2023 Recession: Why Layoffs Can Create Greater Risks for Companies

The U.S. may not officially be in a recession, but the year is off to an anxiety-inducing start. A slowdown in growth caused several big-name companies to end 2022 by cutting thousands of jobs. Then only days into 2023, more major employers announced sweeping layoffs including:

• Salesforce cutting an estimated 7,000 people
• Amazon raising its planned cuts from 10,000 to 18,000 employees
• Vimeo trimming an additional 11% of its workforce after cutting 6% two quarters prior

Companies are doing what they’ve always done in an economic downturn: slash costs, then hunker down. On the surface, it may make sense to cut staff then add headcount once better times return, as payroll is one of a company’s largest expenses. But the old fire-and-rehire approach may backfire in 2023. Because unlike in previous economic slowdowns, employers don’t have the upper hand.

Why layoffs are risky for companies in 2023

Layoffs may be unavoidable during economic slowdowns, but executives must approach the tactic more cautiously in 2023. In a CNBC article, Paul Knopp, U.S. chair and CEO at KPMG, warns that downsizing workforces could spell trouble for long-term success. These signals suggest why.

Talent shortages will likely continue long term

There are about 1.7 jobs for every unemployed worker in the U.S. Globally, it’s estimated companies will be short 85 million people by 2030. Massive recession-induced layoffs may not offset the talent shortage, as it’s predicted to remain for several years. A few reasons for the persistent deficit: retiring baby boomers, slowing population growth, fewer college enrollees, restrictive immigration policies, and people quitting their jobs for reasons ranging from long COVID to a lack of childcare.

You invested a lot of time and money to secure the employees you have now. Not only will you lose that investment for each person you let go, but you may also spend more time and recruiting expenses to replace them later. And for each day a job remains unfilled, work doesn’t get done, which may slow your post-recession recovery.

Wages are still rising

Inflation and ongoing competition for in-demand skills are pushing up wages for many workers. Bureau of Labor Statistics (BLS) data show wages increased an average 5% over the past year and up to 7.7% in some industries. Thus far, the widespread layoffs haven’t provided employers any pricing relief. In fact, most CEOs (73%) worry they won’t be able to raise wages enough to retain the talent they require.

Two ways rising wages may impact the business’s ability to compete are:

• Budgets are tied up in fewer hires, so teams don’t attain all the skills required to execute on important initiatives and to keep up with growing demand.
• Teams must hire less-qualified people, which could adversely affect work quality and productivity.

Employees still have bargaining power

Shrinking retirement savings and increasing job insecurity are swinging some power back to businesses. But executives should be cautious about thinking they can pull back on initiatives that employees prioritize, such as remote work and diversity, equity, and inclusion (DEI).

Workers with in-demand skills still hold the upper hand—even if they may not have as many job offers. And recession or not, COVID changed how people define work-life balance. As such, they’re less likely to accept or remain in a job they don’t enjoy.

What businesses can do now

Preparing your workforce for a recession in 2023 requires a balance between reducing costs and building long-term resilience.

Reduce costs

Consider these two ways to conserve cash and preserve as much of your core workforce as possible.

Get creative in managing employees

Think of new ways to reduce costs while keeping core talent employed. For example, you could:

• Reduce hours and pay by 20%
• Enable employees to share a single job until work demand increases
• Have employees work three days a week and allow them to to take freelance projects on the side
• Gain efficiencies by automating tasks, then move employees to work on projects aimed at business growth

Leverage a variable cost structure for talent

Talent is often treated as a fixed cost; salaries, technology, and recruiting costs don’t change based on the volume of work. A variable cost structure enables you to free up cash by paying for talent by usage and bypass recruiting expenses. Just as important, turning talent from a fixed cost into a variable cost increases what the company can do and allows it to respond faster to changing business demands.

A simple way to create a variable cost structure for talent is by contracting independent professionals when hiring isn’t possible or when there isn’t enough work to justify adding headcount. For example, you could contract

• A fractional executive to lead a critical initiative,
• An engineer to transfer a tech stack,
• An interim professional to cover an employee on leave,
• Or a team of customer service agents to handle a volume spike.

When Rajneesh Sehgal was the director of engineering at Flexera, he accessed talent directly through the Upwork talent platform. Working with talent on-demand enabled Sehgal to complete all his projects and still have 50% of his budget left to spend. Sehgal explained:

“Upwork lets me be more strategic with my budget. Many times, I don’t need an employee, I just need someone for 3 months. Instead of locking up my budget with a single hire, I can break it up to get several people with different skills and get several specialized projects done.”

Build short- and long-term resilience

How well a business withstands disruption relies on its ability to continue delivering as expected, seize opportunities, and position itself for rapid recovery.

Utilize your workforce like Legos®

Global thought leader and best-selling author Keith Ferrazzi says successful businesses treat their workforce as a massive pool of onsite and remote individuals who assemble, disassemble, and reassemble again on a project basis. It’s a model he calls a Lego® block workforce.

The fluid model is designed to optimize efficiency and effectiveness as employees focus on core work and offer non-core work to contracted professionals.

For example, many analytics teams spend so much time pulling data that they don’t have time to analyze it. You could engage independent data experts to write SQL queries and build impactful visual dashboards. This frees your analysts to handle higher-value work that helps business partners make strategic decisions faster.

Building a fluid workforce made up of employees and independent professionals generates workforce flexibility, stretches budgets (variable cost structure), and enables you to expand capabilities while maintaining smaller teams.

So, how do you know who to contract? The article, Designing Your Business To Enable a Fluid Workforce, suggests starting from the end:

Optimize agility

Independent talent can increase a company’s ability to respond faster to changing circumstances, but a flexible workforce is only as effective as your ability to find the right talent at the right time. Talent platforms, including Upwork, are vital in facilitating these connections. In fact, Upwork clients find their ideal talent within three days on average.

Adam Hofmann introduced talent platforms in nearly every company he worked for because platforms were an efficient way to augment a company’s resources. When he was VP of Marketing at Singularity University, he used Upwork to expand the team’s capacity while maintaining control over work quality and spend. He explained:

“Upwork helps our marketing team find new talent, run experiments, see if things are going to work, and then decide whether or not we want to scale them a lot faster than we could otherwise...[Giving the team] access to Upwork increases the speed we can work. I don’t have to be a bottleneck because I know the right systems are in place for them to go find somebody great, get them hired, and start working with them quickly.”

Winning a recession

Despite a looming recession, workforce trends suggest executives should be especially cautious about how they approach layoffs in 2023.

By adopting modern workforce models, businesses can preserve more of their core workforce and have the skills required to recover faster, and potentially stronger, from a recession. See the full strategy, research, and business examples in “Powering Out of the Curve: How Challenger Companies Win a Recession.”