Bad news about the U.S. economy continues to arrive on a daily basis. Although it is not yet known if the United States is officially in a recession, it is clear that tough economic times have arrived. This presents both an opportunity for, and a test of, organizations that have long declared people to be their most important asset.

Research suggests that organizations using layoffs as a first response to tough times will be, within a few years, worse off than those using other methods to manage through difficult economic circumstances.

We predict that the long-run, harmful organizational effects of layoffs will be even greater in the future than they have been in the past. Quickly resorting to layoffs not only damages firms’ future capacity, but also reveals a lack of commitment to employees as key organizational assets. This, in turn, will make it more difficult to attract and retain talented people in the future, even as more organizations depend on their employees as their sole source of competitive advantage.

Certainly there are circumstances under which layoffs are unavoidable. But those organizations using layoffs as a last, rather than a first, resort will be better able to compete when the economy improves – as it always does.

Alternatives to Layoffs

Some of the alternatives that organizations have successfully used instead of layoffs include the following:

1. Increasing time spent on training and development; the big cost of training (the “opportunity cost” of employees’ time, when they’re being pulled away from their work) declines when an organization has excess capacity

2. Allow for a voluntary reduction in hours; some employees would happily trade lower earnings for less time at work

3. Cut executives’ pay; this provides a real demonstration that an organization is committed to its employees as assets

4. Use a “human capital audit“ to help identify and improve the human drivers of an organization’s productivity and profitability

Remember that when the good times return, so too will talent shortages.  The organizations that will profit the most will be those that stood behind their employees when times were tough.

Reprinted with permission from McBassi & Company February 2008 e-newsletter www.McBassi.com.