Does Organizational Change Need Mass Firings To Succeed?

by Dora Wang on Dec 17, 2014 8:00:00 AM

Are Layoffs Necessary in Organizational Change?This year 18,000 employees were laid off from Microsoft. This got everyone thinking and talking about downsizing. It’s a specter that looms over announcements of organizational change, especially ones that include the words “restructuring” or “streamlining.” Workforce reductions aren’t good news for the employees getting fired, of course. But what about the companies?

A Ballooning Workforce

It didn’t really come as a surprise that Microsoft needed to do some trimming. The company’s headcount topped 127,000 after it acquired part of Nokia in April—double what it was in 2004.

As CEO Satya Nadella wrote in his email announcement to the company in July, the cuts are part of sweeping changes to the company’s business direction and culture. Absorbing Nokia’s Devices and Services division meant a lot of redundancy to get rid of. Nadella’s email was peppered with words like “lean” and “efficient,” “synergies” and “more agile.” It’s hard to argue with downsizing in the face of those circumstances.

Cutting Waste Without Cutting People

A few years before Microsoft’s reduction, Virginia Mason Medical Center took a very different approach to their restructuring. Dr. Gary Kaplan became CEO in 2002 and was faced with a tangle of problems that included million-dollar losses and fading staff morale. He tackled those problems. He also instituted a no-layoff policy.

It was a bold stance to take. 78% of Virginia Mason’s costs are labor, so leaving that intact meant serious work was needed everywhere else. Part of Kaplan’s motivation was to get buy-in from the staff. They might not be committed to making the solutions work if, he said, “they might improve themselves right out of a job.”

Inspired by the Toyota Production System, Kaplan and his team created what eventually became the Virginia Mason Production System (VMPS). Focused on cutting waste and improving process, this philosophy still guides the hospital today.

The VMPS worked. Over two years, Virginia Mason saw savings between $12 and 15 million. Productivity increased, and staff whose positions became redundant (remember, they couldn’t be fired) were redeployed within the hospital.

A Letdown In The Long Term?

Virginia Mason’s no-layoff policy paid off for them. It’s too early to tell how Microsoft’s layoff-heavy approach will turn out, but there’s reason to believe that downsizing isn’t a surefire strategy for improving a company’s performance.

Research provides conflicting answers on whether cuts work. It also risks employee morale, sacrifices institutional memory, and in some cases doesn’t reduce costs. A 2009 study indicates that the gains might not outweigh the losses:

  • Productivity improved in only 21% of cases.
  • 40% of employees lost motivation after layoffs.
  • 41% of employees lost respect for their employer.

There’s reason to believe that organizations are putting themselves at risk when downsizing—or at least that they should think twice before turning to this method to get them through changes.



New Call-to-action

author avatar

This post was written by Dora Wang

Dora is an employee engagement researcher for TINYpulse and managing editor of TINYinstitute. Having grown up in Texas, she is now firmly settled in Seattle, where she spends her free time reading comic books, wrangling her three cats, and (of course) rooting for the Seahawks.

Connect with Dora