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Reality Bites: The Dark Side Of Layoffs

Cutbacks that cut their work forces too deeply may bleed to death. An alternative. Revamp processes, eliminate errors and retrain staffers to boost bottom lines.

Faced with tough economic times, some chief executives-including many so-called turnaround experts-chop the work force first and ask questions later.

Wielding an ax is a quick way to cut costs; support share price; and cast the CEO as a tough, no-nonsense character.

Clearly, this approach is not a panacea. IBM is a case in point. Amid wave after wave of layoffs-resulting in a body count since 1991 of more than 85,000 employees-customer satisfaction suffered, new product launches stalled, and smaller competitors gobbled up market share. In fact, the company’s prospects are just beginning to improve, but now it faces the additional problems of employee stress, low morale, high turnover, and wavering loyalty.

In an era of chronic overcapacity, some companies are bloated, and biting the bullet makes good business sense. Yet layoffs may be little more than a quicineffective management and leaving companies ill-equipped to take advantage of improving market conditions. As illustrated by an increasing number of small and large companies, there are a host of revenue-generating alternatives, including process improvement, quality control, and retraining. And in some cases, the most effective course may be a combination of controlled layoffs and other aggressive strategies.

ONLY FOOLS RUSH IN

Declining profits? Increased competition? Excessive spending? The first thing many CEOs look at is reducing one of their biggest fixed costs-payroll. However, after more than a decade of consistent layoffs, many companies are no better off today than they were at the height of their payrolls. Their solution? Lay off a few thousand more people.

Stock market analysts invariably applaud these moves. A quick round of layoffs does wonders for a company’s short-term financial picture. But some observers believe American business relies too heavily on layoffs, using them as a longterm tool to control costs. Even companies that are basically healthy continue to lay off workers to stay “lean and mean.”

Layoffs often result when a frustrated CEO is unable to come up with a more comprehensive strategy. But an increasing number of CEOs is seeking alternatives to layoffs, rather than simply expecting the survivors to pick up the slack. Many realize a company cannot “save” its way to success; cost-cutting and reductions only go so far. Before implementing any plan involving mass layoffs, CEOs would be wise to consider the following options.

  • Process improvements: Although layoffs often are perceived as immediate remedies to business problems, other management strategies can lead companies to the same short- and long-term improvements without the damaging side effects. For example, establishing empowered work teams that focus on major problem areas for a short time, such as 90 days, can produce dramatic results. By examining processes and looking for waste and inefficiency, companies can streamline production and maximize their potential.

Natural Gas Pipeline Co. of America, a Lombard, IL-based subsidiary of Midcon Corp., was considering process improvements when it faced substantial regulatory changes in its industry. Impending deregulation meant the natural gas transmission and storage company would have to be more effective in an increasingly competitive environment. In order to reduce overhead, the company embarked on a process-improvement system aimed at smoothing work flows and maximizing efficiency. The process was even more challenging, because the company’s entire business was conducted using computers, with little hard copy.

Employees teamed with consultants to analyze work processes and map them down to their smallest parts. Once the tasks were understood and defined, cumbersome routines, error-causing transactions, and various delays were identified and corrected through re-engineering.

The process-improvement systems, along with corporate restructuring and some very small-scale reductions in staff, resulted in savings well over the initial projections, which were in the millions, from late 1993 to early 1994. This helped Executive Vice President Gary Bartlett “see how good my people really are.”

  • Eliminating error: Manufacturing companies typically waste up to 25 percent of their revenues on rework, including such things as scrap, machine downtime, and order-entry errors. Service companies spend up to 35 percent of their operating costs on rework, including data-processing errors, lost purchase orders, and billing mistakes. By driving these costs down through improvement efforts, companies can recover much more money than they could through layoffs, while enhancing customer satisfaction. Monmouth Medical Center, a teaching hospital in Long Branch, NJ, sought ways to cut waste while increasing efficiency and profitability. By conducting a “cost of quality” analysis, the hospital identified more than $10 million in waste-nearly 10 percent of its $120 million budget. The waste came from all areas: accounting procedures, duplicate orders of patient medication, and a lack of standardized forms for nurses to make patient-care notes, all of which caused extra work and man-hours.

The hospital examined its work processes and determined which were part of doing things properly and which were done to fix things that had gone wrong. Processes were then quantified in terms of materials spent, man-hours used, expediting fees, and other costs associated with completing each task.

After assigning a total cost for each process, Monmouth was then able to recognize how much of each operating cost was used to correct errors and recover losses. By eliminating rework, Monmouth decreased the total cost of its functions, thereby reducing overall waste by $2 million in less than 18 months. Eliminating error from work processes not only saves the company money, but also boosts employee morale. As workers discover they can solve nagging problems that have hampered their jobs for years, they take ownership and responsibility for their work processes, thereby improving quality and productivity.

  • Skills training: One major obstacle to maximum productivity is inadequate employee skills. This does not necessarily mean job skills-employees usually know how to do their tasks-but can include communications, team, or problem-solving skills.

While the costs associated with providing concentrated training in these areas should not be dismissed lightly, the results of such a program create an empowered. atmosphere in which work teams improve their own processes. These teams contribute much more than mere job skills as they work to drive costs down and profits up.

National Gypsum Co., a Charlotte, NC-based manufacturer of gypsum-related building products, continued to make training a priority, even as the company rebounded in July 1993 from Chapter 11 bankruptcy declared in October 1990.

National Gypsum had initiated a total quality management process prior to filing for bankruptcy, yet it faced difficult decisions about spending more money on training. Chairman and CEO Peter Browning decided to reinforce the company’s investment in its employees. “With the entire industry in a state of change and our principal competitors facing similar economic difficulties, we needed to prepare for what we perceived as an opportunity to assume the leadership position in our industry,” Browning says. National Gypsum invested more than 86,000 man-hours in training its work force in quality management principles. Corrective-action teams then spread throughout the organization, tracking and eliminating waste. The company began to recoup its investment almost immediately through reduced waste, increased productivity, and improved customer satisfaction.

As a result, National Gypsum improved its work processes while working toward reorganization. More important, the company did not lose a single worker as a result of the bankruptcy and, in fact, realized an increase in morale and employee satisfaction during the reorganization.

A TALE OF TWO COMPANIES

The difficulty of using layoffs effectively, and the temptation to turn to them in times of crisis, is illustrated in the case of Rochester, NY-based Eastman Kodak. The film and imaging-equipment giant went into the ’90s with more than 115,000 employees worldwide, anticipating continued success and growth in the new decade.

Even when the picture began to blur, as manufacturers of inexpensive, generic film snapped at Kodak’s market share and profit margins, Kodak’s management resisted the trend toward massive layoffs. It made efforts to whittle down the work force-shaving off 16,000 in 1991 mainly through attrition, early retirement, and generous inducements-but earnings did not improve.

Shareholders finally began grumbling about shrinking earnings and demanded drastic measures: They called for deep cuts in spending and staffing. A more aggressive management culture was adopted; industry analysts now expect the company to lay off as many as 30,000 employees. Even as the company moves forward with those plans, it continues to work hard to find solutions. Recently, Kodak shed its pharmaceutical and household-products division to focus on core strengths. It is obvious layoffs alone are not enough to clarify this corporate picture.

Fairfield, CT-based General Electric, on the other hand, is an often-cited example of the power of downsizing, having reduced its payroll from 420,000 to 222,000 in the last dozen years. Unlike Kodak, GE realized early on that layoffs alone would not improve the company’s performance and abilities. GE combined its layoff process with creative management planning, including pioneering efforts at re-engineering the company that have caused profits to triple and revenues to double.

The company was one of the first to implement a range of ideas that tap into employee creativity, boost morale, and solidify the corporate culture despite ongoing reductions. For example, GE’s “Work Out” process, in which groups of employees meet with top managers to discuss and present ideas for improvement, allows workers to feel they have a hand in the company’s future.

GE also moved closer to a “boundary-less” organization, in which managers no longer jealously hoard resources and employees but are encouraged to appreciate and benefit from the collective sharing of skills and experiences. In addition, GE took the proactive approach of continuing to judiciously pour millions into research and development-the lifeblood of future growth and success in technical fields.

For better or worse, mass layoffs have become part of the gospel of American business. Even in an improving economy and with growth on the horizon, many companies continue to hand out pink slips, as layoffs remain a tempting option for troubled CEOs, anxious shareholders, and short-sighted stock analysts. But the dark side of downsizing should give executives pause before dropping the ax. Today’s business world demands more of its leaders-the foresight, intelligence, creativity, and courage to develop and apply unique alternatives as they lead their companies, rather than follow conventional wisdom.


Daniel L, Valot is chairman and chief executive of Denver-based Total Petroleum (North America) Ltd., a $2. I billion refiner and marketer of petroleum products. The company is working with consulting firm Proudfoot PLC. to implement re-engineering and training programs.

Joseph M. Bujold is president of the Americas Group of Proudfoot PLC., a West Palm Beach, FL-based management consulting firm specializing in productivity and quality programs.  

About daniel l and joseph m. bujold