Layoffs Should be Last Resort for Nonprofits

I hate sounding like a broken record but we are in tough economic times. Which makes me curious about human resources issues. When should you layoff employees? Can you do other things to avoid laying off employees? How do layoffs affect nonprofits? Larry Ladd of Grant Thornton offers some sage advice to nonprofits regarding layoffs. Bunnie


Layoffs Should Be Last Resort for Nonprofits

By Larry Ladd, Grant Thornton LLP

While layoffs seem to be the preferred solution to control costs in the traditional business sector, layoffs in the nonprofit sector tend to have a deep and long-term impact on the viability of the organization and the services it provides to members and constituents. At its basic core, nonprofits are dependent on a cadre of good people interacting with other people to meet their needs. Laying off people sends a negative message that people are not important in the equation, and could result in a ripple effect that further reduces income sources.

We are counseling nonprofits to use layoffs as a last resort and instead, completely reconsider any non-salary expenditure decisions. Start by instituting incentives for cost savings and cash conservation. For example, cut back on travel expenses and operational expenditures. This seems to have been embraced by many organizations. Just consider industry data that shows that attendance at trade show meetings is off by 1/3 over previous years.

If more cuts are required, institute salary freezes, leave vacant positions unfilled, make benefit cuts, or perhaps use furloughs so that the head count can be maintained. People would rather be working and drawing a salary, even a reduced one, than be unemployed. Tough decisions are better understood within your organization in a time of financial difficulty. Use objective criteria focusing on the best interests of the mission.

The one initiative we counsel against is across-the-board employee cuts, which will likely reduce the quality of every program or service. Particularly in tough times, your organization needs to maintain or enhance the quality of its most mission-critical or strategically critical programs. Keep in mind that across-the-board cuts are politically the most palatable, but strategically, the most damaging.

When they are made, most cost reductions have a tendency to bounce back when the budget starts growing again. The real challenge is to make permanent cuts, i.e., ones that reduce work tasks so that existing staff can handle the newly defined workload. For example, if five people handle a department’s work load and one person is let go, don’t ask the remaining four to do the same tasks the same way. Re-engineer the tasks to create efficiencies, or automate some tasks to reduce labor-intensive activities. In my experience, permanent cost reductions actually improve morale and allow for funding new programs or services when the economy gets better.

It may seem counter intuitive to suggest that eliminating an employee can improve morale, but in many cases, the first people to be let go aren’t terminated just to save money, but there are deeper issues involved. Usually, the first cuts are directed against employees who have demonstrated an ongoing lack of productivity or contributions to a team. When that person leaves, those left behind suddenly find that they are getting more done more quickly and efficiently.

While most nonprofits are feeling the pain of a down economy, nonprofits currently hit the hardest are those that are endowment dependent (museums, universities, etc.) and human services organizations (foundations, government programs, etc,). Capital giving, especially large donations by big givers, is significantly down.

I wish I could predict when nonprofits will see their financials improve, but funding and the economy are interdependent. When the stock market goes up, endowments go up. When GDP improves, the government can restore some funding.

No matter what happens with the economy, nonprofits need to remember that people make the difference.

Larry Ladd serves as a business advisor to Grant Thornton LLPs’ not-for-profit clients and provides his professional expertise to the firm’s not-for-profit practice. Before joining Grant Thornton, Mr. Ladd had served in academic administration for a number of leading colleges and universities. You can reach Mr. Ladd at: larry.ladd@gt.com