Barclays, Pearson and Virgin Media have all announced significant job cuts as part of a growing pressure to cut costs, adding up to more than 6,000 job cuts in total. Firms are increasingly turning to cost-reduction strategies as a coping mechanism for competitive and difficult economic conditions. But while these strategies help to reduce costs in the short-term, these cuts can have much bigger, and fundamentally important implications for the identity of the firm and their long-term competitiveness.
Take education giant Pearson. The publishing company is to cut 4,000 jobs globally, or one in ten of its staff, as a result of the prolonged downturn, though largely across its US markets. Its chief executive, John Fallon, defended the decision by arguing that cost savings of £350m would be achieved by 2017 – something greatly needed within a firm with one of the highest administrative costs of any FTSE 100 company. Pressure from shareholders has trapped the firm in an economic cycle, which has proven difficult to get out of.
No doubt this kind of cost-reduction strategy stimulates a short-term solution and appeases shareholder demands – evidenced by share prices rising 15% on announcement of the news. But there’s evidence to show it actually creates longer-term issues for companies, continuing to trap them in a downward cycle.
Over the last decade, numerous studies have demonstrated the precedent that cutting costs by cutting people can have longer-term, damaging effects on company performance, in addition to the negative consequences for employees and their families. Indeed, despite warnings, major businesses still decide to use mass layoffs as an effective weapon to deal with difficult and competitive conditions.
Fostering Innovation
In the heat of any competitive crisis, companies must focus on financial viability, but they must do this while considering their strategic needs. Short-term actions have longer-term consequences. As such it is possible to argue that quick headcount reductions come at a price. Notably, the price of missed opportunity.
