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The Unkindest Cut


Pharmaceutical Executive

Pharmaceutical ExecutivePharmaceutical Executive-04-01-2009
Volume 0
Issue 0

Layoffs are raging through the economy. But do they actually affect the bottom line

On one cold Monday in March, the global economy lost nearly 14,000 jobs in a perfect storm of layoffs reported by news organizations around the world. What was so striking about these particular losses was not the number of people they left out of work, but the breadth of the affected industries. Financial services giant HSBC cut 6,100 jobs. General Motors, the poster child for the struggling auto industry, let 1,633 workers go. Even Yale University trimmed its staff by 300 people. Other organizations reporting layoffs included three manufacturers, two newspapers, two bearings factories, two municipal governments, and a casino. Kmart, too, announced cutbacks.

Sander A. Flaum

These companies have little in common. They market unrelated products of varied importance to unique target audiences; they're headquartered in different countries or states; they're no closer to one political party than the other. Yet they all took the same approach to cost-cutting—an approach that many lawmakers, economists, and executives believe is flawed. The psychology underlying these mass layoffs had more to do with misguided management, the scrutiny of the media, and the short-term whims of shareholders than with true commitment to long-term growth.

What's Happening

During the current recession, the ax has fallen at a remarkable rate. In the fourth quarter of 2008, 508,859 workers lost their jobs to what the Labor Department calls mass layoffs—staff reductions of 50 or more people lasting at least 31 days. And just like that day in January, it was difficult to lay blame on a single industry.

We know that mass layoffs are bad for the economy. Fewer people working means fewer people spending, a higher unemployment rate, and a larger share of tax dollars dedicated to unemployment benefits. What may be less obvious is how layoffs impact bottom lines and prospects for growth at the very companies that implement them. Labor research has never found solid evidence linking layoffs to reduced costs, higher profitability, or improved productivity.

"While downsizing rages through the US economy, there is a great deal of uncertainty about its bottom-line effects," William McKinley wrote in 1995. McKinley cited a warning from management legend James Lincoln, whose storied no-layoff policy at the Lincoln Electric Company was born out of a belief that staff reductions can actually increase costs.

Layoffs also cast a shadow over the workforce. A decision to cut the B- and C-level players can leave the A-players not only overworked, but also concerned about their future. Nonetheless, here we are tallying job losses at many of the nation's most successful companies. What's happening here?

Alternative Methods

Peter Cappelli, director of the Center for Human Resources at the Wharton School, says firms that make sweeping job cuts simply may not know any better. There are few reliable metrics for gauging the cost of rehiring staff after a recession or the impact of layoffs on morale.

The good news is that many American companies are turning to more effective ways to cut costs. A survey conducted this year by the outsourcing firm Challenger, Gray & Christmas found that the most popular method is to scale back travel expenses. Roughly 67 percent of respondents said their firms would dedicate fewer resources to travel. Other popular measures included canceling holiday parties, freezing salaries, and trimming or eliminating bonuses.

Shift reductions are also gaining popularity. At Hardinge, a machine toolmaker in Elmira, NY, management has saved about 20 jobs by cutting staff hours to the equivalent of a four-day work week. The upshot is that workers get to keep their benefits and the firm saves on retraining costs when the economy picks up again.

"Very few companies rely on a single cost-cutting initiative," John Challenger, chief executive of Challenger, Gray & Christmas, said in a statement. "While layoffs are usually the most visible action, and usually the most painful, companies are finding a multitude of ways by which to cut costs and, in some cases, delaying, reducing, or eliminating the need to make permanent job cuts."

As a chief executive, your employees are your most valuable resource. They should be your first priority and your last option for trimming costs.

Sander A. Flaum is managing partner of Flaum Partners and chairman, Fordham Graduate School of Business, Leadership Forum. He can be reached at sflaum@flaumpartners.com

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