Breaking the layoff cycle: how companies can avoid over-hiring

In recent years, layoffs are a common occurrence in the world of business. The companies that experienced unprecedented growth and success in covid adopted a culture of hiring and spending too much, expanding their workforce rapidly and undertaking increasingly ambitious projects. These companies are reducing costs by laying off employees as a result of economic uncertainty and market changes. In many cases, these companies cut through the fat and muscle to the bones of their abilities.

These companies will have to find new talent in order to remain competitive. It is important for business leaders to ask themselves: how can they create a workforce that is more cost-effective and sustainable when the growth returns and "add back" begins?

There are no signs that this trend will slow down. Companies from startups to Fortune 100 firms like Amazon and Alphabet, have all resorted mass layoffs over the past year. According to Layoffs.fyi, the total number of tech layoffs in 2023 was 121,000. Employees who are frustrated have blamed the over-hiring of employees as a major reason for the letting go of thousands. It's not only employees who say this. Zoom executives have admitted that layoffs were caused by over-hiring. Others, though this may not be the case in all cases, reflect the evolution of the business model of a firm during an age of increasing automation.

Over-hiring or optimizing their workforce can lead to an overly bloated organization structure, which leads to unsustainable costs, inefficiencies and a lack focus on the core business goals. Over-hiring increases operating and labor costs, reducing shareholder value.

National Bureau of Economic Research found in a report that excessive staffing can lead to lower profits as the excess labor results in decreased productivity and output per employee. Over-hiring can have a variety of negative effects. Companies looking to rebuild their workforce and hire again must carefully assess their hiring needs, and challenge their traditional hiring methods.

Paul Oyer, Scott Schaefer and others in Personnel Economics: Hire and Incentives emphasize that the fundamental problem of hiring is matching. This involves expensive search and bilateral information with asymmetrical characteristics. Hiring is time-consuming and expensive. It also involves a lot of uncertainty.

After a headcount has been approved, a hiring manager only needs to meet a few criteria to "open a request." The recruitment process can then take several months to complete. According to LinkedIn's hiring statistics, talent acquisition specialists spend almost a third of their week (about 13 hour) sourcing candidates. The artisanal nature in talent acquisition is evident. Companies need to add talent in a more scientific way.

To do scientific hiring, you have to throw away chance and predictability. The hiring process needs to be more methodical and calculated. It is important that managers prove to the company that the new hire will spend at least 30 hours per week "on task", leaving the rest of the time to attend meetings and perform operational tasks. If they cannot demonstrate that they need this, they should hire talent on a part-time basis and let the billings over time (3-6 month) tell the story about whether or not they should be hired full-time.

It involves developing a comprehensive plan for hiring that includes contractors and fractional workers. This is done to first bring in talent on a part-time basis, while using data-driven approaches when determining if and when full-time hires are needed. Since January 2023, Over 40,000 contract to hire jobs have been posted on Upwork's marketplace. There are over 2 million professionals who are open to contract-to hiring opportunities.

Companies can better predict their hiring requirements by utilizing fractional workers. These workers are more flexible and can adapt to changes in workloads. Flexible work arrangements also give independent professionals more freedom to set their own schedules. Mixing full-time workers with fractional ones allows companies to scale up and down quickly, reducing the costs and risks associated with understaffing or overstaffing. It allows them to achieve a variable cost structure similar to cloud computing or software as a services (SaaS), which is used for technology expenses. By analyzing the past usage patterns of fractional workers, companies are able to identify trends and predict future needs with greater accuracy.

Since more than a hundred years, employers have prioritized full-time work. The full-time mentality is associated with high costs, limited flexibility and difficulty in finding qualified candidates. The company gains control by bringing on talent first on a part-time basis.

According to research, companies that survived an economic downturn best relied on improving their operational efficiency rather than laying off employees. It's not always necessary to lay off employees in order to prepare for an economic downturn. After mass layoffs, industries will begin to search for new talent. Strategic hiring practices and careful planning can help maintain an engaged, focused and efficient workforce. By using alternative staffing methods like fractional workers, companies can break the cycle of layoffs and over-hiring. They will also be able to establish a predictable rhythm for acquiring talent in real time. They will be able to remain competitive for many years.

Tim Sanders is responsible for Upwork's client strategy, which helps businesses to implement new ways of working. He has over 25 years experience in working with companies to improve innovation and change management. He is on the advisory board of several startups including Goodreads. Tim started his career in Mark Cuban’s broadcast.com as a member at an early stage. After Yahoo! acquired him, Tim became chief solutions officer. He is the co-author of five books including the New York Times bestseller Love is the killer app: How to win business and influence friends.