At the Margins

How to rightsize your workforce and avoid layoffs

by John Johnston, CPA, MHA

In my last post, I discussed Cleveland Clinic’s tactical approach to labor cost reductions and how hospitals should set their future labor targets. But once those targets are set, how do you make sure your hospital reaches them in a timely manner?

Other than layoffs, there are a few strategies that are frequently deployed to reduce the workforce to the extent most hospitals need.

The first is attrition: as employees leave the organization, make adjustments to workflow and operational processes so that you don’t have to backfill the open positions. Hospital attrition is typically around 15% annually, so it is a slow and steady approach to either holding labor costs in check or reducing costs marginally over time.

The second strategy is to offer early retirement packages to employees. Cleveland Clinic announced in January that 700 of its employees accepted early retirement.

Early retirement programs have many advantages, but also carry limitations in how they are implemented. The departure of long-tenured employees opens the door to replace their positions with less expensive staff, and, in the same vein as the attrition process, some vacated positions can be eliminated altogether. But these programs can create challenges. For example, the loss of a large number of staff in one department could compromise quality for a period of time. In addition, long-tenured employees are often loyal, committed, hardworking employees who lead by example, so losing too many of these employees could have implications on your organization’s culture.

Why current labor costs prevent sustainability

The Workforce Efficiency team surveyed 150 executives about their workforce challenges and found that many organizations still struggle with retroactive staffing, outdated budgeting methods, and disjointed strategic planning.


What about Lean Six Sigma?

I often get questions from clients about whether Lean Six Sigma approaches can improve workforce efficiency and decrease labor costs without layoffs. Lean Six Sigma is a valuable methodology for improving efficiency, and many of our projects incorporate this approach. 

However, while it is designed to improve processes, the model is not designed to reduce workforce hours. So I typically advise our clients to look at Lean methodologies not so much as mechanisms to drive your labor reduction efforts, but as tools to sustain the efficiencies you gain from the reduction.

Why I have to mention layoffs

As much as I hate to bring it up, I can’t write about workforce reductions without discussing layoffs, or reductions in force. The unfortunate reality is that some hospitals will need to make these kinds of cuts to achieve cost reduction goals.

I always advise to look first at attrition and early retirement options, but ultimately some hospitals will need to implement layoffs because attrition and early retirement initiatives cannot make an impact quickly enough.

If—and only if—you’re one of those hospitals, we recommend making all anticipated reductions at one time. Think of it like ripping off a bandage: faster is less painful. Executing layoffs in phases or over a longer period of time creates an environment that can adversely affect management, staff, your physicians, and even your patients.

You’ll also have to determine which departments to target and prepare in advance for how they’ll function in the aftermath of a termination event: the number of staff will change overnight, but the workload will not.

Employees who remain will undergo adjustments. Managers will need help shifting schedules and workloads. And failing to address these items risks having to bring workers back. You will have undergone a negative layoff process without ever achieving the savings necessary to gain financial sustainability.

Easing your way into it

There’s nothing easy about reducing your workforce. (Even writing this post wasn't easy!) But it’s necessary—my team and I have these difficult conversations regularly with organizations across the country. The sooner you begin to address your cost reduction needs and your target workforce budget, the more options you have for attaining the right workforce in both size and type.

If you're unsure where your hospital stands with having the right-sized workforce, connect with us and I can provide more detail on an approach that has proven successful for other organizations.

Finance Staff Engagement

Learn how finance employee engagement levels compare with the overall health care workforce and understand the primary drivers of engagement. Read the white paper.

Interested in membership?

Learn more about the Financial Leadership Council and how we can help your organization. Contact us.