How can the costs of a reduction in force be measured?

Short-term costs

Typical employer costs include:

• Planning. Planning costs such as attorneys, consultants and staff time reviewing and planning the reduction are the basic costs. Increases in travel and associated costs must be included.

• Actual reduction costs. Actual costs arising from the reduction such as severance, outplacement, survivors training, counseling, lost time due to meetings, and additional costs from communications methods such as hotlines or newsletters form the majority of the costs in this category. Bonuses paid to employees for remaining should also be estimated and included. Costs arising out of voluntary severance program incentives and costs associated with such programs such as attorney's fees should be added.

• Projected benefits cost. Increases in benefits costs including costs of the downsizings as well as estimates of continuing costs of insurance, diminished productivity and turnover. Included are also costs from termination of pension plans. Any benefits such as vacation pay, sick pay, company gifts, and other benefits that will be provided must be included in the calculation.

• External relations costs. Public and shareholder relations efforts and responses can be estimated and included. At a minimum, press releases must be distributed and staff made available. Depending upon the degree of adverse publicity and customer reaction, there may be additional advertising costs.

• Contractual relationships. Fixed and projected costs that arise from ceasing a planned company activity such as termination of vendor relationships, canceling advertisements and other contractual relationships must be added. There may be other penalties and fines that would be included.

• Security. Estimate and include additional security costs such as increased guard staff, extending current security staff hours during the separation notice period, and consulting fees.

It is important also to estimate the cost of likely increased turnover and include in your severance cost estimates. Use prior experience and adjust for comparable impact, or if you have no prior experience, use benchmarking data.

Long-term costs

Other, more subtle long-term costs to an organization are much greater, impact the entire organization, and last far longer than the actual restructuring. For example:

• While impossible to accurately measure the dollar cost, the loss of employee commitment presents major future challenges and obstacles.

• Companies will see over time an increase in unemployment insurance premiums. These costs can and should be estimated when analyzing the costs of the proposed action; however, the total impact of the turnover that will increase the rates may not be possible to project completely and the rate may change depending upon how the state(s) calculates the rates.

• Companies that have restructured have seen greater increases in disability insurance costs than companies that have not. Increases are seen with much greater frequency and have a longer duration in mental illness, substance abuse, and heart and blood-pressure related claims.

• Customer satisfaction is an issue that has confronted many companies. Customers may resent the loss of a contact person as well as react negatively to a reduction in the level or type of service that is provided post-restructuring.

• Business publications and mainstream media continue to publish stories often contrasting executive benefits with job losses. This contributes both to employee dissatisfaction among staff remaining as well as to customer discontent if the inequities are viewed as indefensible.

• It is more likely for employers to be sued by former employees than by existing employees.

Managers tasked with planning restructuring must take into account all the factors and costs, and ensure that senior management is also apprised.

Restructuring costs involving retained employees. Reductions in force affect more than those employees who lose their jobs. Survivors are impacted as well. Some of the readily apparent costs are:

• A serious distraction to the employees whose peers are likely to be affected.

• Fears that the employer is not as secure a place to work as had been perceived.

It is difficult to measure the impact of these feelings in terms of dollars. Without question, downsizings and the threat of downsizings represent a serious challenge to an employee's commitment.

Other intangible costs to the employer include:

Stability. Loyalty to individual organizations has declined among workers as employees become more educated, more loyal to their professions or disciplines than to an employer, more able to move geographically and within industries, and as job loss due to layoff or restructuring is more routine. The threat of a downsizing will increase the tendency to rely on one's training or profession rather than invest in a single employer. Fear of job loss may make experienced employees harder to keep; those who have options may exercise them.

Commitment. Commitment to the job is, most researchers agree, the single best motivator if the goal is to increase each employee's productivity. Layoffs tend to focus the attention of employees on themselves and their own economic well-being, rather than on the employer's growth, the job itself or its relationship to the organization's goals.

Short-term productivity. Worry over loss of income is not only a long-term distraction but a near-term factor in most employees' willingness and ability to work productively.

Public impact. Depending upon an organization's visibility in the community, the impact of a layoff on the surrounding area including goodwill, recruiting, customer reaction, and reputation cannot be measured but can be very damaging.

<p>Costs associated with a reduction in force, unfortunately, are not restricted to an analysis of hard dollar costs of severance, outplacement, survivor training </p>

How can the costs of a reduction in force be measured?

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