Redundancy ‘a false economy’ says CIPD

05 January 2009

Redundancies should be a last resort as businesses review costs in the New Year, the Chartered Institute of Personnel and Development (CIPD) said today.

The CIPD has estimated the real cost of redundancy can reach £16,375 per employee laid off, even before hidden costs like higher labour turnover and a fall in staff productivity are added in.

It is urging employers to plan for recovery by retaining their people, rather than downsizing and risking long-term damage to their business.

CIPD Chief Economist John Philpott said:
“Businesses are under huge pressure right now and restructuring is a fact of economic life that can never be ruled out. But while making people redundant can seem one of the most straightforward ways of cutting costs, redundancy is itself a significant cost to most organisations with a number of direct and indirect or hidden costs. This is particularly true if redundancies are an employer’s first resort in difficult times and have to be quickly reversed by renewed hiring when economic conditions improve.

“While the average direct cost to employers of making redundancies can reach £16,375, on top of this are hidden or indirect costs resulting from the effect of redundancy on survivor employees, such as higher labour turnover and a fall in staff productivity.

“This is likely to be a conservative estimate and provides a hard business case for why redundancies should be a last resort in the downturn. We urge employers to plan for recovery by investing in and growing their people, rather than reducing their workforce.”

The CIPD has created a new formula to help employers realise the genuine cost of redundancy on their business:

Real cost of redundancy = (n ×R) + (x ×H) + (x ×T) + ny(H + T) + Wz(P - n)

Where:
• n = number of people made redundant
• R = redundancy payments
• x = number of people subsequently hired
• H = hiring costs
• T = induction/training cost
• y = percentage quitting post redundancy
• W= average monthly staff salary
• z = percentage reduction in output per worker caused by lower morale
• P = number of people employed prior to redundancies

John Philpott said:
“The formula shows how redundancies can impede quick recovery from the downturn. This doesn’t mean that restructuring can’t take place but it should be with a view to the long term and not short term cost cutting.

“Employers should hold their nerve and focus on retaining talent and investing in the skills of their people. It is these people with their commitment, productivity and ability to add value who will ultimately keep individual businesses and the whole of the UK competitive, and put us in a strong position to recover from the downturn quickly.”

(Source: http://www.cipd.co.uk/pressoffice/_articles/050108Costofredundancy.htm)