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Job cuts seem to be many companies' way to deal with low oil and gas prices. But is this the best way to balance the budget?

Layoffs: Are they really the answer to your financial woes?

The energy industry has found itself in a time of financial hardship as oil prices have drastically dropped since the end of 2014. In order to avoid filing bankruptcy, leadership has taken a reactive step to the situation. This style of management speaks to leadership’s strategy, or lack thereof.

The oil and gas industry is an industry with a cyclical nature. Commodity prices have dropped by 33 percent four times in the last 40 years.  In these instances the industry has reacted to falling prices by worker layoffs each time, resulting in over 100,000 fewer jobs in oil and gas since 2014, according to Reuters. By now it would be expected that management expects downturns and has a plan for these cases.

Opportunities and Alternatives

Rigzone recently posted an article explaining opportunities and alternatives during times of future downturns. A couple of suggestions included a focus on efficiency. Instead of cutting back on head-count, finding other operating costs that can be cut will be more efficient long-term–and still viable during profitable periods. Technology, for example, plays an integral role in “doing more with less.” Mobile solutions and more efficient processes help companies figure out how to cut dollars out of their bottom line without cutting jobs.

“They should be looking at ways to streamline, simplify and automate operations such as leveraging new mobile technologies to cut their operating costs,” said Paula Waggoner-Aguilar, who has more than 20 years of experience in the energy industry as president of The Energy CFO, a firm specializing in financial leadership in the energy industry. “One small change in your operating costs can compound over time. When you [reduce headcount], it’s typically a one-time cut, whereas trimming operating expenses is something you can do over and over.”

Some employees may be willing to work fewer hours for a lower pay during times of hardship, guaranteeing them income but sill saving on some human capital costs.

“Most employees understand the need for that because they get to keep their jobs,” said Graves & Co. in a recent USA today article. “They go along with it because at this point in the energy industry where else would they go?”

Another option might include employee loans to other sectors or companies down the value chain, or company subsidiaries may allow both companies to benefit from an exchange without the necessity of hiring or firing in either company.  Of course these options are much more viable when there is a pre-established plan in place before the downturn, and that plan is written into employee contracts.

Expense of Layoffs

Layoffs are more expensive than initial calculations project. Employees often receive severance packages and cash out unused vacation time, forcing managers to allocate time to transitioning employees out of their positions and reassigning tasks to other employees. But what hurts the most is the loss of great employees. Later, when laid-off employees are called to come back, they may not be motivated to return to a company that abandoned them. Now the company must pay training and hiring costs for new employees, which can be particularly expensive and time consuming in an industry that relies on training that is both technical and specific to the industry. After big layoffs potential employees may look to other brands before a company known for cutting back on its workforce as they look for job security as a part of the employment package.

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