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In this latest Harvard Business School Healthcare Alumni Association Q&A, Dr. Peter Cappelli, Professor of Management at The Wharton School and Director of Wharton’s Center for Human Resources, explains how biopharma C-suites can lead their teams through 2023’s turbulent times.
Michael Wong: With US-based employers’ 77,770 job cuts in February, the total was the highest for the month since 2009, when 186,350 cuts were recorded.1 While technology cuts have gained the most attention, J&J, Pfizer, and other biopharmas have executed downsizings as well during these turbulent times. Given your expertise on human capital, what are your thoughts around these recent C-suite decisions to reduce their biopharma headcount?
Capellii: If biopharma C-suites, and frankly their Fortune 500 peers as well, have critically evaluated the need to potentially pull the layoff lever, and it is necessary; then they should proceed. However, some recent announcements have continued poor layoff decisions for the following reasons.
Decades of research have shown that few layoffs do any good for performance.2 While layoff announcements often are embraced near term by Wall Street, rarely do C-suites get questioned months later to see if their “announced” layoffs were actually even executed. Still, even actual layoffs can have huge and unanticipated detrimental effects. As one study shared, “…downsizing a workforce by 1% leads to a 31% increase in voluntary turnover the next year.”3 The most powerful evidence is that companies that delay layoffs as long as possible do better financially in the long run because they are prepared for upturns in business.4 So while it is an easy short-term lever to pull, it often does not address some of the real pain points that a firm is encountering as well as creating a potential near-term retention challenge.
Moreover, announced layoffs distort our perception of the reality of the job market. Especially in tight labor markets, turnover averages about 30% per year, and average tenure is about four years for employees. It is not that difficult to cut the workforce by say 10% simply with attrition. We forget that even with the 77,000 job cuts in February, employment grew by 311,000 workers that month, a very brisk pace. When the public is bombarded with the recently announced layoffs at tech darlings and historically stalwart Fortune 500s, it is natural for fear, uncertainty, and doubt to cause employees to begin diverting time toward exploring new career options when it may not even be needed. When employers are already faced with employee retention risks, as one report pointed to how seven of 10 workers have considered a major career move in 2022,5 layoffs should be considered as a last resort.
There are some firms which have already embraced your advice for layoffs to be avoided. For instance, at one firm which had delayed a promotion opportunity for a high-potential employee, it was commendable to hear that this person, while disappointed for the delay, had expressed that it was more important that the company preserved jobs for her teammates during these turbulent times. Still, building a culture andworkforce like this instance must be incredibly challenging. What are your three recommendations for biopharma C-suites which are striving to do so?
First, C-suites leading large biopharmas that are earning profits and have a solid balance sheet need to set the appropriate tone and culture for their firms. If you have R&D employees working on drug approvals that could be 10+ years in duration, why would you put unnecessary stress of announcing job cuts to improve current financial performance when you want your staff focused on getting safe and effective products approved for the long term? If it is a start-up with no profits and an unhealthy balance sheet, then a layoff might be necessary, but you need to craft a narrative explaining the facts around the decision, as well as why things will get better after the restructuring. Moreover, for the survivors, one needs to create a narrative explaining why they were chosen to be retained, be it for some specific capabilities or other reasons and why things will be better for tomorrow. Otherwise, they will think they could be next and will panic at that possibility.
Second, while emerging technologies in people analytics are a shiny new penny for C-suites, smarter executives will recognize that many of these offerings are about monitoring (checking on employees’ work habits, etc.) that erode employee engagement and commitment. Frankly, it is the classic divide between engineering (measurements) and psychologists (trust). While I can appreciate the value of both positions, my research and experience in this sector leans towards the high-trust model.
Finally, biopharma boards of directors need to set the correct tone for their C-suites and their direct reports if they want to build a high-trust culture that drives innovation and performance. It requires large investments of time with employees. Focusing instead on high-profile deals and other initiatives which support their own ambitious career goals may not be as valuable for the company’s workforce. For a biopharma to build the type of culture and workforce that your case analog highlighted, biopharma C-suites and their direct reports need to engage directly with their teams and communicate transparently why certain decisions are being made, such as when discretionary expenses have been cut to the bone, in order to preserve jobs. While these ideally in-person discussions might seem mundane, they are crucial to building a highly engaged workforce, which research has shown to create value for employee retention and shareholders.6
1. Job Cuts Hit 77,770 In February 2023; Highest YTD Since 2009 | Challenger, Gray & Christmas, Inc. (challengergray.com).
2. White, April, Why Layoffs are a Losing Strategy, Harvard Business School, February 25, 2020.
3. Todd, Sarah, The Short But Destructive History of Mass Layoffs, Quartz, July 12, 2019.
4. Wayne F. Cascio, Arjun Chatrath, and Rohan A. Christie-David. 2021. Companies that Delay Layoffs Fare Better for the Long Run. Academy of Management Journal 64(2).
5. Richardson, Nela, Antonello, Marie, People at Work 2022: A Global Workforce View, ADP Research Institute, 2022.