Run Your Business So You’ll Never Need Layoffs

by Dennis Campbell , John Case and Bill Fotsch - June 09, 2020

The recent “Open Letter to Business Leaders,” written by three Harvard Business School students and cosigned by 1200+ MBAs and counting, appears to ask the impossible of the Fortune 500 CEOs to whom it is addressed. “Put your employees first now,” it urges. “Retain them, re-deploy them if needed, and most importantly, pay them.”

Such advice runs counter to customary U.S. business practice, which is to let employees go at the first sign of trouble. Boeing, for instance, regularly furloughs large numbers of people in response to the business cycle. Its response to the current pandemic? Ax 10% of the workforce. At the end of May, Forbes magazine compiled a list of companies that had cut staff as of that date. No surprise here: it goes on for page after page.

But the MBAs are on to something - something that most of those companies on Forbes’s list are missing. The best companies have already prepared financial buffers. They have built a workforce that can cope with a crisis. Most of these firms don’t need to lay off anybody.

We were reminded of this during the fierce recession that began in 2008. One of us, Bill, was traveling on Southwest Airlines, and he complimented the gate attendant on the fact that - unlike most other major airlines - Southwest hadn’t let anybody go. “It’s no accident,” she replied. “The other airlines are loaded up in debt. They have no choices. We have more than a billion in cash, so we have all kinds of options. Would you like to see the new markets we are opening in?”

But it isn’t just a strong balance sheet that separates the leading companies from the laggards in a crisis. As you can tell from the Southwest attendant’s response to Bill, leaders treat their employees like trusted partners, not like hired hands. They share information. They foster participative management. In a crisis, they turn to their employees for innovative ways to survive. Layoffs are a last resort, not a first.

You might think that entrepreneurial companies - which don’t have much borrowing capacity and must often operate on low margins - would be the first casualties of any crisis and so would be forced to rely on layoffs. But our research (not yet published) has found that many of these companies are following strategies that larger businesses might do well to emulate.

Consider Seattle-based Gravity Payments. Back in 2015, CEO Dan Price got a lot of publicity - not all of it favorable - when he raised his company’s minimum salary to $70,000 a year. Since then, Gravity has thrived. But this year, the Covid-19 pandemic led to a more than 50% drop in revenue, and Gravity was facing bankruptcy in a period of months. So Price met with all of his company’s employees in small groups, made sure that they understood the financial situation, and asked for ideas. Pretty soon, everyone had agreed to a pay cut, with higher-paid employees taking the biggest hit.

Another example is Adams + Beasley Associates (ABA), a home remodeling company in the greater Boston area.  The company shares full financial information with its workforce, and in fact had developed a “job security index” - made up of anticipated gross margin from ABA’s backlog plus cash in the bank - well before the pandemic hit. The pandemic put nearly all of the backlog on hold and the flow of sales leads slowed to a trickle. But ABA still had five months’ worth of cash, and it had a group of trusted partners in its employees. In one week the group came up with nearly 100 ideas of productive things they could do - implementing new project management software, for example - and the company began devoting its weekly meetings to prioritizing the ideas.

Then there’s Canlis, a landmark fine-dining restaurant, also in Seattle. Canlis’s business disappeared with the pandemic. But owners Mark and Brian Canlis convened their team and came up with three new ideas: a morning business focused on bagels and coffee, a drive-up burger menu, and take-out fine dining, with servers taking on the role of deliverers. The bagel business couldn’t cope with demand and the burger service caused immense traffic tie-ups; both had to be discontinued. But the dinner service boomed, and the company was able to keep everyone on the payroll. Our colleague Henry Patterson, a restaurant consultant, asked Mark Canlis whether he considered laying people off. The response: “No, why would I?”

Large companies can take lessons from these entrepreneurs. One obvious one is to maintain a strong balance sheet. If Boeing, American Airlines, and others hadn’t spent so much on pre-pandemic stock buybacks, they would have had more cash in the bank. You can’t cope with an emergency if you haven’t anticipated the possibility that an emergency will come along.

But the real difference is the way the no-layoff contingent views its employees: as trusted partners rather than as easily disposable assets. Even now, in the middle of the crisis, a company that seeks out ideas rather than handing out pink slips may find that it doesn’t need to let people go after all. The MBA students would take heart. So would we.

Dennis Campbell is the Dwight P. Robinson Jr. Professor of Business Administration at Harvard Business School.

John Case is the author of numerous articles and books on business and economics, including Open-Book Management and (with Corey Rosen and Martin Staubus) Equity. He recently joined the board of the NCEO.

Bill Fotsch, founder of Open-Book Coaching, has helped more than 300 companies around the world learn the principles and practices of open-book management.