The costs of redundancy

Students should be familiar with the concept of redundancies - which is defined as a reduced need in demand for employees by a firm. However, there has been little data available about the cost of redundancies - until now…

Redundancies arise in several situations, including:

- disposal of part of a business (e.g. shop closures)
- relocation of a business
- merging of business functions and units following a takeover (as the acquiring business tries to meet its target for cost saving synergies)
- the closure of a brand, product line of operating unit
- the introduction of new methods of work (e.g. automation) that reduces the number of employees needed
- rationalisation of the organisation structure of a business (e.g. delayering)

Making redundancies enables a business to achieve cost savings. Staff are almost always a significant part of operating costs. However, the process of redundancy imposes an extra, one-off cost on business, and the scale is pretty significant. Statistics obtained under Freedom of Information show that UK redundancy payments totalled £4.4bn in 2010. The average redundancy payout was £9,362 per person in the year to March 2011, with businesses cutting 470,000 jobs, a fall of 10,000 from the previous year. A good statistic for students to remember, and perhaps use, when evaluating the costs and benefits of retrenchment, delayering etc.