What potential problems are associated with headcount reductions, especially as a form of cost-savings?

Most of the organizations that face the decision of implementing cost-cutting measures usually resort to reducing the headcount as one of their initial strategies. Headcount reduction refers to the process of laying off employees from various departments or a particular department of the organization with the objective of cutting costs. Strategic managers are forced to consider the decision of letting people go when the company does’t have enough money to pay them salary or enough work to keep them utilized or engaged. In times of economic downturns or recession, large number of workforce across the companies and industries have to face unemployment owing to the implementation of cost-cutting strategies by their employers. Although, in the short term, headcount reduction may look beneficial for the companies as it saves immediate costs for them in the form of additional salaries that they were paying earlier, it also poses potential problems for the organizations in the longer term. Some of these problems are listed below:

1) With less workforce available to carry out the same amount of work, the workload on the remaining employees increases manyfolds. Such scenario may lead to stressful conditions for them resulting in high employee dissatisfaction and employee turnover.

2) It affects the confidence level of the existing workforce as they get a hint of the company’s financial health. Because of layoffs of their peers and colleagues, they always work under the pressure and uncertainty of their own job.

3) From an external point of view, reducing headcount may affect the credibility of the organization as it presents the company in poor light to shareholders, investors and customers.

4) The shaking of the confidence of the important stakeholders of the company like customers, employees, investors, shareholders, etc. can have rippling effect on the company which can further negatively affect the performance of the organization.

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