The Reason Why the Financial Sector Deals with Layoffs - Essay Example

Global recession leads to mass layoffs in every sector and this has repercussions on the society, on the industry, on the nation, the individuals and their families. More people become unemployed and hence look for jobs, making it a difficult job market to deal with. Hence, before any sector considers mass layoffs, they should appraise themselves with its consequences. The IT and the banking sector in the UK have been the worst hit with the recession. However, any sector or organization must carefully analyze the impact of layoffs before taking action. Sectors such as financial services, property, construction and automotive, face serious contraction during downturn and redundancies also result as demand reduces (Walters 2009). Other sectors such as food and drink, utility and energy, are less badly affected by the downturn. Even within the sectors, the impact of recession can be mixed. The impact on the financial sector has been dramatic and here the finance and the banking sector layoffs are being discussed. The overall business environment changes due to recession. This leads to mass scale layoffs and redundancies. As businesses contract due to reduced demand for goods and services, layoffs become unavoidable, according to the organizations. Britain has experienced unprecedented unemployment on a scale not seen in the labour market for almost three decades. In the first three months of 2009, almost 250,000 people lost their jobs with unemployment rising to about 2.1 million in March 2009 (Walters, 2009). The RBS (2010) also finds that the UK economy shrank by 6.25% in the recent downturn but the reduction in employment has been modest compared to previous recessions. The simple reason could be that firms have yet to react to the deteriorated condition and the pace of layoffs may accelerate in the months to come. There has been a slowdown in the layoffs but the RBS Group contends that further dramatic weakening is imminent. They expect recovery to be sluggish and this situation may force firms to make further substantial layoffs. It may even take them longer than usual to hire additional workers. Higher interest rates could further exert pressure on the firms to make further layoffs to cut costs and increase margins. Redundancy is the most evocative and fear inducing form of organizational change for many workers (Worrall, Campbell & Cooper, 1999). Redundancy, within a year leaves people disenchanted and demoralized. Within a year there are thousands affected by restructuring. The authors also found that large firms employing more than 500 people were more at risk of being affected by restructuring. The effects of restructuring and layoffs, according to them differ across sectors because the public sector experiences the highest job losses. During such times emotions synonymous with grieving such as shock, anger, denial, guilt and fear (Brockner et al., 1986; Kozlowski et al., 1993 cited by Worrall et al). This leads to decreased motivation, decreased trust in management and decreased levels of organization commitment even when the employees switch job or sector. Layoffs are not a pleasant experience for anyone – from the HR department to the individual concerned (PR Newswire, 2009). Being laid off can produce psychological, economic, and social distress (Grunberg, Moore & Greenberg, 2009). Understanding the reaction of all employees is important before layoffs and more so of the front line managers. This is because the front line managers are in close touch with the workforce and hence in a better position to understand the perceptions and morale of the employees. If managers are sensitive towards the workforce and their reactions, they can help the survivors to settle down. The organization may also be able to mitigate the distress that the workforce experiences. The managers who implement layoff spend sleepless nights compared to those who are not directly involved in layoffs. Managers that had issued warn notices of layoffs experienced higher levels of job stress, lower levels of job security, higher levels of depression and emotional exhaustion. The managers find justification in their actions as they are taking such stern actions for the survival of the company. This, to some extent, helps them handle their own emotional status. The workers that are laid off during downturn suffer with lower wages for many years than those who are not laid off during recession (Bauman, 2009). If workers are laid off during favourable times, the losses do not linger for years, but are short-lived. This pattern has been observed regardless of the size of the firm or the gender of the worker. It also becomes difficult for workers laid off during downturn to get a job within the same sector. If they have to switch sectors, the losses are even more. This study was held at the University of Connecticut but the same situation prevails in all countries, and hence applicable to the UK also. The most affected are the temporary staff and the external consultants. The finance directors contend that restructuring has to take place during such times and the expertise and experience of the managers plays a vital role in leading these companies out if the bleak situation (Anonymous, 2008). The government provides support package for banks including interest rate cut. The banking industry has undergone unprecedented disaster and a steep collapse in business and consumer confidence (Lambert, 2010). As a result all businesses have been cutting on their investments in stock and working capital. Rising unemployment is one of the greatest fears that takes over the workers. Output falls and so does the GDP. During the last recession in the UK employment has continued to decline but organizations have not laid off full-time employees. Most people that were laid off have managed to get back to work quickly. The number of people claiming Incapacity and Lone Parents benefit has not increased much over the past year. The number of part-time workers rises during recession. It helps the global, national and the organizational business environment. Following the financial crisis jobs in the financial services sector around the world has been severely affected, with announced layoffs reaching 325,000 between August 2007 and February 2009 (ILO, 2009). Such figures almost always understate the issue because many job cuts are not announced. Moreover, these figures do not include layoffs from independent mortgage brokers, the independent contractors or the numerous small financial firms. IT support is also likely to be severely impacted as firms scale down their operations due to reduced demand. As many as 50,000 IT professionals in the banking were expected to be laid off by the end of 2009. Europe Investment banks are expected to drop their IT investments by 9 percent while Europe is expected to reduce it by 15 percent. Moreover, layoffs, and reduction in bonuses in the financial sector would have a knock-on effect on employment in other sectors. Corporate and individual bankruptcies are going to create further problems for the financial sector and its employment. However, the layoffs normally affect the back-office operations. The firms have reduced the labour costs this recession much in a different way than the past recessions. During the current recession, the employers have been reluctant to lay off workers than in the past (Lambert, 2010). In the cost cutting measures adopted, layoff was minimal even though this raises the per unit cost of production. They minimize loss of permanent staff by freezing recruitment. Moreover, layoffs take place among the less skilled workers and hence the hiring and laying off the educated workforce is more expensive. Apprentices are the cheapest to lay, contends Walters, as they are inexperienced, the least flexible and harder to utilize in the different roles that contracting business demands. Hence they are always under fear that they would be the first to be laid-off. Wages in the current recession have been more flexible but may freeze takes place either through lesser working hours or job loss. It is advisable to reduce the working hours along with reduced wages than to layoff skilled employees as they are harder to recruit and layoff. Flexible work and pay are accepted by both employees and the workers. It has been found that in the banking sector and particularly, HSBC did not layoff as many employees in the last recession than in the past. This was because the bank realized that during the last credit crunch, HSBC, then Midland Bank, had encouraged the senior employees over 49 years to take early retirement (PR Newswire, 2009). Many availed of this offer but along with them, they took valuable tacit knowledge, experience, and skill to their competitors, which jeopardized the bank/s competitive position. Thus, during credit crunch, talent should never be compromised with. When the situation started to recover, HSBC was not in a position to take advantage of the market position. During the last recession Barclays too reduced the headcount although they hoped to avoid complete redundancies. The Swiss bank has also responded to their heavy loss by reduced working hours, job cuts and layoffs. Lloyds Banking Group is eliminating almost 40% of its IT workforce and this mostly includes the temporary workers and the back-office staff. To limit the layoffs, both Lloyds and RBS are terminating contracts with their contractors but despite this, almost 4,000 IT staff is being laid off (ContractorUK, 2010). Credit Suisse is reducing its headcount by 5300 worldwide which means about 650 posts in London (ILO, 2009). Nomura Holdings that took over Lehman Brothers will lay off 1000 employees which is one-fifth of its local staff strength. Ulster Bank is going to lay off about 750 people on a voluntary basis and they are closing down their investment and mortgage business (BBC News, 2009). No branch closures are taking place but they are trying to adapt to the prevailing market conditions while strengthening the organization. They are working with the trade unions and staff representatives to find the best way forward. During the last recession, HSBC once again cut 3,400 jobs but they claim that these jobs are mostly in the back-office operations which would affect credit card and collections (Kollewe, 2009). Restructuring of their brand network results in such layoffs, they justify. They also emphasize that their retail customer service would not be affected in any way. Nevertheless, they faced criticism from Unite, the largest trade union in the UK. Cutting jobs amidst recession sends wrong signals to the marketplace and to the customers. Human resources are now the most valued assets and moreover, at HSBC, the staff has contributed £3bn half year profits and delivered market strength in a challenging business environment. They continue to justify that this is merely a restructuring of their operations. Besides, HSBC has a good track record of redeployment. The entire financial and banking sector however needs to be cognizant of the impact on the workers. In the UK as a whole, major job losses have been recorded in investment banking and other financial institutions that were trading in short-term financial instruments against long-term securities and loans. Then investment banking units of HSBC and Credit Suisse cut 500 and 650 jobs respectively while Germany also laid off considerable number of employees (Gennard, 2009). The banking sector in general has low level of unionization at both the company and the sector level. The influence of trade unions is minimal and flexible working as in the manufacturing sector is difficult in the financial sector, thereby avoiding redundancies becomes difficult. Banks have already reacted by attempting to reduce costs and the employees have experienced decline in their working conditions. Banks have started offshoring and subcontracting work. The trade unions feel that employers in the banking sector you sing the current financial crisis as a cover to lay off employees, which in any case would have taken place later, had the crisis not taken place. It is just that it has occurred sooner than planned. Countries such as France and Germany have specific labour market policy which centres on working shorter hours to protect employment. However, UK has been severely hit by the crisis. As the UK does not have specific labour market policy like France, Germany, Belgium or Holland, chances of redundancies, specially among the temporary workers, are high in the UK. The organizational climate is besieged with fear, uncertainties and even anger frays the emotional bonds which link employees to their supervisors (Grunberg, Moore & Greenberg, 2009). Layoffs have to be planned in advance because restructuring means firms would have to find newer means of recreating their economic activities. Insolvency rates reduce during recession probably because of government support and initiatives. When organizations layoff during recession, they are faced with low morale staff and loss of talent when the situation recovers. They find themselves in a situation where they have met their objective of reducing costs but the performance too declines (PR Newswire, 2009). They have to address the “survivor” issues otherwise they risk their own survival in the long term. Downsizing also leads to fall in the employee morale that survive the credit crunch. They suffer from the “survivor syndrome” (PR Newswire, 2009). Once the relief that they have not lost their jobs, has settled down, the realization dawns that they have been able to survive the job at the expense of their colleagues, many of who may have been close friends. This gives rise to feelings of guilt and if this guilt turns inwards it could manifest as anger, directed at the employer who they see as the architect of the situation. The workers that “survive” the layoffs also suffer with anxiety, insecurity, low morale, and stress as they witness the layoffs of co-workers (Grunberg, Moore & Greenberg, 2009). They also suffer damage to their physical and psychological well-being. They may even compromise with loyalty to the extent that when the situation improves, they would seek employment elsewhere (PR Newswire, 2009). The “survivors” are too deeply affected as they tend to become indecisive, they are averse to taking risks, and they are not willing to exert extra effort than necessary (Thornhill et al., 1997; Smith and Vickers, 1994, cited by Worrall et al.,). People are more concerned with their development than the organization (Reilly et al., cited by Worrall). Layoffs lead to decreased satisfaction level amongst the survivors, and it could reduce organizational commitment, morale and motivation. Besieged by fear, employees try to escape fear and as a result put in extra hours of work (Handy, 1998 cited by Worrall et al.,). A variation of lay-off is reduced working hours with pay cuts. Before considering layoffs or flexible work schedules with lower pay structure, the financial sector should note that flexible labour policy could result in lower level of loyalty and commitment by the employees (Hiltrop, Jenster & Martens, 2001). This is because they have the option to switch jobs, the labour mobility is high and this could lead to declining customer satisfaction levels. Employees too suffer with a flexible labour policy as they are denied the fringe benefits and they face employment insecurity. If the banks outsource the back-office jobs, the employees, not being part of any union, find their bargaining power has declined (Allen, Brosnan, Horwitz & Walsh, 2001). They may also become ineligible for health insurance and other benefits as they are unable to accumulate the minimum length of service (Bronstein, 1999). Before considering layoff in the UK, the employers must also be aware of the law that protects the rights of the employees. Employers can legally layoff an employee only if there is a contractual agreement to do so (Bradley, 2007). If there is no contractual agreement, layoff would amount to breach of contract and the employee has the right to claim constructive dismissal. The employee may be entitled to compensation for unfair dismissal and a redundancy payment. If the layoff lasts for four or more consecutive weeks, the employee has a right to claim redundancy payment after service notice as required by law. If the employee has been in more than two years of service, he/she has the right to redundancy payments. According to the Royal Bank of Scotland ( RBS, 2010), firms that have unrealistic expectations of recovery after the downturn, or expect to benefit from the weaker exchange rate or low interest rates to support profit, may have to lay off employees in larger numbers as none of these factors are likely to provide long-term support to members. Further job cuts could pose threats of sustainability of the wider recovery. The financial sector lays off staff primarily to reduce costs but redeployment is difficult. Moreover, most banks claim that they are laying off IT staff. Lloyds is laying off staff because it is closing down it personal loan centres (Oates, 2010). It is expected to lay of hundreds more as it merged with HBOS. Bank of Scotland IT staff is expecting major job cuts and many have already left even as they expect news of job cuts. Barclays is laying off more than 400 IT staff as their “roles and responsibilities” are unclear (Oates, 2009). Such layoffs suggest that IT jobs are being outsourced to developing countries where labour is cheap. Lloyds and HBOS both have been in favour of outsourcing for a long time. When Barclays offshored part of its IT department about 1800 staff had been laid off. The contractors too were forced to accept ten percent salary cut. Most banks justify their actions to be an exercise to restructure the organization with the aim to integrate and consolidate teams, to reduce management layers and bureaucracy, and to improve performance. Moreover, they justify the laying off of the IT staff as they have identified some aspects of their technology operations where the organization structure impedes performance (Oates, 2009). The roles and responsibilities of the staff are also unclear. At some places they found roles are obsolete or duplicated. Hence restructuring helps them identify the redundant posts and layoff staff. However, they are trying to take measures to mitigate redundancies. They have hence started voluntary redundancy registers. They work with the individuals affected and offer then individual support to help tackle the situation. While the banks laying off the IT staff, according to a Forrester Report global IT spending is expected to rise by 7.8 percent in 2010 (Morgan, 2010). The French are however, better placed to handle the crisis than their UK counterparts. The French banking system has been recruiting massively in 2009 (Downie, 2009). While the investment banking division of most French banks has also been laying off people as in other countries, as a whole, the French banking system is expected to hire some 20,000 new employees in their retail banking operations. This is in addition to 25,000 hired last year. This is a strange anomaly and this has occurred because of the age pyramid in the banking system. Approximately 40 percent of all employees are expected to retire over the next three years. The French banks are very cautious when it comes to lending money and how they limit their risks. They spread their investments much more widely than the banks in other countries. The investment banking and dealer-broker activity is limited and their focus is on retail banking unlike other countries in Europe and the US. This calls for a stable workforce and hence the justification for recruitments in the overall banking system. This policy is also provided them with a shield and hence they were not as badly affected with the current recession. Moreover consumerism in France is half of the UK which means personal loans are not as sought after here as in the UK. They are also conservative in the use of credit cards. Thus the reason why the financial sector deals with layoffs is debatable. The financial sector is one of the worst hit by the current recession. Although, this has occurred globally, the impact on the UK is the largest because of their liberal policies in granting loans. France is much more conservative and cautious in extending loans. Most banks in the UK are claiming to shut down or trim their investment banking division, which justifies the laying off of the IT staff. They are in turn outsourcing or contracting out work. In fact the trade unions debate that banks are using the crisis as a cover to lay off, which they would have done anyway. Thus, banks need to weigh the labour situation and the agreements and contracts properly before laying off. Moreover, those that are laid off suffer from earning losses much more than others who are not laid off. When people are laid off, the economy of the country also is affected as the purchasing power of people is affected. This affects the entire retain sector and consequently the economy. Then, those that are not laid off suffer in other ways. They either carry guilt feeling that they have their jobs at the cost of their colleagues. It also gives rise to feelings of insecurity and despair. The organization too suffers in terms of reputation, well being and growth. Moreover the legislation in the UK does not support shorter working hours which can help avoid layoffs and redundancies. Hence, before laying off staff, the financial sector should consider the impact on the individual, on the staff that are not laid, on the organization as a whole and on the nation as well. 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