Submit Articles | Member Login | Top Authors | Most Popular Articles | Submission Guidelines | Categories | RSS Feeds See As RSS
Forgot Password?    New User?
Welcome to Very Good Articles!

ALL Business >> View Article

By: John Di Frances
Almost daily, newspapers, business magazines, radio and television
carry reports of companies, large and small, that are downsizing.
Their attention is chiefly focused on the impact to the employees, as
they are the ones most acutely experiencing the effects. But what
are the effects on the companies? Downsizing, rightsizing or any of
the number of synonyms for cutting expenses and employees, may
provide a decrease in operating expenses in the near term, but how
will they impact the longer term future?

In my experience over several decades of business cycles, I have
witnessed a succession of economic contractions and expansions and
although at times the outlook has appeared bleak, in fact, far
bleaker then our present circumstances, every decline has been
followed by a subsequent period of growth. It was not that long ago
that we awoke to "Black Friday" when the stock market appeared to
teeter on the brink of a cataclysmic collapse. What followed
however, was the beginning of what has proved to be one of the
longest lived economic booms in memory. The lesson here is that
there will be a new economic tomorrow and in all likelihood it will
begin sometime in 2002.

Therefore, it is with eyes wide open that business leaders need to
carefully consider the long range effects their cost cutting actions
will have on their organizations. This is especially true as the
nature of those cuts, especially where they concern personnel, are
fundamentally different today from what they were in the past. Circa
1950's, 60's, 70's 80's and even much of the 90's, downturns in
employment for the most part meant layoffs. Certainly, there were
specific industries where structural decline resulted in large scale
permanent job losses. However, in general, most cutbacks
precipitated layoffs vs. permanent terminations. Not so today. The
new order is that of permanent severance. The proverbial "pink slip"
has turned to bright red.

Moreover, the level of employee being severed has also changed
dramatically. In previous decades, the cuts were heavily weighted
toward production personnel and therefore, first line, blue collar
worker oriented. Today, with our heavy reliance upon technology to
drive the economic engine, the cutbacks in both the manufacturing and
service sectors are skewed toward white collar workers.
Additionally, more senior workers in their 40's, 50's and 60's have
borne the brunt of the reductions more heavily than ever before, as
their higher cost compensation and benefit packages are targeted for
maximum near term bottom-line savings.

Conjointly these changes have set in motion what could become a
veritable time-bomb for companies that decide to pursue cost
reductions through massive staff cuts. The negative consequences
will include:

1.Lack of a recallable employee pool. Historically, layoffs
inherently communicated at a minimum the possibility, if not the
probability, of being recalled by the employer when economic
conditions improved. Many furloughed employees expected to
eventually return to their employers and, reacted to the layoff
accordingly by taking interim and part-time jobs. Today many
employees are not only informed that their release is final, they are
provided outplacement services funded by their former employers.
Thus, the employers themselves are ensuring that these people will,
indeed, not remain available to them. Many of the more senior
employees, finding new employment difficult if not impossible and
having personal savings at their disposal, are choosing to become
entrepreneurs, thereby, forever removing them from the available
labor pool.

2.Poor morale & lack of trust among younger employees as terminations
increasingly target older employees. Much has been exposited
recently in the press about the disturbing loss of employee loyalty.
Terminating large numbers of older, more senior and experienced
employees who have faithfully served the corporation for many years,
has a profound long term effect on younger, newer employees. Place
yourself in their shoes for a moment. They have already been
indoctrinated by friends, relatives, neighbors and the media that
business, especially big business, is not to be trusted. Now they
see their co-workers, supervisors, and mentors being fired
because "cost cuts need to be made and these individuals represent
higher per capita costs to the organization" The message is clear
and they understand. The reward for loyalty is to be axed when you
are over fifty and unable to find another comparable position. They
may not bolt today, due to a tightening job market, but they will
remember and when the economy improves they will seek a future where
they feel more secure.

3.Loss of knowledge and experience base. This is a frequently
overlooked aspect of the cost of losing long term employees. Many
companies and even industries are currently developing knowledge
bases in order to capture and access organizational knowledge
resources. Yet, no matter how effective these databases are, and
they can be extremely beneficial, they will never be a substitute for
the knowledge, experience and wisdom that rests in the veterans of
the organization. Although this is true in terms of deductive
knowledge, it is even more important regarding the organization's
continuity and history. People need to feel a sense of belonging to
more than just the present, tha "now" of an organization. They also
need a sense of past and future. Without this, there are no ties, no
traditions, no continuity and often no ethics and values.

4.Loss of corporate culture and available mentors for existing and
new employees. This loss of continuity is also reflected in
dispossession of the corporate culture. I am a great believer in
change vs. the status quo. However, there are some things that
should not change. "In this company we do thus and so, because we
believe it to be fundamentally right." Every organization needs to
have incontrovertible statements that transcend the fluctuating
business climate and current trends. These values can and should be
committed to pen and paper, but they are not passed on in this
manner, at least not primarily. Rather, they are taught and lived
and mentored from one person to the next. The fewer seasoned people
the company has to pass these on, the less they will be able to
maintain the soul of the organization.

5.Loss of established customer service and customer contact points.
It happens to all of us. One day you call your favorite supplier or
vendor and ask for good ole' Joe who you have done business with for
years and are shocked to learn he is no longer there. "Why? Has he
died or contracted cancer,?" you ask. "No," is the response. We
have had a major reduction in staff due to the economy. In silence
you ponder: "If after all these years Joe is gone, who's left? Will
they even be in business tomorrow? Maybe, I should begin looking
around for another supplier." No one is irreplaceable. However,
long term customer and supplier/vendor relationships are invaluable;
they also say something about the reliability and stability of your
organization. Although the organization's investment in these
relationships does not show as a line item on the asset portion of
your balance sheet, do not underestimate their value, especially in a
day when the global search for new suppliers and vendors is made
instantaneous by the internet. Without relationships, price rules
and the only price that matters today is the lowest one. Years spent
in commodity businesses taught me this principle all too well.

6.Employees may be needed again before termination savings are fully
realized. If the economy does begin rebounding by mid 2002, then
many of the anticipated savings of reducing the workforce will have
not yet been fully realized before companies will need to begin
replacing the terminated workers. The expense of replacement
includes both the termination costs as well as the costs of training
and integrating the new hires. Thus, in cases where terminations
include substantial severance and outplacement costs, these plus the
training and initial inefficiency costs of rehiring frequently equal
one to several years of the terminated workers' cost to the

7.Possible need to bring employees back as independent contractors at
higher total cost. The shrinking labor pool together with the fact
that a high percentage of the middle-aged and older terminated
employees are either beginning their own businesses or opting for
early retirement will mean that many of those who are willing to
return to former employers will want to do so under their own
conditions. A large number of these may choose to do so as
independent contractors preferring to gain a greater degree of
control over their own lives. Many companies initially prefer this
approach believing that they may only require the services of the
former employees for a limited period of time. Frequently, however,
the weeks and months become years and the independent contractors,
knowing the inner workings of the organization and where projects and
sponsors may be found, remain costing the company significantly more
than if they had remained on the payroll.

8.Hidden costs that are never fully accounted for such as declining
morale, lost customer relationships and lost productivity due to over-
stressing the remaining employees. There are very real costs
associated with mass layoffs that in my experience are almost never
fully assessed. Declining morale, disrupted customer relationships,
a frequently steep decline in customer service and the frustration of
remaining employees who cannot possibly absorb all of the
responsibilities of their departed coworkers, results in a surrender
to cutting corners wherever possible.

9.Future sales may be lost due to inability to ramp up delivery
quickly as the economy improves. I have already addressed at some
length the labor pool shortage that may well be just around the
corner. An economy spurred by the tax cut, a weakened dollar
propelling export sales and/or a drop in oil and gas prices could
individually or in combination cause demand in many industries to
grow rapidly. Where will they find sufficient personnel fast enough
to meet that demand? Any failure to respond quickly to the increased
demand will result in lost sales and possibly long term market share

10.Diminished market position and status as market leader, innovator
and corporate citizen. I am frequently amazed at the lengths that
major corporations will go to and the investment they willingly incur
during "good times" to build their image in the public's mind.
However, as soon as the economy dips, the slashing begins with little
thought as to the negative impact it can have within days upon years
of careful work and millions of dollars invested to build that image.

When cutting is absolutely necessary, do so with a scalpel rather
than meat cleaver. Across-the-board percentage staff reductions are
the most damaging variety and should only be used in those instances
which demand the immediate and drastic cost reductions compelled by
the imminence of business failure. The use of global reductions as a
general cost reduction methodology is tantamount to an abdication of
responsibility by the leadership and management.

Whenever large scale reductions of any sort are made, they should be
matched by reductions of a corresponding magnitude in senior
executive compensation. Huge compensation packages for corporate
executive leaders have been justified as necessary to attract and
motivate the best talent available and as just rewards for their
leading mega-corporations to unprecedented high profit levels and
market valuations. This standard must also apply in the reverse and
thus, significant drops in profit and worth, requiring deep cost
cutting throughout the organization, should be equally reflected in
deep cuts to the senior executive compensation levels.

As an alternative to layoffs and terminations, corporate leaders and
managers should look to rapidly redeploy corporate assets in order to
bolster revenues and profits. In the case of people assets, this can
often be done through the reassignment of personnel to those areas
and functions of the organization offering the greatest potential for
rapid internal innovation. Such action frequently results in
innovative breakthroughs of enormous immediate value to the company
as people new to a given function approach it with a fresh
perspective and a different experience and personal knowledge base
from which to draw upon.

Although severe cost cutting can increase the near term profitability
of virtually any corporation, ultimately, the broad-based innovations
of its committed and motivated employees is essential to restoring
profitable long term growth, especially in periods of economic
downturn. And its is sustainable growth, not temporary savings, that
should be the primary goal of every business leader.

About the Author

John Di Frances is the Managing Partner of DI FRANCES & ASSOCIATES,
LLC founded in 1983.
208 E Oak Crest Drive
Wales, WI 53183

See All articles From Author