Capability risks rise with layoffs: What CIOs should know

Layoffs are, by nature, chaotic and disruptive forces that affect both people and the company they work for. While sympathies are usually with those affected by layoffs, those left behind are often left to clean up the mess and shoulder a greater burden than before the cuts.

Among the many potential consequences of workforce reductions is capability risk. Basically, that means the risk of losing staff with vital skills and talents needed to keep the business operating efficiently and at its best.

Companies may think they handle workforce reductions in a coordinated manner, but they are often decided and implemented quickly and chaotically. They try to cut the most expendable roles, but inevitably, someone important is cut. Even if the company tries to reverse course and rehire them, that person may not be available or willing to return.

Understanding capability risk

Capability risk is often among the most consequential yet least visible risks in a layoff. It arises when a reduction removes scarce skills, tacit institutional knowledge, critical relationships or sufficient capacity within interdependent teams, leaving the company unable to reliably execute its strategy afterward.

The effect rarely shows itself immediately. A layoff may achieve the short-term goal of payroll savings, but the other half of the equation includes damaging delivery, product quality, innovation, controls, resilience and retention.

So, a company may save money in the short term, but the long-term effects can completely negate those savings. And capability risk doesn't rear its head immediately. It can take weeks or months before realizing what's been lost.

In a layoff context, capability risk is not simply having fewer employees. It is the knowledge they take with them when they leave.

This can include the following:

• Critical expertise. Specialized engineering, sales, operations, legal, security, compliance or domain skills.
• Tacit knowledge. Undocumented know-how about systems, customers, decisions, exceptions and workarounds.
• Team capacity. Enough people to operate services, manage projects, review work and handle incidents without chronic overload.

The loss of critical skills, knowledge and institutional memory during staff reductions has obvious costs, such as loss of staff and morale. Yet, hidden costs go beyond head count reduction, says Stephen Murray, president and founder of GrowFast Advisory, an enterprise business consultancy.

"You're filling the roles with other individuals, but you have to pay for the whole recruiting process, so that is a hidden cost," he said. "Also, in productivity. If it's sales, there's a hidden cost in failed sales [and] shrinking sales with clients. If it's in operations, the hidden cost after they go through a big staff reduction affects quality, and it affects runtime. There are several impacts when you get these vacancies."

Primary risk areas for CIOs

CIOs face multiple risks stemming from layoffs, including the loss of technical expertise and specialized system knowledge. That's the direct and immediate loss. Also, legacy system maintenance can suffer if the last person who knew how the mainframe worked is laid off.

"The first concern is whether critical systems and processes still have enough coverage," said Pratik Mahajan, senior data analyst at JPMorgan Chase. "If too much knowledge sits with a small number of people, losing even one person can create a key person dependency."

But the big risk that isn't as obvious is known as institutional knowledge drain. This is the loss of knowledge that was never documented or written down. It was handed down person to person, rather than written in a documented form that survives the loss of the first person.

"The undocumented knowledge is one of the biggest capability risks, especially after layoffs," Mahajan said. "A lot of critical knowledge may never be formally written down, like why a system was designed in a certain way or how unusual exceptions are handled. So, the risk is that everything may continue working normally until an unusual event occurs. At that point, the organization discovers that the person who understood the context is no longer there."

Institutional knowledge drain affects all departments differently because they have distinct forms of knowledge and understanding.

For example, in an IT department, the immediate loss of a veteran network operator centers around pay, because their senior status earns them a higher paycheck. But that network operator worked for 20 years and has considerable knowledge of the network's quirks and intricacies that may not all be documented. In fact, they probably are not.

The answer is to prepare for potential future layoffs at a time when there is a more stable period in the company, according to Graham Glass, chief technology officer of Cypher Learning, an AI training firm.

"That needs to be part of the way that your department runs," Glass said. "Our head of engineering is constantly asking teams to document, record and create training courses."

Strategic mitigation approaches

Layoffs often come with no warning, so preparing to mitigate capability risk is often not an option. If there is ample time between the decision to reduce head count and the implementation of the workforce reduction, then there's time to prepare to mitigate knowledge loss.  

"The first thing I would focus on is identifying critical capabilities and key person dependencies, wherein one individual or a very small group holds knowledge that is essential to the system, process or controls," Mahajan said.

Second is excellent documentation and knowledge transfer, especially around exceptions, system dependency, decision logic and some escalation paths, Mahajan said.

Third, cross-training and backup coverage can ensure important responsibilities are not concentrated on one person. Finally, reassess the priorities after a workforce reduction, trying to maintain the exact same workload with fewer people who can actually increase capability risk.

"The mitigation starts with the planning a couple months beforehand," Glass said. "Take a look at where the organizational structure is today. What's it going to look like? What's your change management process to bridge that? If you put in the work, it never goes smooth, but should mitigate a lot of the lost knowledge and all that good stuff goes with it."

Smaller companies are often assumed to be more prone to hack-and-slash layoffs. In Murray's experience, the larger the company, the more likely it is to cut without prior thought. 

"The larger companies, with the bigger boards that need the money, need to show Wall Street that they're cutting costs," he said. "They just make a telephone call and tell HR to cut costs tomorrow. I had one company that said, 'Get X amount of people out of here in two weeks and be done.' But I've worked for other companies that said, 'Hey, you have two months to prepare and make the transition.'"

In his experience, bigger companies shoot from the hip when it comes to workforce reductions, often because they are publicly held and answer to shareholders about cost-cutting efforts.

Post-layoff recovery strategies 

The hammer has fallen, and the dust has settled. Now, it's time to dig into the workflows and systems, Mahajan said.

"This is an opportunity to say what is going to be efficient, so you get to rebuild it with new individuals, or rebuild it with technology," he said.

However, Mahajan does not advise bringing in contractors and consultants in the short term, until people are replaced.

"Those have never really done me any good except put a heavier cost on things, because they need to come in and spend their time doing an assessment of your organization, and you say, 'Fantastic, we already have that,'" he said.

In the end, the amount of time an outside consultant needs to thoroughly assess systems and recommend improvements will end up eating any savings from cutting head count, he said. 

Instead, Glass recommended a recovery strategy in which -- assuming institutional knowledge has been captured -- CIOs would set up a learning path for the new team to reabsorb it.

"Obviously, it's not going to be perfect, but at least they start off with a lot more knowledge than if they were just coming in cold and just relying on ad hoc conversations to get up to speed," he said.

Long-term resilience building 

For long-term resilience-building strategies, don't make the common mistake of writing information down in a Google Drive or SharePoint and then forgetting about it, Glass said.

"That usually just accumulates a bunch of dust because it's not easily electronically available. There's no easy way to merge it into an onboarding process when it's an isolated Google Doc," he said.  

He uses dynamic repositories, courses or mini-courses of institutional knowledge because they can be automated and incorporated into onboarding. They're dynamic, so people are much more likely to remember them.

Organizations must move beyond simply replacing people and start building redundancy into critical capabilities, Mahajan said. That means the following:

• Maintaining a clear view of which skills, systems, processes and decisions are business critical.
• Reducing key person dependencies through cross-training and succession planning.
• Continuously documenting procedures and the reasoning behind important decisions and exceptions.

"Organizations should maintain a capability and skills inventory, so they can see where expertise is being concentrated or updated," he said. "That becomes especially important as technology, AI and regulatory expectations change."

Because technology is now an integral part of culture, it's time to consider where agents can replace individuals, Murray said.

"Right now is the time to take a pause to understand strategically what's out there. Not the shiny new objects, but longer-term here in the next three years. What do we need to replace with that technology?" he said.

Andy Patrizio is a technology journalist with almost 30 years' experience covering Silicon Valley who has worked for a variety of publications on staff or as a freelancer, including Network World, InfoWorld, Business Insider, Ars Technica and InformationWeek. He is currently based in southern California.