Who to fire? How the biggest companies plan mass lay-offs

Job cuts are very much on corporate minds. A first round of swingeing culls hit the technology sector in November. US companies including Goldman Sachs, Microsoft and Amazon followed by laying off nearly 103,000 people in January, the highest monthly total since the height of the pandemic.

Now the misery is spreading, as executives hunker down ahead of a possible recession. Tech groups are retrenching further after overestimating how much the pandemic changed customer habits. Financial companies and consultants are dealing with choppy markets and reduced deal flow. Meanwhile, carmakers are having to adjust to rising demand for electric vehicles.

Management experts caution that there are better and worse ways to reduce payrolls. Some of the biggest employers may be falling into common traps that could inflict lasting damage on morale and future growth. One of the worst mistakes, they agreed, is to give employees the sense that quick fix cost-cutting targets — rather than longer term strategic plans — are driving the process.

“To have a skittish response to the threat of tumultuous economic times will set a company back,” said Angie Kamath, dean of New York University’s School of Professional Studies. “Making very sharp turns right now is a mistake . . . [and] smells to me of very poor management.”

A striking example in the recent mass redundancies is McKinsey, the consultancy famous for advising other businesses on how to bring down costs. The company is cutting up to 2,000 of its 45,000 people, hitting divisions that do not serve clients directly, such as human resources, technology and communications.

Until recently McKinsey’s headcount had been growing and it has been an active participant in a bidding war for top recruits. McKinsey, Bain and Boston Consulting Group increased annual base pay for MBA hires in the US to more than $190,000 last year, one of the biggest rises this century.

Employers must act fast

Management experts warn companies embarking on mass lay-offs not to let the process drag on. “The worst thing people can do is to do it very slowly and painfully,” said Kairong Xiao, associate professor of finance at Columbia Business School. “If you say, ‘we’re going to do it in three months’, during those three months no one is getting work done.”

Wall Street banks Goldman and Morgan Stanley, which are making big cuts after bulking up headcount significantly during the pandemic, have taken contrasting approaches.

At Morgan Stanley, 1,800 redundancies, slightly more than 2 per cent of staff, were made in early December, with little build-up or angst.

Goldman, which is cutting 3,200 jobs, 6.5 per cent of its headcount, moved more slowly. Team leaders were instructed in early December to draw up lists of employees who could be let go. News of the planned cull leaked, kicking off weeks of uncertainty about who was on the way out.

The anxiety was not helped by a year-end voicemail message from chief executive David Solomon, instructing employees that lay-offs would be announced in early January. Younger employees reportedly dubbed the day of reckoning as “David’s Demolition Day”. When the axe finally fell, managers described the process as “brutal”. Solomon ended up offering a mea culpa to the bank’s senior executives, telling them he should have cut jobs sooner.

“If you do it in one fell swoop, it is an action plan,” said Brandy Aven, an associate professor at Carnegie Mellon’s Tepper business school. “That is a much better situation than piecemeal, because that starts to degrade [employees’s views of] your competence and your benevolence.”

At Amazon, the process that led to 18,000 job losses, the most in the company’s history, was also lengthy. Last year it imposed a hiring freeze, followed by job cuts in lossmaking or experimental units, such as the team behind the Alexa voice assistant.

Early talk of cuts in the region of 10,000 jobs prompted an admission in January that nearly twice that number would need to go. In a note to staff, chief executive Andy Jassy said “these changes will help us pursue our long-term opportunities with a stronger cost structure”.

Some soon-to-be Amazon employees described offers being rescinded while they were in the process — quite literally packing their bags — of relocating to Seattle to start a role.

Internal discussions on workplace communications tool Slack, seen by the Financial Times, showed frustrated employees feeling they had been left in the dark. In an interview shortly after the losses were announced, Jassy told the FT his company had no intention of any more cuts.

Consider where to swing the axe

Once the need for job losses is clear, companies have choices about where to make them. It can be easy to target the most recent arrivals, management experts say. But that wastes the money that has just been spent to recruit and train them and may leave the company missing a generation of workers in the future.

“A better approach is to use it as an opportunity to think about the strategic direction of the company,” Columbia’s Xiao said. When cuts focus on non-core businesses, “the whole team is gone and there is nothing personal about it.”

Job losses announced by Ford last month were specifically driven by larger business decisions at the US carmaker: a shift to electric cars and a thinner vehicle line-up.

Chief executive Jim Farley estimates that about 40 per cent fewer people will be needed to build electric models in future because they contain fewer parts and are simpler to design and engineer.

“The amount of work needed to be done [in electric cars] is less because of that simplification, and the fact these are electrified products,” said Tim Slatter, head of Ford in the UK.

The carmaker is also reducing the number of models it offers in Europe, eliminating the Fiesta, its smallest car, and the slightly larger Focus. It has already axed the Mondeo, its once-popular family car.

Slatter said the latest redundancies in Europe — which follow cuts in other parts of the company last year — would “make sure the business is set up for the future”.

Staff will leave over the next two years, on a “voluntary” basis, while Ford also has a “proactive programme to retrain people,” he added.

Rank and yank

Some companies intend to use job cuts to weed out poor performers, but their assessment systems may not be up to the task, said Carnegie Mellon’s Aven. “With ‘rank and yank’ [programmes], the underlying assumption is that some people are better,” she said. “It’s reductive. You can miss key measures and thwart your overall performance. It is really important to look at how this person contributes to overall organisational performance.”

Last September, Facebook owner Meta’s chief executive Mark Zuckerberg ordered directors to draft lists of 15 per cent of their teams to be put on performance review. Less than two months later, Meta laid off 11,000 people, 13 per cent of its total workforce at the time — the deepest single-day cull in its history.

The cuts were largely performance based and affected all departments, although certain areas such as recruitment were harder hit.

Meta is now exploring further redundancies, according to insiders. Zuckerberg said last month that he planned to be “more proactive” about cutting low-performing or low-priority projects, and to “remove some layers in middle management to make decisions faster”. The shake up has been nicknamed “the flattening” internally.

One disappointment about the 2023 lay-offs is that few companies appear to be trying to find creative ways to cut labour costs, NYU’s Kamath said. Some businesses are clearly facing cyclical pressures, yet there seems little appetite for trying furloughs or moving people to part time until business picks up again. “Those are viable options and companies should think more about that,” she said. “The war for talent is expensive. With the cost of severance and signing bonuses, [lay-offs can be] a wash.”

Additional reporting by Peter Campbell, Joshua Franklin, Dave Lee, Hannah Murphy and Michael O’Dwyer