Even as the economy shows some signs of emerging from the doldrums, several leading companies–such as Goodyear, Humana and Verizon–are cutting thousands more jobs.
They plainly believe that lowering labor rolls now will help them perform better in the long term. But experts on corporate strategy and human resources are not so sure.
Some argue that layoffs, combined with a careful revamping, can set the stage for growth. Others contend that companies that avoid downsizing reap huge benefits in loyalty and productivity.
In a quest for the most productive companies in the world, Jason W. Jennings, a consultant and author of a recent book on the subject, settled on 10 businesses that had never made a layoff.
“Not only have they never had a layoff,” Jennings said, “but each of them has a well-understood covenant with the workers that the corporate checkbook, or management missteps and misdeeds, are never going to be balanced on the backs of the workers.”
Jennings, who chose the companies using a combination of elementary financial criteria and on-site research, conceded he could not prove that a no-layoffs policy led to profits and growth for the group. But he did see something valuable in the strategy of the 10 companies, which included innovators such as Nucor Steel, the mini-mill operator, and Ryanair, the low-cost European airline.
“They know if they use layoffs, they’re going to end up with a workforce that’s going to be more concerned about themselves than about increasing productivity,” he said.
But the picture is not so simple, according to Peter Cappelli, a Wharton School professor who runs the Center for Human Resources at the University of Pennsylvania.
“If you look just broadly at whether companies that lay off do better, the answer appears to be no,” Cappelli said. But, he added, “the ones that lay off the most are already the ones that are in the most trouble.”
In the past, manufacturers responded to cyclical downturns in sales by making temporary layoffs, usually concentrated among blue-collar workers. Often unionized, the workers were usually rehired for the same jobs when business turned up again.
Many other companies, except those about to collapse, often chose to retain their workers on the theory that firings and rehirings were costly. Absorbing the expense of wages and benefits allowed the companies to remain ready to take advantage of orders for new business.
But increased competition and investor demands have made companies more aggressive about cutting costs. At the same time, structural changes in the economy–among them, declines in unionization and the rise of information technology–have made the labor market more fluid, a trend Cappelli expects to continue. Starting more than a decade ago, with waves of layoffs that also aimed for white-collar workers, many companies began to reconsider the traditional thinking.
The trade-off is a serious matter at Goldman Sachs Group, whose financial businesses are people-intensive. “You want to cut enough excess capacity in down markets to be cost-effective, but you don’t want to cut so deeply that you can’t respond when markets turn up,” a Goldman official said.
The company has interspersed at least seven rounds of cuts with several spurts of job growth in the last 15 years. This year, when business conditions soured, Goldman reduced its headcount by 13 percent–its biggest cuts ever.
Companies who have had layoffs recently appear to perform no worse than the market. According to news reports, 38 publicly traded companies based in the United States all made more than 1,000 layoffs in the fourth quarter of 2001. Between January and mid-December, their share prices dropped by 22 percent on average–exactly the same loss suffered by the Standard & Poor’s 500 index.
In some industries, making job cuts is not a choice. More airlines and telecommunications companies, faced with a steep drop in demand, might have failed if not for hundreds of thousands of layoffs in the past two years. And for many companies outside those hard-hit industries, cutting jobs has always been an important component of strategic change.
The long-troubled Sears, Roebuck & Co.–which has steadily lost ground for years to Wal-Mart and other discounters–has cut jobs several times. In the late 1980s, it pared down its bureaucracy. In 1993, it cut about 50,000 positions (30,000 people were actually fired) to wind down its catalog sales arm.
“Most of the downsizing has been predominantly due to a shift in business model, rather than directly related to the economy,” said Peggy A. Palter, a Sears spokeswoman. About a year ago, the company announced thousands more job cuts as it transformed its sales floors.
“We’ve changed our service level in the stores, moving more toward self-service in the smaller ticket items,” Palter said.
While several experts endorsed downsizing as part of a strategic plan, they differed on the merits of making layoffs just to cope with temporary slackness in demand. Hiring good people back may not always be easy.
“We don’t think that it’s a good idea to focus a very high percentage of your organization on leveraging the flexible labor market,” said Mark W. Womack, an executive vice president for Celerant Consulting Group.
Cappelli echoed the principle of Womack’s argument: “If the cuts are part of a restructuring plan where you’re doing other stuff as well, then it’s more likely to help.”
But Cappelli’s research found that companies that downsize for strategic reasons reap fewer benefits than those that lay off workers to deal with excess capacity.
Womack advised caution, though, especially in industries where talented employees are still a scarce commodity, like pharmaceuticals. His firm recently advised a multinational drug manufacturer. “They have to be quite careful about who they let go,” Womack said.
That hiring problem may worsen in the future, if demographic forecasts hold true. “We’re simply not generating the kind of labor force growth that we have in the past,”‘ said Sylvester J. Schieber, director of research at Watson Wyatt, a supplier of professional services.
