TN Hari on tech layoffs: Companies must be generous with severance

Layoffs are a result of a few factors like long-term shift in trends and short-term pressures induced by certain macro-economic factors. (Representative image/Shutterstock)

Layoffs at some of the large tech companies have been making front page news for a while now. Before coming to this, I’d like to share a personal experience with layoffs. I joined Tata Steel straight out of college in 1988. The company operated in a protected market at that point of time.

Economic liberalisation changed everything in 1991. Overnight, import duties were slashed across a wide range of commodities. On the back of India’s protectionist policies, the domestic steel industry had grown sluggish and obsolete with a bloated workforce. Suddenly, it had to deal with the big boys of global steel who were slim and agile. It was a life and death moment for Tata Steel, the kind it had never experienced ever in its nearly hundred-year-old history.

Layoffs: Tata Steel’s Way

JJ Irani, a complete antithesis of his charismatic and larger-than-life predecessor Russi Mody, had just taken over as the new Managing Director of Tata Steel. He was the perfect leader for a crisis like this. In a company that was considered ‘caring’, and where employee welfare was of paramount importance, he changed the narrative by emphasising productivity and drawing brutal comparisons with similar steel plants worldwide.

Rightsizing the workforce was not just a top priority, but the only priority for some years. However, in true Tata tradition, a generous separation package was carved out for employees who were let go of. The package became a gold standard that no other employer anywhere in the world would ever be able to match.

Tata Steel lived to fight another day, and soon went on to become the lowest-cost steel producer in the world.

Boom And Bust Cycles

Layoffs are a result of a few factors like long-term shift in trends and short-term pressures induced by certain macro-economic factors, and it is not easy to say with certainty which of the two is causing a particular set of layoffs. Starting with the long-term factors, it is a well-known fact that there is continual churn in the Fortune 100 list of companies, and the half-life of public companies in the US is just ten years.

This means that half the companies that exist at any point of time are either acquired or perish in ten years. There is compelling evidence that almost all successful companies that appear unbeatable in the initial years (or even decades) end up fading away into the sunset after being disrupted by the new waves of innovation.

Whether the current layoffs are a result of any long-term shift is difficult to say, but it is reasonably clear that a combination of big bets that didn’t play out as anticipated along with a decrease in overall consumption (and the resulting reduction in ad spends) is driving the current layoffs.

What is interesting is that the layoffs are across both the high-cost as well the low-cost geographies. Many of the large layoffs between 2000 and 2010 were mostly in the high cost geographies because of work moving to countries like India. Where layoffs are because of temporary factors like slowdown in the global economy, companies bounce back and quickly get into hiring mode when the cycle reverses.

How Companies Bloat

Companies that are more thoughtful (meaning conservative) in hiring are unlikely to have as much of a bloated workforce as companies that choose to hire aggressively. Does that mean companies should be less aggressive in their growth projections? This depends upon a company’s core beliefs on how to build a business, and some of the choices that it makes. Therefore, it is not fair to expect a 'yes' or a 'no' kind of answer to this question.

The harsh reality is that some companies do end up with a bloated workforce when growth falls short of projections for various reasons.

Salary reductions across the board (and unpaid vacations) have been suggested as more humane options to layoffs. This is a bit simplistic. The issue is a bit more nuanced. In high growth periods, companies consciously, and unconsciously, end up ignoring basic house-keeping issues in processes related to human capital. This leads to both a bloated workforce as well as strategic mismatches between capability and rewards.

Laying Off, Compassionately

These inconsistencies and mismatches grow over time, and many incompetent people end up being paid more than the hardworking and competent folks. And some of them end up being in roles they are not competent to perform. While one might argue that companies should pay more attention and prevent this from happening, the reality is that despite all efforts some of this is inevitable in periods of high growth.

Companies have always seen recessions and low growth phases as opportunities for cleaning up the mess that high growth periods invariably create by letting go of such individuals. However, one would expect an element of collateral damage in such layoffs where some fully competent individuals could find themselves receiving the pink slips.

Cycles of layoffs and hiring are merely a reflection of the two larger cycles:

* Changes in long-term trends which result in reallocation of human capital between the sunset and the sunrise sectors

* Short-term variations in the macroeconomic factors.

While layoffs are inevitable, it is helpful if companies deal with this with some degree of compassion. The Tatas probably set the benchmark on this and it is not without reason that the word ‘trust’ is subconsciously associated with the group. From all accounts, Google has announced a fairly generous package for the separating employees.

However, we can take some comfort in 150 years of hard evidence that technology has been the biggest job creation engine in the history of mankind, and despite temporary job losses and pressures on reskilling, in the long run the number of jobs have always gone up.

TN Hari is Co-founder, Artha School of Entrepreneurship. Twitter: @TNHari. Views are personal, and do not represent the stand of this publication.