Business

The high cost of 'dumbsizing'

Has the restructuring wave gone too far?

DAVID ESTOK June 3 1996
Business

The high cost of 'dumbsizing'

Has the restructuring wave gone too far?

DAVID ESTOK June 3 1996

The high cost of 'dumbsizing'

Has the restructuring wave gone too far?

Business

The memories are still vivid. On a single day a little over a year ago, Unitel Communications Co. cut almost a quarter of its workforce. Caught in a high-stakes battle for a share of the country’s long-distance market, the Toronto-based company was bleeding red ink at the rate of $1 million a day. So on Feb. 24,1995, Unitel’s senior executives laid off 650 employees from every level of the organization. Now, after a management shakeup and the arrival of a new chief executive officer, Unitel is on the rebound. But within its senior ranks, there is also a widespread recognition of the emotional and financial costs of large-scale layoffs—consequences that range from low morale to increased workloads and lost productivity. “We understand there are dangers,” says Judy McLeod, Unitel’s vicepresident of human resources. “Downsizing for the sake of downsizing is something we hope we never do again.”

McLeod’s sentiments reflect those of a large number of executives, academics and management consultants. For more than a decade, big business and governments across North America

have been slashing staff, of-

fering early-retirement incentives, eliminating layers of management and turfing out surplus executives. But while there is little doubt that radical restructuring is the dominant trend of working life in the 1990s, an increasing number of business leaders are coming to the conclusion that the slash-and-burn approach to corporate cost-cutting has gone too far. A few analysts even argue that downsizing—or “dumbsizing,” as some critics call it—has hurt North American productivity. “We are hearing about corporate anorexia,” says Dwight Gertz, a vicepresident at Mercer Management Consulting Ltd. in Boston. He adds that in the past few years, “downsizing became addictive. People lost sight of the other things you need to do to make a company grow.”

Gertz and most other ex-

perts are not suggesting that corporate downsizing is always wrong. Since the mid-1980s, deregulation, increased foreign competition and the introduction of new technology have forced companies in almost every sector to become more efficient. But as the downsizing trend gained momentum, corporations and investors sometimes behaved as though massive layoffs were a guarantee of future success. Gertz, for one, challenges that view. He says that his own research—for his 1995 book Grow to Be Great: Breaking the Downsizing Cycle—suggests that fewer than half of all firms that dramatically cut staff actually achieve

their goal of increased profitability.

Similar findings are contained in a study published in 1994 in Canada by Watson Wyatt Worldwide, a U.S.-based management consulting firm. Of the 148 major Canadian companies surveyed

by Watson Wyatt, 40 per cent reported that downsizing did not result in reduced expenses and more than 60 per cent did not experience higher profits after cutting staff. Lloyd Cooper, a consultant at the firm’s Toronto office, says those findings are proof that “lean and mean” strategies are often destined to fail. What is more, over half the companies that laid off workers actually hired new staff soon after the downsizing. “I think a number of firms cut too much,” says Cooper. “To me, that says the downsizing was often used as another way of performance management. Instead of dealing with people and coaching them, they used downsizing to get rid of them.” Another common complaint is that downsizing often robs companies of their best employees. In many corporations, early-retirement schemes were introduced as the first wave of cost-cutting. The oldest and most experienced employees took lucrative early-retirement packages as corporations sought to “buy back jobs” to meet new employment targets. When that failed to produce the desired results, companies implement-

LEANERAND MEANER In a survey published in 1994, executives at 148 Canadian companies were asked about the effects of downsizing. Most reported that their efforts to restructure had resulted in higher employee workloads and lower morale. In a minority of cases, productivity and customer service also suffered. Percentage of companies reporting an adverse impact on: Workloads 7 0 Morale 59 Commitment to company 47 Job satisfaction 43 Ability to retain high performers 30 Ability to attract quality employees 24 Quality/customer service I 3 Willingness to take risks I I Productivity I I Workforce competence IO

ed across-the-board cuts, often by requiring each division or department to cut their staff levels or budgets by a specified percentage. “You lose the older people who had the experience,” says Gertz, “and you lose the younger people who had the energy.”

Unitel’s McLeod notes that the people who remain on a company’s payroll after downsizing often suffer from poor morale and high levels of stress. “We’ve learned it is important to pay a lot of attention to those who are left,” she says. Otherwise, the “survivors,” sometimes including the company’s most talented employees, may be tempted to wait for the next wave of downsizing, this time with the intention of leaving themselves. “The brightest people say, ‘I’m going to get a nice bag of gold. I am marketable. I can get another job and still have the bag of gold’—and then they leave,” says Cooper.

The result, according to Wall Street analyst Stephen Roach, has been the “hollowing out” of a growing number of large corporations. For most of the past decade, Roach, the chief economist for Morgan Stanley & Co., preached the virtues of downsizing, insisting that the drive for efficiency would produce surging profits, sustained low inflation and improved competitiveness. But in a report issued on May 9, he surprised many of his followers by announcing that he was “having second thoughts as to whether we have reached the promised land.”

Roach added that it is “highly debatable” that plant closings and massive layoffs yield long-term benefits and productivity improvements for corporations. “The so-called productivity resurgence of recent years has been built on the back of slash-and-burn restructuring strategies that have put extraordinary pressures on the workforce,” he wrote. “But this approach is not a permanent solution. Tactics of open-ended downsizing and real-wage compression are ultimately recipes for industrial extinction.”

Whether Roach’s admonishments have any impact in the boardroom remains to be seen. But some executives, at least, are rethinking their approach to layoffs, trying to ensure that their efforts to cut expenses do not damage the overall health of the

company. Last year, Montreal-based Bell Canada launched a three-year drive to cut 12,000 of its 46,000 workers in one of the largest corporate restructurings in the country’s history. But unlike earlier downsizing efforts in the 1980s, Bell wanted to make sure that it did not lose large numbers of valued employees. The company’s solution was to invite employees to apply for voluntary severance packages, while retaining the right to screen those requests and decide who would be eligible. “It’s been a gradual process—giving employees as much notice as possible, removing work that’s redundant and shifting work to areas where it can be done more efficiently,” says Harold Giles, a senior vicepresident with Bell human resources. In all, some 16,000 Bell workers applied for the severance packages; 12,500 have been approved. “I think companies generally have recognized that setting layoff targets without any rationale is patently silly and can have a negative impact,” says Giles.

In other cases, companies have managed to avoid layoffs altogether by working with employees to find alternatives. An example is Nesel Fast Freight Inc., a Mississauga, Ont., trucking company with about 230 workers. After the company hit tough times in 1991, the employees agreed to give up their bonuses and accept a 10-per-cent reduction in hours in order to save jobs. “When we get into a crunch situation, it is part of the culture of this company to talk about it,” says Katherine McWilliams, the 36-year-old president. By avoiding cutbacks, she adds, the company preserved jobs, maintained morale and positioned itself for future growth. By 1995, economic conditions had improved and the bonuses and lost hours were restored.

For Fred Reichheld, that kind of old-fashioned corporate loyalty is essential not only in developing a strong workforce, but also in creating a bond with customers. Reichheld, a management consultant with Boston-based Bain & Co., maintains that it is important to treat employees as assets and not simply as expenses. In his book, The Loyalty Factor: Hie Hidden Force Behind Growth, Profit and Lasting Value, he argues that downsizing has had a lasting and negative effect on many corporations. “Loyalty is not taught at the business schools and it’s not an economic term,” Reichheld says. Smart and successful companies, he notes, tend to pay their employees well, offer profit-sharing or bonus programs, and know that downsizing almost never leads to productivity gains.

In Unitel’s case, the challenge was simply to ensure the company’s survival. But while that has been achieved, Judy McLeod is the first to agree that layoffs are not an easy fix for companies that face declining sales or intensifying competition. As she puts it, “You can’t downsize your way out of all of your problems.”

DAVID ESTOK