Why Do Companies Pay for Outplacement Services?

Outplacement services are typically offered to people that are being let go. So, if the company can't afford the person anymore, why are they paying for additional services?

Calculating the real costs of terminating employees and outplacement services

Outplacement services are typically offered to people that are being let go from their company. This could be for any number of reasons - restructuring, acquisition, location shut-downs, etc. Offering outplacement services to the impacted employees can be a win-win for the employer and separating employees. So, why do some employers opt for these services and how do they decide who to offer them to?

What are Outplacement Services?

Outplacement services are offered by an external company that specializes in supporting people in their job search efforts. This can look like a lot of different services that are offered online, in person, or in a hybrid format (in person and online).

Like many other companies, the Contingent Plan does this through resume writing, career coaching, cover letter building, and LinkedIn profile updates. Basically, all of the services that someone needs to find a new job will benefit from in their efforts to get back out there.

Understanding the Real Costs of Letting People Go

The company may no longer be paying the employee's salary once they are let go. But, the company continues to bear a cost well after the person has separated from the organization. Many times this can include severance packages, unemployment insurance, and employee benefits (i.e. health, ESOP, and 401k). The basic internal HR cost of processing the separation of the employee averages about $68.71 (including the time spent on calculating final payout, exit interview, COBRA processing, and documenting separation).

In some cases, there can also be costs for external administration services needed to complete the separation. These costs can include things like lawyers, accountants, and benefits administration/technology services. None of which are inexpensive.

It can also result in the loss of other key employees that saw the headcount change and accelerated their efforts to secure a new job. This can translate into considerable financial losses in terms of replacing that key person and communication efforts to maintain customer relationships.

Calculating the ROI of Outplacement Services

Although all outplacement services come at a cost, they are not all the same. Outplacement services are intended to get the impacted employee back to work as soon as possible. This will help reduce the continued costs of the company. It will also help smooth over relations with customers and employees.

The real return on investment (ROI) of any good outplacement service is one that is proven to get people back to work. There are lots of options out there and they can have been priced quite high historically. But, there is a benefit in providing outplacement services to people that aren't senior executives.

For example, a person that made $50,000 annually prior to their separation in Minnesota. That person will typically be eligible for benefits for up to 26 weeks after their separation. These benefits will be about 50% of their average weekly wage during the base period up to a maximum.   That person may or may not decide to immediately move over their 401k and the company will have to continue paying the administration fees. Thus, these direct and indirect costs can add up quickly for employees that aren't at the top leadership echelons of the company.

The faster the person gets back to work, the more money that the company will save. The particular costs of what can be saved will depend on a lot of factors including the person's base salary and the unemployment costs at the time. Thus, employers should look at its costs in determining whether the costs for the outplacement services, when to offer them and how to offer them can all play a factor in maximizing the ROI of the benefit. This becomes even more true when the number of employees grows with larger changes in the overall headcount.

Impact of the COVID-19 Pandemic Uncertainty on this Calculation

The COVID-19 pandemic has played a huge role in changing who is impacted by potential restructuring and lay-offs. Some employers during this time have been forced to lay off or furlough people during the COVID-19 pandemic with the hopes of recalling those people when they can reopen. The reality is that this is not always possible and it is not clear if that will make sense when adding the headcount is possible. So, some employers are faced with a difficult decision of offering outplacement services to cut their costs and risk losing them or to simply bear the costs of unemployment and to still have to replace those people that have moved on.

No company wants to face this difficult decision and the right answer is whatever is best for your company. The costs of unemployment, particularly when these becomes multiple people or entire departments, can be enough to shutter the organization when cash flow is challenged. In other cases, it could be the risk of losing PPP forgiveness that makes the continued wages worthwhile. Whatever the decision is for your business, make sure that you think about all of the direct and indirect costs to make the decision based on the realities of your operation.

Want an affordable option for your impacted employees? Schedule a consultation today to get a free, customized quote for your outplacement needs today.