KUALA LUMPUR (May 12): Changing demographics and declining labour force participation mean rebuilding a workforce is slower and more costly than in the past, according to Gartner Inc.

In a statement on Wednesday (May 10), the consulting firm said chief financial officers (CFOs) tend to underestimate the organisational drag created by large-scale workforce reductions, and therefore can inadvertently reduce shareholder returns when taking actions to protect them.

Gartner finance practice senior director, research and advisory Vaughan Archer said given a higher cost of capital, renewed investor focus on profitable growth and widespread forecasts of a global recession, chief executive officers are asking their CFOs to reduce costs.

“In many notable bellwether companies, particularly in the technology, retail and financial services industries, this is taking the form of layoffs.

“The first thing to recognise is that there is an immediate upfront cost to layoffs as a business will need to reorganise itself around a smaller group of employees and typically incur costly upfront severance payments.

“Thereafter, a business is likely to see an increase in both costly contractor hiring and demands for increased compensation from remaining employees who are now under a greater burden,” he said.

Gartner said given that personnel are a key cost driver for most organisations, it’s not surprising that business leaders look for cuts here when trying to contain costs in an uncertain business environment.

However, a recent Gartner analysis suggests that forecasted savings tend to become offset by the unforeseen consequences of layoffs within three years and in many cases can be detrimental to shareholder returns in the long term.

The firm said many businesses will see any cost savings from layoffs eroded, and that’s even if a business manages to avoid a vicious cycle of employee turnover driven by overstretched staff and lower morale.

Moreover, it said that at some point the business cycle will turn, and businesses will need to rehire the headcount anyway, likely at higher rates than the employees who were laid off.

Archer said in the more negative scenarios, the factors detailed here are also going to harm growth in existing and new business, and ultimately a firm will start losing its customers.

“None of this is conducive to long-term shareholder gains. CFOs need to work cross functionally with peers in HR, recruitment, sales and service to ensure they are properly accounting for the potential cost of layoffs,” he said.