CFOs tend to underestimate the organizational drag created by large-scale workforce reductions, and therefore can inadvertently reduce shareholder returns when taking actions to protect them, according to Garner, Inc.
“Given a higher cost of capital, renewed investor focus on profitable growth and widespread forecasts of a global recession, CEOs are asking their CFOs to reduce costs,” said Vaughan Archer, senior director, research and advisory in the Gartner Finance practice. “In many notable bellwether companies, particularly in the technology, retail and financial services industries, this is taking the form of layoffs.”
“The first thing to recognize is that there is an immediate upfront cost to layoffs as a business will need to reorganize itself around a smaller group of employees and typically incur costly upfront severance payments. Thereafter, a business is likely to see an increase in both costly contractor hiring and demands for increased compensation from remaining employees who are now under a greater burden.”
Given that personnel are a key cost driver for most organizations, it’s not surprising that business leaders look for cuts here when trying to contain costs in an uncertain business environment. However, a recent Gartner analysis suggests that forecasted savings tend to become offset by the unforeseen consequences of layoffs within three years and in many cases can be detrimental to shareholder returns in the long term (see Figure 1).