon. I began by describing the first set, which includes indicators of elevated risk of layoffs. I now turn to the second set of indicators, which include actions the employer might take to control costs, but which are short of widespread downsizing. These actions might include some terminations, but only those that can be explained as "normal cost control actions."

The examples provided below are constructed for a company with publicly traded securities, but there are analogous forms for privately held firms and for government organizations.

Indicators that actions are already underway

Long before most management teams reach consensus that they must impose massive force reductions — layoffs — they deploy a series of cost reduction measures that they hope will delay those reductions or reduce their likelihood. In many organizational cultures, the number of people a manager manages is an indicator of the manager's power. That's one reason why management teams see reducing headcount as reducing their own power. So they first seek other ways of reducing costs, hoping to eliminate the need to reduce headcount.

Anyone in the organization who is interested in estimating the probability of layoffs can monitor organizational policy for these measures. That monitoring is difficult to do from outside the organization because the measures are so "micro" and because public reporting requirements don't cover many of them. What follows is a little catalog of tactics that can reduce costs without reducing headcount.

New or expanded cost reduction initiatives

Cost reduction initiatives often fail to reduce costs. Sometimes they just gradually fall out of favor. Although that result isn't an indication of reduced financial pressures, a new or enhanced initiative can be an indication of increased financial pressure. And that's why these initiatives can signal a coming force reduction program. Watch for these:

• Retention of cost control consultants
• Investment in AI applications to replace professionals
• Increases in use of contractors, freelancers, remote workers, and outsourcing
• Increases in the combining or bundling of purchases across business units that formerly acted independently
• Reassessment of the product lineup leading to discontinuation of low performers or even moderate performers
• Consolidation of physical plant
• Constraints on enterprise sponsorship of employee training and professional certification
• Travel restrictions
• Increase in use of videoconferencing to eliminate or shorten company meetings that involve travel
• Elimination or reduction of use of destination venues for company meetings
• Cancellation or delay of initiatives to retire legacy assets
• Increased attention to maverick spending
• Pressure to reduce license seats for software applications

Postponed, replanned, or cancelled projects

Changes to project schedules might indicate looming financial pressures that foreshadow layoffs.

It's clear that postponing the start of a major project can reduce some kinds of expenditures. What is less clear is when these effects will be observable in financial reports. Postponing the start of a project by Q quarters doesn't necessarily shift later expenses by Q quarters unless the project is replanned. Full replanning isn't always possible because the company might have already made downstream financial commitments that cannot be shifted by the full value of Q. And some of the project's milestones might not be adjustable because they're imposed by the need to meet external dates that aren't in the control of the company.

Moreover, if the projects were expected to produce revenue, and that revenue is delayed as a consequence of postponing the project, the timing of the effect on net income can be difficult to project. All of these factors affect our ability to project the effects of postponing, replanning, or cancelling a project. For these and other reasons, we must monitor not only project date changes, but also project replanning activity and project cancellations, keeping in mind that these actions can also arise for organic reasons.

Changes to the performance appraisal process

As I mentioned last time, cancellation of annual pay raises or bonuses can indicate financial trouble. But even if there are no such changes, changes to the annual performance appraisal process can be even more ominous. In many organizations, the performance appraisal process has been based on an annual appraisal, and that appraisal has been timed to coincide with the anniversary of the employee's hiring. In such an organization, a change of schedule to synchronize all appraisals might be a signal that layoffs are about to occur.

For example, if Management is contemplating layoffs, they might regard as helpful a synchronized annual appraisal system that provides current information about all employees independent of the anniversary of hire. An anniversary-based system can't do that. Thus, a change from anniversary scheduling to fiscal quarter scheduling can indicate that layoffs are under consideration.

Such a change can instead be unrelated to layoffs. For example, if appraisals are used to determine merit pay increases, the anniversary-based system affects employees differently depending upon when their particular anniversary date falls within the company fiscal year. If bad news for the company arrives in Q3, the Q4-anniversary employees could suffer in comparison to the Q1-anniversary employees in the same fiscal year. Thus, fairness alone can justify a change in performance appraisal schedules to have all appraisals occur in the same fiscal quarter.

Last words

In the United States, the actions of most enterprises with more than 100 employees are constrained somewhat by theWorker Adjustment and Retraining Notification Act of 1988. The act requires them to provide employees 60 days advance notice of mass layoffs. Although this sounds like it would be helpful to employees considering a voluntary early exit, by the time employers provide such notice, most alert employees have already sensed what's coming.   Next issue in this series   Top    Next Issue

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