Making Redundancy Work

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Job CutsWhen a firm makes staff redundant, the management hopes that this action will be enough to solve the firm’s problems and return it to profit. But this outcome is far from certain. There’s much that management needs to do to avoid the firm bouncing from one round of redundancies to another.

Overall though, management is responsible for making redundancy work for the firm.

 Redundancy reasons

Management may consider redundancies for two financial reasons.

Firstly, it may be because the top line has fallen (because the market is difficult or because a big account has been lost). In that case costs must fall in line with the top-line reduction to recover the situation to give a profit.

Secondly, the firm may have just become inefficient, with productivity eroded and staff costs increased, or its cost-of-goods-sold may have risen. In either case the net margin will have dropped. Again costs must fall to reverse the financial loss.

Redundancy is an option available to management to reduce costs in order to return the firm to profit[1].

Controlling costs

Logically, reducing the staff numbers reduces the staff costs and the firm returns to profit. Business can continue by restructuring the work and this is a common response to a loss-making situation.

But unless management has some strategy in mind to protect or recover the top line, firms often go from one round of redundancy to another. This occurs because the staff left after the redundancies can’t cope with the workload or they become demoralised by lack of leadership and they reduce their productivity – or they leave. In either case invoicing or takings reduce to trigger the redundancy cycle again.

Reducing costs through redundancies works, but if the firm was inefficient before the redundancies and no corrective action is taken, it will still be inefficient after.

Improvement strategies

Strategies to protect the top line and improve productivity might include training and development, introduction of new technologies or introduction of new methods. All are focussed on increasing the productivity of the staff left after the redundancies. Alternatively, if the problem is purely a reduced top line, strategies might include hiring more sales staff or investing in marketing.

So it may be that work of the type done by those made redundant is truly not needed. In that case, workload for those left behind will not rise. But it might be that the firm was just inefficient, or cost-of-good-sold rose, and therefore workload per person will rise. In this latter case, management must have a strategy to improve productivity and help staff cope.

Management; get a grip!

If nothing is done, the remaining staff will be under pressure to cope and stress will result. In a buoyant labour market where those with scarce skills can get a job easily, key staff will quit. That then makes the situation worse and, until new staff become productive, the workload per person rises again!

Fundamentally, when the profit and loss account is under strain, management must get a grip of the situation and act to make sure a single round of redundancies corrects the firm’s woes.


[1] Note that the legal definition and the management reason are different. Legally, redundancy may occur if there is ‘diminished need for work of a particular kind’.

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