Dear Dave: My company has tried to save money by getting rid of people, that not only performed well, but also made our customers quite happy to do business with us. Our customer service was once truly outstanding, but the cuts have made our service suffer to the point we are losing customers daily. Why can’t management understand that these cuts are only hurting business? -- P

Business evolves around people serving people. When there are less people serving customers, the quality of customer care will disintegrate faster than an ice cube on the sun. I think most companies track their lost customers. The part they may not be doing is finding out what they left in the first place — which can be determined simply by asking them.

A lack of customer care will cost companies valuable customers who would love to continue doing business with them, but now sense betrayal and neglect. There is not one of us who has not received lousy customer service in stores or on the phone because of a lack of qualified, trained service staff. A customer doesn’t feel very important if the line goes dead when being transferred.

What makes a company successful in the long term is its service, innovation, management and products. All of these success elements do not happen without good people. From a short-term perspective, layoffs make the company more viable, but from a long-term perspective, it can seriously damage the culture and the good people needed to run the business in the future.

In short, the shareholders are the ones who will suffer in the long run. The talent will leave. Sales and revenue will continue to drop. The customers will be left with a worthless product produced by highly stressed, nervous, unmotivated and over-worked employees. Finally, customers are not blind; they notice the drops in quality and service in an instant.

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What layoffs mean

It seems that companies now routinely cut workers even when profits are rising. They want to be “lean and mean.” Some troubled industries seem to be in a perpetual downsizing mode. Ongoing research shows that firms incur big costs when they cut workers. Some of these costs are obvious, such as the direct costs of severance and outplacement, and some are emotional, such as the toll on morale and productivity as anxiety infects remaining workers. Not a pretty picture.

There are other short-term costs to consider. For instance, it takes time to process people out. Managers have to go through the difficult process of breaking the news to employees, to reallocate work to remaining employees, and to train those survivors how to do the work they've absorbed – all of which eats managers' time and, therefore, costs money. And “survivor” employees have to figure how to do their job while fitting in all of the extra tasks.

Other indirect costs include lost knowledge, skills, productivity, contacts and customers, which are all hard to quantify, but are real factors in determining the short-term costs of laying people off. The ridiculous thing I've seen is that companies might make the balance sheet look good in the short term, but later need to hire people back. I think the conversation may be something like this. Manager: “Hey, we would like to hire you back.” Former employee: $%^^$#@!#!

Then what?

A company may lay off employees it considered to be “low end producers,” but in doing so it creates a climate of personnel uncertainty — even chaos. That uncertainty causes others to leave. One manager I know tells me that the first people to leave due to uncertainty in the company are often the best people, because they can always get another job somewhere else.

In essence, the cost savings only last as long as the company doesn't need to rehire employees, and in most cases, that's not a long period of time. The employer will pay a premium price for attracting valuable replacements, including the cost of recruiting and screening candidates. And people talk to people and the news about the poor business dealings of a company are shared quite quickly.

So, does it really pay to get rid of good people? At first glance layoffs seem to be an easy fix to reducing costs, but it doesn’t appear to be a strategic initiative that pays off long run. I realize that there are many customers that may not care about the employment history of a company as longs as they can get a cheap price. However, I believe that good customers like to do business with smart, ethical companies that guarantee (fair) pricing and quality customer service.

You can determine if you want to throw the dice and remain with your company or take a look around to find a company that matches your values. I know what I would do.

Contact Dave Conrad with questions or comments at conradd@augsburg.edu. Conrad is an associate professor of business at Augsburg University in Rochester.