How Layoffs Can Hurt Profits

Reducing head count may seem like a quick way to cut costs, but it can also reduce overall profitability.

Title:
The Effect of Labor on Profitability: The Role of Quality

Author:
Zeynep Ton

Publisher:
Harvard Business School, Working Paper No. 09-040

Date Published:
November 2008

Laying off store employees is a tactic retailers commonly use to cut costs, but according to this paper, it may have a negative impact on the bottom line. After spending four years studying a national retail firm with more than 260 stores (the name of the retailer was kept confidential), the author found a direct link between staffing levels and overall profitability. When a store maintained too few employees, and the employees were overworked, so-called conformance quality — how well employees follow specific processes, such as restocking shelves or returning unsold products to the manufacturer — suffered, which led to higher levels of customer dissatisfaction and lower profitability. The data showed that even a slight increase in conformance quality led to a 4 percent increase in store profit margins. The research also showed that pressure on managers to reduce payroll costs in the short term degraded the firm’s financial performance in the long term.

Bottom Line:
Retailers should pay special attention to how their store staffing levels affect their bottom line. Reducing head count may seem like a quick way to cut costs, but it can also reduce overall profitability.