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Editorials
We encourage our readers
to submit relevant articles of interest to be published
on this web site. Students, members, and companies are
invited to take advantage of this opportunity! Please send
your editorial to: Dick Forrest, CPIM dforrest@charter.net
Ira Smolowitz, Ph.D. Professor of Finance and
Dean, Bureau of Business Research and Program Development
at the American International College, Springfield, MA.
Some of Ira's past articles of interest:
Corporate Downsizing: A Counter Productive Reflex
By Ira Smolowitz, Ph.D.
If you find a good solution and become attached to it, the solution may become your next problem. (Robert Anthony)1
The above quote, it seems to me, well describes my concerns with corporate downsizing. Downsizing is a counter – productive solution for the following reasons:
a) Corporate knowledge resides in an employee’s head, file cabinet, computer disk. This knowledge walks out the door with the downsized employee. This scenario is particularly counter – productive in an information based economy.
b) A downsized employee represents a forfeiture of corporate investment in associated employee training and knowledge.
c) Downsizing leads to the break-up of efficient, well-run employee teams.
d) Downsizing leads to demoralization of the surviving employees.
e) Downsizing hinders knowledge sharing. If you are the repository of a particular knowledge base you lower the odds of being downsized by remaining the only source of this knowledge vs – sharing your knowledge with your colleagues.
f) Since Wall Street dislikes uncertainty, a positive sales forecast is not as certain as control of reduced salary costs associated with downsizing. As a consequence – downsizing may lead to an increase in the price of the corporation’s stock. This in turn serves to enrich executives (stock options). The symbolism of executive wealth enhancement at the expense of downsized employees has to be particularly demoralizing.
g) A demoralized, disgruntled employee is not going to go the extra mile to close a sale with potential customer.
h) Downsizing also brings in its wake the following not-so-obvious problems:
1) While those who survive the corporate ax may find career opportunities, they may also face potential problems. First is the issue of money. Even though they may receive fancy new titles, some people promoted during these tough times may now receive fatter paychecks. “It’s very awkward for companies to hand out raises after they’ve just canned people or handed out pay cuts (Bill Coleman, Vice President for compensation at salary.com in Wellesley, Mass. which tracks pay).
2) Even more unsettling for some promoted workers are the reactions of others. “If the person you’re replacing was well-liked and seen as more experienced, you’re going to have a huge challenge on your hand,” said Emory Mulling, chairman of the Mulling Companies, an outplacement firm in Atlanta. “People won’t feel like you deserve the job.”
3) Perhaps the biggest problem for layoff survivors who are promoted is that many do not receive the training or resources needed to succeed in their new positions. After all, the people most equipped to train them, their predecessors, are gone. 2
What are the alternatives to downsizing?
To me, they include:
a) Placing some of your employees in the customer’s factory to observe how the customer is utilizing your product and to generate creative, lucrative, feed-bank.
b) Demonstrating to employees that the corporation is experiencing a true crisis, however, no downsizing will occur. Instead of reducing labor costs by 20 percent via associated downsizing, all employees will work 5 days/week and be paid for 4 days of employment. When the economy recovers wages owed will gradually be returned to the employees. If the CEO comes under the same mandate, isn’t this an enlightened beneficial way to handle an economic downturn?
c) Many corporations have reacted to the economic downturn by cutting work forces, trimming budgets, reducing travel and eliminating marginal operations. That is to be expected. But while businesses wait for the economy to improve, they will lose out if they focus only on how to survive. Companies that are truly adept look beyond hard times and follow a course to outmaneuver rivals and emerge from the downturn with a bigger market share or greater competitive advantage. Some introduce new products, make a key acquisition or start a business. Eastman Kodak and Sanyo Electric, for example, have announced plans to invest $350m to create a new type of flat-panel screen display for use in electronic devices. Others may take less capitally intensive steps to capture options in future growth. Examples include establishing strategic partnerships with smaller firms, continuing research and development and brand investing. Think of these dual and compatible strategies as Job 1 and Job 2. Almost all companies roll up their sleeves and attend to Job 1: preserving value. Customers have less money to spend, so the chances of increasing revenues are slim. The only way to survive is to cut costs. This is fair enough for the near term. The smart and the brave, however, focus on Job 2, the opportunity that the downturn offers to take market share from rivals. 3
d) Happy employees make for more profitable companies. Now there seems to be more data to back it up.
Watson Wyatt Worldwide, the benefits consulting firm, says it has evidence to support the idea that improvements in human-capital practices (in which it includes both compensation and traditional human-resources concerns such as employee recruiting and retention) can boost a company’s financial performance. What’s more, after comparing the human-capital practices and financial results of 51 companies for 1999 and 2001, the consultants claim that the practices are a leading, rather than a lagging, indicator of financial performance.
If a company makes a “significant improvement” in 16 pay and benefits practices, for instance, its market value should jump 16.5 percent, according to the study. Practices yielding the biggest gains included linking pay to performance and using the lure of stellar health benefits as a recruiting tool.
Brian Becker, a professor at the State University of New York and Buffalo’s School of Management, says the Wyatt findings confirm similar discoveries he and colleague Mark Huselid of Rutgers University made in the 1990s. In five surveys that polled a total of 3,000 companies between 1992 and 1997, the research team found that significant jumps in an index of human-capital improvements tend to lift shareholder value 20 percent.
Such findings may cause finance executives to pause before they opt for cutbacks in the current downturn. “If human-capital practices drive financial results, then it behooves you to make the investment even in a down market,” argues Bruce Pfau, a Watson Wyatt consultant and author of the study. And rash reductions in benefits packages or pay-for-performance incentives made in response to the recession may have unintended financial consequences, says Becker. 4
Given the above findings one can better appreciate the following concerning two prominent corporations:
When Entegrity Solutions Corp. went into cost-cutting mode recently, it decided against the slash-and-burn staff reductions that marked the demise of many other young high-tech companies. Instead, the San Jose, Calif., software company took a route that has become increasingly common among American employers, particularly since Sept. 11: avoiding layoffs, or at least minimizing them, with cost-saving alternatives, including salary and benefits cuts, job-sharing and leaves of absence, and deferred or eliminated bonuses and salary increases.
Entegrity was able to reduce its layoffs – although it won’t say by how much – by persuading employees to agree to an across-the-board 20 percent pay cut. It eliminated or deferred bonus programs and increased its remaining employees’ stake in the company with stock options. “People are our capital. You have to try to preserve that as much as you can,” said Bob Howells, Entegrity’s chief financial officer. ……..Although no one celebrated a pay cut, some employees accept it as preferable to being laid off – or worse, seeing the company fold.
Intel Corp. closed a manufacturing facility in Puerto Rico this year, and had as a goal to reduce its work force by 5,000 employees by the end of the year. Instead of laying off valued employees, the company has a so-called redeployment program in which workers are given two to four months, with full salary and benefits, to look for other work inside Intel or with another company.... 5
To reinforce how pervasive downsizing has become consider the following:
Poof! You don’t exist. The newest way to fire employees without a trace is with $500,000 software that does it all, except escort you off the premises, but that too, can be arranged. At the press of a key, the software dumps you with a memo, closes your payroll account at the bank, cancels your credit cards, shuts down your e-mail, eliminates your parking privileges and locks down your telephone extension and cell phone numbers. Your name is ripped off any password or company account you ever used, including FedEx or even a deli account. “We cover the entire life cycle of an employer," said Sharon Tolpin, a spokesperson for Business Layers Inc., whose new “fire-ware” is used by giants such as Chevron. “We provide an entire trail of everything the employee has ever dealt with – equipment, data, everything,” she said. “Laid-off employees are a risk. Companies have a lot of horror stories about what former employees have done to them,” she said.
The Rochell Park, NJ firm was launched during the height of the dot-com explosion to help companies get new hires up and running at the job as quickly as possible. “Up until last year, our focus was to put people into the system and make them productive instantly. “Now, it’s the opposite function to take them out,” said Tolpin. 6 In the words of Walter Winston, “The person who figures out how to harness the collective genius of his or her organization is going to blow the competition away.”. 7 Downsizing and the associated turmoil and demoralization left in its wake runs counter, it seems to me, to the sage advice offered by Walter Wriston.
References
Please contact Dr. Smolowitz for the references in this article.
Articles printed with the
permission of Dr. Ira Smolowitz, Professor of Finance
and Dean, Bureau of Business Research and Program Development
at American International College, Springfield, MA.
The views and opinions expressed in
these articles do not necessarily reflect the views and
opinions of the Western MA Chapter #19 APICS, Inc.
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