Why you shouldn't cut jobs in a downturn

In tough times the temptation is to start cutting jobs at the first sign of trouble. But knee-jerk jobs cuts can in fact prove more costly - and be more damaging in the long term - than trying to hang on to your staff.

Just to underline the danger of knee-jerk responses to tough times, new research by consultancy PricewaterhouseCoopers argues persuasively that making redundancies at the first whiff of a downturn is often a mistake.

In fact a light-touch, flexible approach to managing people is much more effective when it comes to riding out adverse market conditions, it has said.

Survey in recent weeks on both sides of the Atlantic have suggested jobs losses are accelerating and will only get worse in the months to come.

And even senior managers are not immune, with the UK's Chartered Management Institute in May suggesting that the redundancy rate for senior managers has more than doubled in the past year.

Yet companies that had greater flexibility in how they managed their people tend to do better when it comes to sustaining their business strategy – and therefore their competitive edge – when times are hard, the PwC study has suggested.

"Reducing headcount can be a knee-jerk reaction to difficult trading pressures but organisations need to remember making redundancies can prove costly, both in terms of payments in lieu of notice and recruiting new staff in an upturn," pointed out Debra De'Ath, director at PwC.

"Companies in all sectors could benefit from thinking creatively about how they reward and deploy their employees as alternatives to redundancies," she added.

If you step back and think about it there will normally be a number of potential alternatives to making employee redundancies, the PwC research has suggested.

Businesses could consider introducing flexible working, job share arrangements or reduced hours.

Other options might be to include seconding staff to charities or clients or encouraging employees to take career breaks.

"In a difficult job market, some people would rather keep their job under a different arrangement, such as with reduced hours, rather than be unemployed. Strategies like this also mean that when the market picks up it is easier, cheaper and quicker for companies to react," said De'Ath.

The fact that employment costs can account for up to two thirds of business costs and, in times of market uncertainty, mean it is unsurprising that CEOs put pressure on their HR and finance functions to manage these costs closely.

Yet there are a much wider range of tactics available to the clever manager for bringing costs under control range than just firing indiscriminately.

These can include expense management, assessing bonus and commission arrangements, reviewing recruitment policies and processes and assessing the use of contractors. "Employers and employees alike can benefit from cost-effective remuneration planning," said De'Ath.

"In practice, this might mean introducing flexible remuneration and benefit plans or offering salary sacrifice options. Simple changes at no or low costs can result in significant financial savings for employers and enhanced benefits to employees," she added.

These included employee share plan deductions, salary sacrifice arrangements and, only then finally, reducing the workforce, she suggested.

The survey is just the latest evidence that job cuts need to be handled sensitively even in the toughest economic climate.

Last month, a survey by HR consultancy Reed argued outplacement services that help workers who are being made redundant find alternative work acted as a useful retention and motivation tool for those left behind and hugely valuable in reducing stress and angst among managers doing the chopping.

And in March a survey by business school Pentacle argued that a generation of business leaders who had grown up knowing nothing but boom times could be thrown into a knee-jerk job-cutting funk by the downturn.

At the same time, the HR body the Chartered Institute of Personnel and Development and consultancy KPMG both forecast a torrid year for jobs.