Responsible Restructuring

Creative and Profitable Alternatives to Layoffs

Wayne F Cascio

• Publisher: Berrett-Koehler Publishers
• Year: 2002
• ISBN:
  9781609943806
• Topic: Business
• Subtopic: Business General
• Index: Business

Firms that restructure through downsizing are not more profitable than those that don't, and often end up hurting themselves in the long run. Responsible Restructuring draws on the results of an eighteen-year study of S&P 500 firms to prove that it makes good business sense to restructure responsibly-to avoid downsizing and instead regard employees as assets to be developed rather than costs to be cut.Wayne Cascio explodes thirteen common myths about downsizing, detailing its negative impact on profitability, productivity, quality, and on the morale, commitment, and even health of survivors. He uses real-life examples to illustrate successful approaches to responsible restructuring used by companies such as Charles Schwab, Compaq, Cisco, Motorola, Reflexite, and Southwest Airlines. And he offers specific, step-by-step advice on what to do-and what not to do-when developing and implementing a restructuring strategy that, unlike layoffs, leaves the organization stronger and better able to face the challenges ahead.

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Restructuring in Perspective

Many firms are restructuring by downsizing their workforces. Those most likely to take that approach see employees as costs to be cut rather than assets to be developed.

Picture this scenario. You are the chief executive officer at Grayson McBerry—a medium-sized securities trading firm headquartered in New York, with branches in most major cities in North America, Europe, Asia, and Australia. The second quarter just ended, and your firm’s year-over-year revenues are off 52 percent. Its stock price is down almost 30 percent from the beginning of the year, and your best guess is that there will be little improvement until the first quarter of next year. You know you have got to do something to improve the financial condition of the firm, but what might that “something” be? As you study the latest set of quarterly reports, two competing considerations cross your mind.

On the one hand, you know that Grayson McBerry relies on the knowledge and creativity of its employees to a very great extent in conducting its business and in generating innovative products and services for its customers. You know that the firm’s employees have enabled it to generate unparalleled results over the past decade and that customers are very loyal to the employees with whom they deal regularly. On the other hand, employees are also your most significant source of operating expenses, for compensation costs account for fully 52 cents of every dollar of sales.

You are well aware that firms have taken alternative approaches to coping with downturns in their businesses. For example, you know that in 2001 your competitor, Merrill Lynch, hit a rough patch. Its net earnings were off 39 percent from the previous year, and its stock price had fallen almost 32 percent since the beginning of the year. In an effort to cut costs, chief executive officer Stanley O’Neal announced plans to cut roughly one of every six employees from its worldwide workforce, as many as 10,000 out of 62,800 employees. Merrill took a $2.2 billion pretax charge in the fourth quarter of 2001 to do that.¹ In contrast, Charles Schwab & Co. faced circumstances similar to those of Merrill Lynch, and while ultimately it did cut 23 percent of its workforce of 26,000 in 2001, it used layoffs only as a last resort, not as a first step.² As a third example, you ponder the strategy of investment bank Lehman Brothers, Inc. At the same time as rivals were laying off thousands of employees to cut costs, chief executive officer Richard Fuld insisted that he would keep his staff intact and even hire new talent!³2

You know that outside your industry, some firms have steadfastly refused to lay off employees. Leading advertising agencies, such as Wieden & Kennedy, Publicis Groupe’s Saatchi & Saatchi, Omnicom Group’s TBWA/Chiat/Day, and WPP Group of London have eschewed layoffs in favor of salary cuts, hiring freezes, and reduced expenses.⁴ In aircraft manufacturing, while Boeing announced as many as 30,000 layoffs after the September 11, 2001, terrorist attacks left the global airline industry reeling, rival Airbus vowed not to cut jobs, choosing instead to reduce head-count by 1,000 from 45,000 through attrition and other cost-cutting measures.⁵

As the economy weakened, other firms actually seized the opportunity to strengthen their competitive positions through strategies such as price cuts (Dell Computer), capital expansion (Wal-Mart), aggressive marketing (Sara Lee, Wendy’s), and acquisitions (Best Buy).⁶

To be sure, senior executives at firms both large and small have made difficult choices about strategies to cope with a downturn in business. Some have decided to cut costs, often by cutting employees. Others have taken a different tack, cutting costs without cutting people, cutting people as a last resort, or even adopting growth strategies to solidify their competitive positions. What will you do at Grayson McBerry?

To many senior executives, the choice is clear: cut costs by reducing headcount. Firms often take these actions in the name of “restructuring.” Oh, yes, they use a variety of euphemisms to soften the blow—“rightsizing,” “repositioning,” “delayering,” “downsizing,” “retrenchment”—but it seems that the result is always the same. Employees lose their jobs. They get “ICEd” through Involuntary Career Events. Is this outcome preordained? Is it written somewhere that when firms restructure it has to turn out like this? To put this issue into perspective, let’s consider the economic logic that drives layoff decisions.3

THE ECONOMIC LOGIC THAT DRIVES EMPLOYMENT DOWNSIZING

What makes employment downsizing such a compelling strategy to firms worldwide? The economic rationale is straightforward. It begins with the premise that there really are only two ways to make money in business: either you cut costs, or you increase revenues. Which is more predictable, future costs or future revenues? Anyone who makes monthly mortgage payments knows that future costs are far more predictable than future revenues. Payroll expenses represent fixed costs, so by cutting payroll, other things remaining equal, one should reduce overall expenses.

As an example, consider Merrill Lynch, which, as we noted earlier, implemented massive layoffs in late 2001 in an effort to reduce its expenses. Before the layoffs, Merrill devoted fully 54 cents of every dollar it took in to employee compensation, compared to an estimated 49 cents at Goldman Sachs & Co. and 52 cents at Morgan Stanley Dean Witter & Co.⁷ Reduced expenses translate into increased earnings, and earnings drive stock prices. Higher stock prices make investors and analysts happy. The key phrase is “other things remaining equal.” As we shall see, other things often do not remain equal, and therefore the anticipated benefits of employment downsizing do not always materialize.

DIRECT AND INDIRECT COSTS OF LAYOFFS

Although layoffs are intended to reduce costs, some costs may in fact increase. The material below summarizes these costs.

DIRECT AND INDIRECT COSTS OF LAYOFFS4

It doesn’t have to be this way. There is an alternative, one known as “responsible restructuring.” This little book describes this alternative approach, illustrates its advantages over “slash-and-burn” layoff tactics, and provides examples of firms that restructure responsibly. Responsible restructuring is not some mystical, obscure set of practices. On the contrary, it is eminently practical and doable, but it does require a break with traditional thinking, as the next sections illustrate. Let’s begin by defining our terms.

Organizational restructuring refers to planned changes in a firm’s organizational structure that affect its use of people. For example, General Electric scrapped the vertical structure that was in place in its lighting business and replaced it with a horizontal structure characterized by over 100 different processes and programs. Xerox currently develops new products through the use of multidisciplinary teams; the vertical approach that had been used over the years is gone. This is restructuring through “delayering.” The objective? Improved financial performance through increased productivity and efficiency.⁸

Such restructuring often results in workforce reductions that may be accomplished through mechanisms such as attrition, early retirements, voluntary severance agreements, or layoffs. The term layoffs is used sometimes as if it were synonymous with downsizing, but downsizing is a broad term that can include any number of combinations of reductions in a firm’s use of assets—financial, physical, human, or information assets.⁹ Layoffs are the same as employment downsizing.5

Employment downsizing, in turn, is not the same thing as organizational decline. Downsizing is an intentional, proactive management strategy, whereas decline is an environmental or organizational phenomenon that occurs involuntarily and results in erosion of an organization’s resource base.¹⁰ As an example of decline, the advent of digital photography, disposable cameras, and other imaging products signaled a steep decline in the demand for the kind of instant photographic cameras and films that Polaroid had pioneered in the 1940s. On October 12, 2001, Polaroid was forced to declare bankruptcy.¹¹

To put the issue of organizational restructuring into perspective, it is important to emphasize what it is not. It is not financial restructuring, which refers to a change in the configuration of a firm’s financial or physical assets, and its financing of debt or equity. Nor does it imply a change in the configuration of a firm’s information resources, such as downsizing or upsizing its information technology infrastructure. As noted earlier, organizational restructuring refers to planned changes in organizational structure that affect the use of people.

IS RESTRUCTURING A BAD THING TO DO?

No. Kodak, an old-line company that sold cameras and film in the early 20th century, is struggling to turn around its businesses in a digital era. Some form of restructuring is healthy—and needed. Likewise, companies that find themselves saddled with nonper-forming assets or consistently unprofitable subsidiaries should consider unloading them to buyers who can make better use of those assets. Sometimes the process of restructuring leads to layoffs and losses of jobs, especially when the jobs relied on old technology that is no longer commercially viable. This was the case in the newspaper industry when most metropolitan dailies switched from hot to cold (computer-based) typesetting. There simply was no longer a need for compositors, a trade that had been handed down from generation to generation. However, indiscriminate “slash-and-burn” tactics, such as across-the-board downsizing of employees, seldom leads to long-term gains in productivity, profits, or stock prices, as we shall see. There is another way, and that way is known as responsible restructuring.6

RESPONSIBLE RESTRUCTURING—WHAT IS IT?

In 1995, I wrote a publication for the U.S. Department of Labor entitled Guide to Responsible Restructuring.¹² As I investigated the approaches that various companies, large and small, public and private, adopted in their efforts to restructure, what became obvious to me was that companies differed in terms of how they viewed their employees. Indeed, they almost seemed to separate themselves logically into two groups. One group, by far the larger of the two, saw employees as costs to be cut. The other, much smaller group of firms, saw employees as assets to be developed. Therein lay a major difference in the approaches they took to restructure their organizations.

• Employees as costs to be cut—executives at these organizations are the downsizers. They constantly ask themselves, “What is the minimum number of employees we need to run this company? What is the irreducible core number of employees the business requires?”
• Employees as assets to be developed—executives at these organizations are the responsible restructurers. They constantly ask themselves, “How can we change the way we do business, so that we can use the people we currently have more effectively?”

The downsizers see employees as commodities—like paper clips or lightbulbs—interchangeable and substitutable, one for another. This is a “plug-in” mentality: plug them in when you need them; pull the plug when you no longer need them. In contrast, responsible restructurers see employees as sources of innovation and renewal. They see in employees the potential to grow their businesses.

We will present several examples of responsible restructuring, but first let us consider the current state of employment downsizing.7

EMPLOYMENT DOWNSIZING—THE JUGGERNAUT CONTINUES¹³

The “job churning” (movement of people from one organization to another) in the labor market that characterized the 1990s has not let up. In fact, its pace has accelerated. However, the free-agent mentality of the late 1990s that motivated some people to leave one employer so that they could make 5 percent more at another is over. Layoffs are back—and with a vengeance. Thus, in 2001, companies in the United States announced layoffs of 1.96 million workers, with firms such as American Express, Lucent, Hewlett-Packard, and Dell Computer conducting multiple rounds in the same year. Corporations announced 999,000 job cuts between September 11, 2001, and February 1, 2002, alone!¹⁴

Manufacturing lost the bulk of the jobs (more than 800,000), but services were not exempt either, dropping more than 100,000. Most such jobs were...