Friday, 11 September 2009

The Cost of Redundancy

"The Lawyer" has a report today on Evershed's latest round of redundancies (see here for the article). Apparently they are looking to shed 22 people from their Real Estate practise offices.

Regular readers of this blog (and I'm delighted to know that there are some) will know that I have a pet topic of "knee-jerk" management and short-term thinking. I think I've stated before that law firm partners tend to like redundancy as a reaction to poor results or difficult times because it's easy to understand and a visible action on behalf of the firm (the "look - we're doing something" school of management).

It was very interesting, therefore, to read a report from the Chartered Institute of Personnel & Development (CIPD) titled "False Economy? The cost to employers of redundancy". It it an good, if technical, read and includes the formula: CR = nR + xH + xT + ny(H+T) + Wz(P-n) to find the true cost of redundancy by examining such variables as the number of people to be made redundancy, the redundancy payments, number of people subsequently hired, the hiring cost etc etc.

The key point for law firms is the cost of re-hiring people. This article reports a survey which found that it was cheaper to keep a lawyer inactive for 15 months than to fire and rehire. This will obviously depend on the level (and so cost) of the lawyer in question - but does not take into account the increased cost (through ineffectiveness) of of training a lawyer in the way the firm works, nor does it account for issues of staff morale.

The CIPD article ends with a comment that more firms (by which it means commercial firms rather than law firms) have been using methods other than redundancy such as reduced working, flexible working allowing for natural wastage and recruitment freezes to cut expenditure. They may have been doing this partly because they understand the cost of redundancy - but also because they have fewer "spare" staff.

I suspect that most law firms have now rid themselves of any spare staff who may have been hanging around. Care must now be taken to ensure that a proper analysis of all the costs is done to ensure that firms do not go through the damaging exercise of redundancy only to find that, within a short period (say 15 months), they need to rehire staff.

There is a danger that partners find that, rather than saving money, redundancy increases costs this year and re-hiring increases costs next year. There is another possibility - that by having a comparatively savage redundancy policy, re-hiring costs are greatly increased in subsequent years - when the good times return (as they inevitably will) staff jump ship to an employer who demonstrated staff-care.

"Our staff are our greatest asset"...

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