The Real Cost of Layoffs in the Latest Oil Downturn
Will you be Reeling or Roaring out the Other Side? Are layoffs really the answer to this downturn.
The numbers keep growing and just like body counts from tsunamis or earthquakes, we might be getting a little numb to the news of the latest casualties. Calfrac and Athabasca Oil are two recent additions to a string of companies announcing deep cuts to their number of employees: 40 per cent of Calfrac’s staff in Canada and 25 per cent at Athabasca. The list is getting horribly long: Cenovus, Husky, Suncor, Encana, Devon, Enerplus, MEG Energy and so many more that don’t even make the news because it’s become so normal. Recently the Canadian Association of Petroleum Producers said 35,000 energy sector jobs had been cut in 2015. Most analysts agree that we’re far from finished in this lower-for-longer bloodbath. But are layoffs always the best strategy for the business when you need to reduce costs in a downturn?
In “Petro Prices to Petro People,” part two in a series of four reports from Petroleum Labour Market Information this year, the tension between letting people go to cut costs and the long-term need for industry talent was highlighted. Sage words from Carol Howes, director of the Petroleum Human Resources Division of Enform, highlight the need to remember past downturns when lots of people were let go, and then companies had to re-hire the talent lost to layoffs when conditions improved. This cycle has been repeated every time the oil industry takes a dive.
How about not letting people go at all? “What?” I hear you say incredulously. “Headcount reduction is a necessary decision that strong executives make in times like these. Our shareholders expect us to make these hard calls.” But is it really a wise call for the medium- to long-term health of the business? Or is it a necessary reaction to short-term external pressures? Not every company is doing it. Some organizations are implementing all sorts of creative expense reduction strategies when it comes to the cost of people. Imperial Oil has not reduced its 5,500 workforce so far and says it isn’t planning to. And it is not alone. Trilogy Energy and many others are doing all they can to avoid diminishing their most valued asset—people. Many organizations are avoiding or delaying layoffs with other initiatives such as reduced hours, unpaid days off, unpaid sabbaticals, pay cuts and trimmed or cancelled bonuses. All of this is aimed at one of the largest fixed costs of any company: payroll. It’s always the beast with the target on its back in times like these.
But wait, isn’t it counter-intuitive to not cut headcount to salvage cash flow and shore up profit that the market demands? Well actually, not cutting headcount has some validity. It may be a more strategic move, as research proves. David Yager, the national leader of oilfield services at MNP, in his paper published earlier this year called Surviving the Downturn suggests, “The objective is to get through the downturn with the company intact while preserving the greatest number of jobs.”
Mark Salkeld, president and chief executive officer of the Petroleum Services Association of Canada, says, “We spend so much time training people on competencies, safety and certifications; it’s a huge investment and a lot of intellectual capital you would do anything not to lose.”
What if we don’t actually have to lose all those skills and all that experience and knowledge?
Just after the 2007-08 “Great Recession,” Harvard Business Review published an article by Bob Sutton entitled “Layoffs: Are They Ever the Answer?” Sutton outlines how layoffs rarely make financial sense and that evidence for layoffs actually helping to improve financial performance over the medium to long term was weak. His conclusion is that workforce reductions are short-sighted. His reasons why? Because of severance costs, survivors’ lost motivation and productivity, and rehiring and training costs. He says that after layoffs, it often takes 12-18 months before a financial benefit kicks in. Well, if this downturn is lower-for-longer, perhaps layoffs are indeed a good idea. But let’s not forget the impact on those who survive the cuts.
Researching for her book called “Top Talent: Keeping Performance Up When Business Is Down,” Sylvia Ann Hewlett quantifies the impact of layoffs on survivor’s morale: 73 per cent felt demoralized, 64 per cent felt demotivated and 74 per cent said they shut down and turned off. “In other words, just when a company needs its top performers to charge the hill, they retreat to the bunkers.” That may be exactly what’s happening in so many energy sector companies right now.
The view that layoffs are not the answer is backed up with compelling evidence in Darrell Rigby’s article, “Look Before You Lay Off,” in the Harvard Business Review. He states downsizing in a downturn can do more harm than good, especially in knowledge-based businesses, and he illustrates this view with several statistics and reasons. One is a mistaken view by executives that shareholders like seeing layoffs in a downturn because they see it as a signal that the company and its leaders are serious about controlling costs. However, his research shows that investors often see it as a symptom of mismanagement or eroding demand, and they sell their shares.
Rigby illustrates how the conventional wisdom to resort to layoffs in a recession is more than questionable and highlights research done by his company, Bain & Company, during the 2000-01 downturn. The study shows that companies with few or no layoffs performed significantly better than those companies with large headcount reductions. The numbers are surprising:
- Companies that laid off three per cent of staff did just as well as companies with no layoffs, posting an average nine per cent share price increase in the three years after the downturn;
- Share prices of companies that cut three to 10 per cent of employees remained flat; and
- Share prices of businesses that laid off more than 10 per cent of their workforce plummeted 38 per cent.
His observation is organizations that had large and repeated downsizings had flawed strategies that produced poor results. That doesn’t necessarily apply to oil and gas companies whose product price suddenly fell off a cliff. Executives at every company don’t take layoffs lightly and often make that difficult decision after reducing costs in many other ways. Rigby concedes that companies with falling revenues and shrinking profits need to act. He also concludes that companies that reduced their headcount as part of a conscious strategic repositioning or consolidate mergers or capture business synergies saw share price increases of 13–19 per cent following the downturn. But is that what most energy companies are doing? Are companies leaving no stone unturned before resorting to letting talent go?
Tom Copeland, co-author of Real Options: A Practitioner’s Guide summarizes some of his key findings in the article “Cutting Costs Without Drawing Blood.” He suggests that layoffs could be reduced or avoided by conducting a rigorous and disciplined evaluation of the small-ticket capital expenditures.
His conclusion is that workforce reductions are short-sighted. His reasons why? Because of severance costs, survivors’ lost motivation and productivity, and rehiring and training costs. He says that after layoffs, it often takes 12-18 months before a financial benefit kicks in.
Not the big projects that are often only 20 per cent of capex, but the little requests that get rubber-stamped without a second thought. These can add up to large cost savings. As Yager says, “You’ll be amazed at what you can live without if you have to.”
Another study shows companies that cut deep and fast have the lowest probability of pulling ahead of competition when times get better. In their article, “Roaring Out of Recession,” Ranjay Gulati and others outline how companies that master the delicate balance between cutting costs today and investing for the medium-term future can thrive following a downturn. These companies with a “progressive focus” work more on operational efficiencies than their rivals and invest comprehensively in the future, such as in research and development, new assets, and, we would suggest, skills training and leadership development.
Which leads (pun intended) us to another important reason to re-think layoffs before you leap this time around. Possibly the biggest reason, and one we’ve either temporarily forgotten or have been ignoring for a inevitable demographic shifts in the global workforce. The latest downturn has masked the fact that all our experienced baby boomers full of vital industry knowledge started retiring at a rate of 10,000/day in 2011. Six years from now, the Canadian workforce will be reduced by one million people. In the U.S., one estimate is that half the entire workforce could retire in the next five to seven years, including geophysicists and engineers. Fifty per cent. Are you kidding? Well no, because in addition to taxes and death, there’s one other guarantee: getting older.
Here’s a picture worth paying attention to:
It shows that the Canadian workforce currently has about eight million boomers employed and the same number of millennials. Despite this and previous recessions causing a delay for some, boomer retirements are continuing inexorably. Unfortunately, there is only half that number of Gen Xers to take their place. When it comes to replacements for all those important roles boomers occupy—such as technical experts, professional engineers and geoscientists, executives and managers, knowledgeable front-line supervisors and field workers—we’re four million people short. This is going to sweep through Canadian businesses like a tsunami despite having been predicted for some time.
Over the next few years, as we recover into whatever a new normal looks like for the oil and gas industry locally and worldwide, it isn’t going to be at all the same when it comes to re-hiring all that knowledge and expertise we lost when we cut staff and boomers decided to retire. Talent will become critically scarce at all levels and for many types of jobs. There will be a growing leadership crisis both in volume and ability with younger, inexperienced managers asked to step up into strategic leadership roles before they are ready. And because we cut training costs as well and didn’t focus on leadership development during this downturn.
We live in a world of volatility, uncertainty, complexity and ambiguity, or VUCA, as coined by the military in Afghanistan. We suggest that three Ds could be added to this challenging mix: disruption, the current downturn and the demographic changes. Our business leaders are dealing with dramatically difficult times in our industry, and this changing world is not for the faint of heart. Desperate measures may be called for, but we suggest a word of caution. Take note of the medium- to long-term trends in the workforce, and make sure all creative options are explored before letting people go. Ignore convention, and be the author of your own wisdom in ensuring you are keeping and developing the talent you need in the next few years to come roaring out the other side.
This article was first published in Oilweek Online Magazine November 23, 2015.