Layoff: A Four-Letter Word in Any Economy

March 7, Buffalo, NY
Steven C. Martin

Introduction

A couple of things happened to me in the past ten days that have had me thinking.  And my nightmares kicked in again.  Last week my wife and I bought a car.  Monday of this week Reuters released a story on mass layoffs that said, in part:

Companies announced101,731 layoffs in February, down 28 percent from January’s total of 142,208 — the highest number of planned job cuts ever reported for one month in the survey’s eight year history, the report said.
       February’s planned job cuts were nearly triple the 35,415 planned job cuts announced in February last year, the report said. Since the start of December 2000, job cuts have totaled 377,652 compared to 130,752 during the same three-month period a year ago.
       ‘The extraordinary three-month job cutting binge is hard evidence that a slowdown is occurring,’ said John Challenger, chief executive at Challenger, Gray & Christmas. “Even during the heavy 1990s corporate downsizing, we did not see monthly figures like this.

We were buying a used car while the U.S. automobile industry was laying off 57,656 people according to the Mass Layoff Statistics site of the Bureau of Labor Statistics. 

 These statistics are enough to give anyone nightmares but my car salesman nailed it for me.  The lot wasn’t very busy so we had plenty of time for idle relationship-building type conversation while my wife checked out the car.  Saturn won’t hire any salespeople with prior experience in car sales.  This car buying experience was certainly more pleasant than my last several.  I suppose we have to give Saturn credit for excellent training but, then again, this salesman had a lot more experience than that.  For six years before joining Saturn he was a top executive of a struggling company in Ohio.  He had been laid off two years ago when a Canadian company bought them out and cleaned house.  Before that he was a financial officer with a billion-dollar plus company that had imploded after 100 years and ultimately been bought out by a French company who had a mass layoff of several thousand people.  His BS, MBA, and CPA were now selling used cars.  For a severely under-employed person he put on a good game face.  Many have not been so lucky.  The hospitals and graveyards have plenty of residents who were laid off to never fully recover.

My temptation is to say that mass layoffs are stupid. 

Let me clarify that.  I think the management that brings about the mass layoffs (downsizing, in the vernacular) is not as intelligent as they think they are.  They had their heads in the sand when they over-staffed and they didn’t evaluate the alternatives when they pulled the trigger.  Blinders on going in and coming out…stupid.  You tell me.

There has been a lot of research on downsizing. Let’s see if companies who have used mass layoffs have met their goals of higher profits and improved corporate function. 

Goal: Higher Profits and Shareholder Value

 A 1991 survey by the Wyatt Company of 1,005 firms suggested that most restructuring efforts fall far short of the objectives originally established for them:[1]

·        Only forty-six percent of the companies said their cuts reduced expenses enough over time, in part because four times out of five managers ended up replacing some of the very people they had dismissed;

·        Fewer than one in three said profits increased as much as expected; and

·        Only twenty-one percent reported satisfactory improvements in shareholders' return on investment.

 Mitchell & Company, a consulting firm in Weston, Mass., examined what happened to the stock prices of sixteen companies in the Value Line database that wrote off ten percent or more of their net worth between 1982 and 1988.[2]  On the day that the announcement is made, stock prices generally increase, but then there usually begins a long, slow slide. Two years later ten of the sixteen stocks were trading below the market by seventeen to forty-eight percent and, worse, twelve were below comparable firms in their industries by five to forty-five percent.

A 1997 study by Cascio, Young and Morris[3] showed that downsizings had negligible impact on firm profitability relative to the size of the layoffs. Further, the research did not produce any evidence that downsizing firms were generally and significantly able to improve profits.

 Goal: Improved Corporate Function

The General Accounting Office conducted a survey and out of 416 companies that embraced downsizing, more than half indicated that they are now understaffed, 44% reported problems meeting deadlines, and 26% stated that business growth was impeded.[4]

Downsizing has a negative impact on employees' health.  A paper in The Lancet October 17, 1997 reports downsizing is a risk to the health of employees. Dr. Jussi Vahtera and colleagues from the Finnish Institute of Occupational Health, Turku, Finland, found that "Individuals who remain in work during a period of economic recession may suffer from an increase in ill health.  The extent to which employees' health was affected depended on the degree of downsizing. The rate of long-term sick leave (more than three days off work) was 1.9 to 6.9 times greater after major downsizing than after minor downsizing. Overall, long-term sick leave increased by 16 to 31 percent during this period of downsizing.”

One poll of 1,142 companies that recently downsized, conducted by the American Management Association, revealed that nearly half were "badly" or "not well" prepared for the dismantling, and had not anticipated the kinds of problems that developed subsequently. More than half reported that they had begun downsizing with no policies or programs--such as employee retraining or job redeployment--to minimize the negative effects of cutting back. Succumbing to the pressure to produce short-term results, many ignored the massive changes in organizational relationships that result from reorganization.  As one observer noted, "In the process, they misused and alienated many middle managers and lower-level employees, sold off solid businesses, shortchanged research and development, and muddled the modernization of their manufacturing floors.[6]

Luthans and Sommer report investigations[5] that downsizing is a decision that organizations need to consider carefully and not enter into lightly. The impact is organization-wide. To be noted, this organization (studied) suffered consequences in spite of its noted culture of concern and support for its members. The implication is that negative effects might be more pronounced in organizations that do not possess just a "family atmosphere." This study has shown potential detriments to employee morale; however, downsizing has a related potential impact that cannot be overlooked. Once an organization downsizes, it has crossed a line it can never go back. As anecdotal evidence has illustrated (e.g., IBM), there is a trust factor that is irreparably changed.

Summary

The bottom line on mass layoffs is that the results are mixed at best.  It’s like cutting off your left arm because it hurts.  If the diagnosis was gangrene, you might have even saved your life to go on to win the Nobel Prize.  On the other hand, the shock might kill you.  Wouldn’t it have been better to apply antiseptic to the arm and treat it prophylacticly first?  Yes, of course.  So treat your company the same way.  Take preventative action instead.

Preventing Layoffs

Here are twenty thoughts on how to prevent destructive layoffs in companies of all sizes.

1.      Do the right thing all the time.  This means making the tough decisions not to hire in the first place or replace less productive positions.  Use attrition to make the necessary cuts.  Make the tough decisions now rather than later.  It just gets more complicated with time.

2.      Hire well.  It has been difficult in recent years to find good people.  But sometimes it’s better to have a position vacant than to hire poorly…especially in management.  One bad manager can take down ten’s to thousand’s with them.

3.      Stay on a low fat diet.  Exercise and keep your company fit by continuous improvement.  Productivity is the intermediate measure of health and if it’s not always going up, you are becoming less competitive.

4.      Use your resources wisely.  I call this CEO or Cost-Effective Organization thinking.  Manage your financial, time, people, space, knowledge, energy, and material resources well.

5.      Read the tea leaves.  Use both the pessimistic and optimistic views of the economy to shape your business decisions.  Some of you companies are so large you have your own economists and we all have the Federal Reserve and others.  Listen to them (with a grain of salt) and test the party line against reality and the predictions.

6.      Partner.  Partnerships and joint ventures can allow you to leverage your core resources and push the variability to others or reduce it.

7.      Have everyone in the company on the team.  Use methods such as the Profit Improvement Process to give everyone some level of influence over and responsibility for profits.  It sure beats the adversarial approach.

8.      Stop being selfish.  Make decisions for the greater good of the corporation instead of the insular betterment of top management.  Your people just may be more important than your bonus.

9.      Beware the siren song of “across-the-board.”  You may find that your company has a 10% disadvantage in the market but a 10% across-the-board cut is guaranteed to take out muscle as well as fat.  Adjust your business unit by unit.

10.  Listen to the pessimists.  Those naysayers you are tempted to quash have something important to say.  Listen but then take positive action on that negative view.

11.  Prepare your contingency plans.  You are much better off to have a plan to review if something bad happens than to have to invent something in the heat of a crisis.

12.  Use overtime.  Covering peaks in business with overtime allows you to scale back without layoffs when things slow down.

13.  Manage your inventory.  If you have missed the economic tea leaves, your next indicator may very well be your inventory or backlog.  Anticipating a slow-down can mediate the impact.

14.  Don’t expect to placate stock analysts with a mass layoff.  There is unlikely to be a long-term positive impact on stock price just because you announce a cutback.  It may be a cop out.

15.  Invest in new products.  New products are the only prevention for premature obsolescence.  If you don’t develop internally, partner with those who do or buy new products.  You must know where your products are in their lifecycles and plan accordingly.

16.  Invest in new processes and technologies.  Keeping up with the Joneses is vital.  Just make sure you pick the right benchmarks to emulate.  Watch out for fads!  For at least some period of the 1990’s mass layoffs were a fad.

17.  Watch your expansion.  Expansion is fun but excitement can create a fog that hides the pitfalls of rapid growth.  This is especially true when capital dries up in the middle of a growth spurt.  Build revenues based on contribution margin and profitability not the top line.

18.  Check your egos at the door.  Be a team player.  Use your drive for success in a positive way rather than just for self-aggrandizement.  The failure to look out for others has taken many entrepreneurs and managers down along with their employees.

19.  Stop shuffling the deck chairs on the Titanic.  If a business unit isn’t achieving its goals, it is unlikely to get better if you just shuffle the staff around.  Find the fundamental problems and fix them.  Start with the top people.  They set the tone.

20.  If you have to make layoffs, do them the right way.  Communicate, communicate, communicate, and get everyone involved.  Have a clear and fair policy on what people are going to get.  Take care of both the people being laid off and the survivors.  Everyone will have pain and, hopefully, healing to experience.  Help them.  If you’ve run your company well to this point, they should understand that you have done everything you could to avoid this outcome.  This will help you avoid future, bigger layoffs.

It’s not easy to be a manager or entrepreneur today.  It never has been and it takes more than twenty tips to succeed.  We always carry a responsibility for the people who work for us.  This is our highest calling.

See a personal view of layoffs for some insights into my point of view...decades in the making.