The Hiring-Layoff Cycle: A New Perspective

Most organizations believe they make rational, responsive decisions when they hire and layoff staff. Why wouldn't they? Their approach is relatively the same as any other company's decision making process.

A Hiring-Layoff Cycle Example

As demand increases, an organization begins to feel the labor strain to keep up. The need additional employees is determined. Eventually the management chain of command approves hiring more people to tackle the current demand. Management creates new roles, and HR begins the recruitment & hiring process. Eventually, those employees are hired!

But then comes the time to onboard, train, and get employees up to speed on the work at hand. New employees operate at a lower speed than their seasoned employee counterparts, of course. Additional time is needed for employees to start effectively tackling the work pile.

Eventually, the first round of employees are caught up! But they are not the only ones going through the process. See, demand continued to show up each month, adding more strain to the organization's workload. Capacity strained each month waiting for new employees to be brought up to speed. Demand looks constant, and possibly growing: so it seems logical to meet that demand with the required labor output to match it (via more employees).

Total timeline? Let us say it took a year to catch up.

Yes, eventually the workforce catches up to the demand. But after a short time, say a fiscal quarter, 6 months, etc. - the financials are not looking good. Labor costs more than doubled, while the demand seems to have slowed down. Efficiency went up for awhile, but has seemingly eroded. Some blame it on labor bloat, others may blame it on lack of accountability. Whatever the reason, the next quarter's reports must show a return to baseline or better. This is especially true for organizations that require frequent financial reporting (publicly traded companies, for example).

Guess what happens? Cost cutting. In addition to expense reports tightening, travel limitations, and streamlining processes, the whispers in the organization's hallways are hinting at layoffs. People get nervous, tighten their grip around their workload, and the culture begins to shift

Right before the next quarter hits, layoffs are announced. A 10% labor cut across the board. From the top ends of the organization chart, this makes sense: the demand is no longer a justification for the labor they have.

Perhaps, even, this is a time to give walking papers to the under-performers and "problem children" employees. Others may have just been caught in the broad cut due to age and salary size. Others still may have been difficult decisions. Nonetheless, the layoffs begin in waves.

The balance sheet looks better on paper, and the work process goes on into the next quarter.

Well, not even 2 quarters later do we see demand begin to be a problem again for the current workload.

So begins the cycle again!

Different Views of the Hiring-Layoff Cycle.

For many organizations, this cycle pattern seems oddly familiar. But to them, the process seems justified at best, or at worst, tolerated. They met demand based on their best efforts and information available. Work capacity eventually caught up to demand, but it took a long time to get there. In that time, the demand seems to have been dwarfed by the current costs of labor. Therefore, in order for the organization to stay out of the red, layoffs had to occur.

Honestly, this makes sense if you saw this process from an executive and senior manager's eyes. How can you possibly do any better, when your world-view is about playing catch-up each & every year? In other words, you are elusively chasing 5 year plan goals, and missing on some (if not many of them) of the key objectives.

Even some middle management might get the sense that workload productivity shifts at a certain point due to the size of the labor force within the organization. They see the productivity decline, but for a different reason than size alone, or even in contrast to a lack of accountability: they see a lack of consistency and commitment from the top. They agree there is an issue in execution, but it is far from soley being answered by organzation size. They also know the direction of the ship keeps moving, and the goalposts keep shifting despite what they see as consistent demand on their employees each month. To them, demand never seems to have shifted in size , but the direction & strategy from the top always did.

To these folks middle management, they see layoffs as the result of the top end of the org chart being incapable of handling the demand in an efficient and consistent way.

Front line employees have far less of the same vantage point, but they can see from the bottom what the top of the organization chart cannot: demand never really changed. Once demand spiked, it never went away. To them, they saw the need for additional labor as necessary. The total jobs filled didn't seem like an issue at all, but the processes of communication and workflow seemed to get worse. Communication slowed, as did the workflow. New processes and procedures were put in place to track the drop in "efficiency", which ironically slowed down the process even more!

To the front line employees, they feel helpless when layoffs occur. Middle management made things worse, and the top of the org chart is too far from the problems to understand that demand never changed. To them, layoffs are part of yet another soulless, profit & efficiency-only organization.

But the question still remains among all three layers: why does this keep happening, in spite of what seem like everyone's best efforts?

The Nature of Delays in the Cycle

The hiring-layoff cycle is actually part of a larger system shaped by delays, feedback loops, and accumulated consequences that rarely show up in quarterly dashboards.

In other words, the consequences of isolated or less-system informed decision making leads to more unintended consequences.

Organizations hire based on growth signals: revenue, backlog, customer volume. But demand is not experienced in real time. It is interpreted through metrics, meetings, and forecasts. By the time a hire is made and onboarded, the system has already moved. Recruiting takes time, as does onboarding and training. Learning on the job is another factor with a delayed response rate. Better put, productivity lags behind headcount.

The result? Organizations add capacity based on yesterday's demand, not today's reality.

When demand levels off, the organization is still absorbing the effects of earlier hiring. Headcount rises even as the original pressure dissipates. This is an example of organizational overshooting.

I think of golf as a perfect analogy here: you overpower your swing on the first drive, causing the ball to horrifically slice. You overshot what was needed for a straight drive. The next tee box comes up, and you try to tone it down from last time... only to barely go past 50% of your average drive. You now undershot what was needed for a good long drive. Such is the same nature for the organizational dynamics of meeting demand with the requisite amount of employees needed to handle it.

Because these delays mask the full costs of of hiring (beyond dollars and cents), managers underestimate how long it takes for capacity to fully express itself. The organization feels stable right up until it does not. Then costs show up all at once.

When utilization drops, managers shift modes. Hiring freezes, and layoffs soon follow. Cost discipline and "belt tightening" becomes the new narrative within the organization.

Delays also matter in the layoff part of the cycle. Letting people go may relieve the balance sheet pretty quickly, but it does not immediately restore performance quality. Knowledge leaves with people. Trust as a whole erodes over every cycle (amongst other reasons). Informal netowrks within organizations become fractured and weakened, which slows down the flow of information and work.

The organization thus becomes more fragile, precisely when it needs the underlying adaptive capacity to navigate this change. The capacity to truly be adaptable decreases along with the with loss of talent, knowledge, and trust.

Seeing The System Changes The Cycle

Using a system dynamics lens, the pattern that unfolded in the hiring-layoff cycle looks reminiscent of the Bullwhip Effect in a system. While typically associated with supply chains, the bullwhip effect applies just as well to other cycles in living systems. The point is this: similar patterns in one system can be telling of how another system's patterns will play out ... even if the other system is visibly much different.

Understanding the properties of the bullwhip system offers a much more complete view of the challenges at hand. The system dynamics lens shifts organizations from reacting to symptoms toward understanding structure. It invites different questions:

1) Where are the delays we are not accounting for?

2) Which feedback loops are amplifying our decisions (ex. how does confidence in the hiring decision process gratifying the immediate symptoms of the challenge, while leaving other parts of the challenged unaddressed... aka what feels good now feeds more of that behavior)?

3) What is quietly accumulating underneath the surface that is critical to the way your organization functions (think it terms of both tangible metrics and intangibles like trust, experimentation/risk tolerance, collaborative spirit, etc.)? And;

4) What would it mean to stabilize the system rather than oscillate inside it (aka understanding how your system works versus fighting it blindly)?

Until that structure is made visible, organizations will keep managing the same problem under different names. And each time, it will feel like the first.

Or worse: it will feel like Bill Murray's character did in the film Groundhog Day!