Why Downsizing Is The Best Option To Reduce Labor Cost

Why downsizing is the best option to reduce labor cost


When some companies downsize the cart seems to come in front of the horse. They first get rid of people, then make some decisions about how to organize those who remain.

Only eventually, as they find their lean staff cannot do all the work that remains, do these businesses start to consider what priority work most needs to get done. Putting this sequence back in its logical order was the subject of the last four chapters.

Now it is time to face the least liked aspect of downsizing, deciding what to do with the managers and professionals whose jobs are declared "surplus."

Companies vary widely in the ways they deal with these surpluses.

Consider the approaches taken by two Houston businesses, Tenneco and the Allied Bank of Texas.

"At Tenneco, 1200 employees were laid off over a six-week period. According to eyewitness accounts, many of them first found out they were no longer employed when armed guards appeared on their office floors early in the morning, along with boxes for them to use in clearing out their desks. The stunned workers were given 20 minutes to leave the building, and were watched by the guards as they packed up their belongings and emptied their lockers at the company gym.

Those managers who had come to work in company cars or van pools were given coupons for taxi rides home.

Said one angry ex-employee to the Houston Business Journal : 'This was at best an outrageous and unnecessary slaughter of human self respect and dignity ... Tenneco obviously planned the day well in advance. More than 250 boxes were ordered and stockpiled for use by laid-off employees.

The cab coupons also were purchased in advance. A line of cabs formed with amazing quickness around Tenneco's downtown headquarters to cart all the terminated employees away.'

At the Allied Bank of Texas, department heads called divisional meetings, then read off the names of the employees to be laid off - in front of their coworkers.

There was only a day's notice that there would be any layoffs at all. According to the Journal , the terminated employees were told to clear out their desks and leave that afternoon; they received no offers of outplacement or recommendations. Officers were given a month's salary, non-officers two weeks pay.

Said a laid-off manager: 'Some of us had been with Allied for more than a decade.

We understood the layoffs, but we didn't understand the way Allied went about implementing them. We were all stunned and disappointed.' "

Contrast the situations of those employees, and those of their "more fortunate" coworkers who remained employed, with those of Hewlett-Packard's workforce as that company went through hard times in the 1970s:

" In the early 1970s the entire electronics industry suffered a drop in orders, and most companies were laying off people in significant numbers.

At Hewlett-Packard estimates indicated that it was necessary to cut back 10% in both output and payroll to match the decline in orders. In this company the obvious solution was to follow its competitors and lay off 10% of the work force. Top management, however, was committed to avoiding layoffs. After considerable discussion, a novel solution surfaced.

How to Reduce Labor Costs in Your Business

Management decided to require everyone from the president to the lowest paid employee to take a 10% cut in pay and to stay home every other Friday.

By distributing the 'pain' across organizational levels, Hewlett-Packard avoided both the human resources loss and the human costs associated with layoffs."

In 1974, pleased with the positive impact the layoff alternative had earlier, Hewlett-Packard used the same mechanism to cope with another business reduction. Some of the credit for the company's committed workforce, in a Silicon Valley of job hoppers, has to be attributed to practices such as these.

A key part of Hewlett-Packard's business strategy is based on maintaining a strong corporate culture. Culture is something carried by people; high turnover makes its almost impossible to keep a consistent set of values and objectives that are followed up and down the ranks.

A 10% layoff would have severely dented this culture; the increased voluntary turnover that most likely would have been plagued the firm for years after the layoff would have impeded growth plans and added to overall personnel costs. It is unlikely the two Texas companies will, several years from their sudden cutbacks, come out with a workforce as committed to serving the company as Hewlett-Packard's.

Most companies approach downsizing implementation with tactics somewhere between these two examples.

Unfortunately, few are as creative and far sighted as Hewlett-Packard. Fortunately, few employ the extreme measures that were used in Houston. Let us review the alternatives available, and consider which are appropriate when, keeping in mind that the more lead time available, the more options possible.

Push or pull strategies
Assuming an analysis indicates there are more managers or staff professionals than there is work they can usefully do, and there are no other ways they can contribute to the business, the customary reaction is to search for ways to remove them from the payroll.

There are two general ways to do this. They result in either pushing or pulling them away.

"Push" strategies are the most direct. They involve, whatever euphemisms are used, firing employees. Even in situations of demassing, these are often firings-with-cause - only the cause is frequently uncontrollable shifts in a business' economics.

Sometimes the cause is employer neglect in letting the organization grow too big, or the market share too small, but generally not employee poor performance or misconduct.

Ideally the selection of those to leave should be based on individual's performance to date and consideration of what their potential is to contribute to the leaner, downsized organization.

In some cases it also needs to be based on an assessment of how many good performing, high potential people the business' economics can realistically support.

Downsizing: Layoff and Employees

These are always difficult judgments to make, and are made even more difficult when weak performance appraisal and career planning systems have helped get the company into a sticky, overstaffed situation in the first place.

These decisions also must take into account company policies about how it treats long service, minority, female, veteran, disabled, and older employees, assuming these policies meet at least the minimum regulatory standards in each of these areas.

"Push" strategies can be targeted by individual, based on the above factors, or they can involve terminating relatively large numbers of employees (either across-the-board percentages of the workforce or elimination of entire departments, plants or divisions).

Because it is often difficult to eliminate many people who are full time managers without also changing the organization structure these jobs are more likely to be cutback on a position-by-position basis.

Staff professionals who function primarily as individual contributors are more susceptible to across-the-board reductions.

A "folk wisdom" about such cutbacks that seems to have spread to many companies says it is better to "get it all done at once as quickly as possible" so employee morale will soon rebound and workers not become shell shocked from successive waves of terminations.

The corollary to this principle is that "it's easier to cope with the problems that result from cutting too deeply than not deeply enough." Though it is common to plan reductions with these ideas in mind, the wisdom on which they are based in open to question.

Why We Moved - Downsizing and Simplifying

Ideas like these have helped encourage demassing in situations where more targeted downsizing would have made more sense. It is often impossible to generalize usefully about issues such as these, they need to be thought out based on a careful reading of each company's unique situation.

Improving morale usually requires the employees allowed to keep their jobs feeling secure in them and confident in the company's leadership and direction.

Single-blow cutbacks themselves will not provide this feeling. Successive waves of workforce reductions, however, can be very destructive, but they usually result from poor planning or unanticipatable business adversity, not insensitivity to employee morale. Careful advance planning can eliminate much of the need to do excess downsizing; the costs incurred by the people involved and the company should be sufficient to make this a least-favored option.

Limiting the human cost involved in firings is a responsibility companies must take on when they chose either "push" strategy of targeted or across-the-board terminations.

This usually involves, at a minimum, some type of adequate financial and benefit severance package to help with the financial loss, and outplacement assistance to help cope with the resulting psychological and career losses.

And insuring that both are provided in a way that preserves the dignity of those losing their jobs. Many companies do take this responsibility very seriously, partially out of a humanitarian concern for those laid off, partially to avoid censure from the communities in which they operate, and partially to help preserve the loyalty of those who remain.

But this is an area where considerable room exists for improvement. Rod Willis, editor of Management Review , noted that "for every company that shows genuine concern, two show insensitivity in laying off employees." As we suggested in Chapter Two, consideration also needs to be given to the psychological needs of those charged with doing the firing and those who see themselves as the survivors.

Too few companies clearly communicate with their employees when downsizing programs are being planned.

The Esmark Inc. take over of Norton Simon Inc. was a rare exception. It offers some lessons in how to do this in as constructive a way as possible. Donald Kelly, Esmark's chief executive, talked to the over one hundred Norton Simon headquarters staff immediately after the merger was finalized.

He was direct and honest. He indicated that, as many already anticipated, he was not going to need two holding company staffs and that a number of them would have to leave. But he also said he needed everyone's help for the next few months to implement the merger details. A generous severance plan was set up and some special performance bonuses awarded to selected executives (who departed after several months) for their assistance in bringing the two companies together.

The transition went much more smoothly than most megamergers and while some from Norton Simon may not have been happy with the merger's impact on their careers, at least they all felt they knew where they stood. Ironically, Esmark was bought by Beatrice Companies shortly after this transition.

Esmark executives were initially assured that there was room for everyone. Then a short time later a number of them were fired.

"Pull" strategies are less focused in the results they produce, but are less harsh in nature. They generally involve offering, for a limited time, some inducement to all or a subgroup of employees intended to encourage some of them to voluntarily resign. For older staff this includes early retirement offers while employees farther from that point in their careers may be offered a cash payment (or "buyout") in exchange for leaving.

Many thousands of managers and professionals have accepted these offers. For some they represented a chance to start a new career or get out of a dead-end one. For others who felt their job security was weak, these may have represented the better of two evils.

Cost-reduction stages

Some employees who accepted them may agree with Beebe Bourne, the president of THinc. the oldest outplacement firm, who notices that "some of these packages have benefits that far outweigh staying with the company."

Among the most generous of these are the "5-5-4" early retirement plans.

These add five years to the employee's current age and five years to the worker's service time to calculate the retirement benefits. These also add four weeks of pay for each year of service and award this in a lump sum.

Most programs are less remunerative, but few have had problems finding employees willing to accept them. Offering lump sum buyouts to those not eligible for the retirement programs is also becoming common, although most reliance is typically placed in retirement efforts because these pull away the highest paid managers most likely to be in the way of other's advancement.

Some companies are adapting programs like the separation allowance that pays $35,000 to each Norfolk Southern locomotive engineer or fireman who voluntarily quits, to their managers.

These types of "pull" strategies are sometimes linked with "push" approaches. The letter that invites a manager to consider early retirement or a buyout may also warn of involuntary layoffs if the voluntary departure quotas are not met.

Chevron and Exxon have taken the most evenhanded approach in this area. Many employees who were terminated were given the same retirement benefits as those who accepted the voluntary offer.

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One chemical company took a different approach. It conducted a limited program of involuntary terminations at the same time as it offered early retirements to others. This was a stronger warning than the threats that appear in some retirement offers. One observer compared this to the practice of some airline hijackers who kill a passenger or two at the outset of their terrorist attack, just to show the others they are serious.

The chemical company, of course, intended nothing of the kind. They aimed the dismissals primarily at poor performers with limited seniority, assuming these would not be eligible for the retirement offer. What happened, to their dismay, was a mood of insecurity spreading throughout the company, far more employees accepting the early retirement than were budgeted for, and morale was weakened for some time after.

Other companies has been surprised at the acceptance rates for their offers.

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DuPont originally expected 6500 employees to accept an early retirement option. Almost twice as many volunteered. While this heavy response rate enabled DuPont to forego some reductions they expected to be forced to make later, they also lost employees they did not want to lose. A number of these had to have their retirements delayed or were brought back as consultants. These programs can lead to other surprising consequences.

When a program similar to DuPont's was offered to the Manville Corporation's employees, the takers included the company president. Because this reduction strategy is such a blunt tool (companies are restricted in how finely they can target the offers) some users of it have practiced subtle ways of letting staff know where they stand. According to William Morin, chairman of the largest U.S.

outplacement business, "the inflection in your voice can show whether you want people to stay or leave - or the way you tilt your head." Some companies are more direct. American Motors Corporation helped avert some unwanted departures by avoiding buyouts altogether and putting favored staff into the positions vacated by those it previously fired.

A New York company counseled a 55 year old manager considering early retirement: "You will always have a job with us, but you'll have a position at a lower level, and you're already above that salary range now. So you can't expect you'll get any increases in salary between now and when you're 62."

These plans do produce results.

DuPont has used them to reduce its workforce by 10%, Exxon by 15% of its U.S. staff. And their economics, at least in the short term, can be favorable. DuPont in 1985 took a $125 million one-time charge in the first quarter of 1985 to gain a $230 million recurring annual after tax savings. Union Carbide, with a less generous plan, spent $70 million in up-front charges to obtain $250 million in annual savings afterward.

Why downsizing is the best option to reduce labor cost

One stock analyst, and IBM watcher, estimated that if 8000 employees accepted IBM's early retirement offer, a forty cents per share earnings gain would result in the following year, and a fifty cents a share increase in the years afterward. Another inducement encouraging businesses to consider this retirement cost increasing strategy is the almost $100 billion surplus in overfunded U.S.

corporate pension accounts.

Easing pain; lowering costs
It is always easier to precisely quantify short term costs and benefits; numbers representing the long term are usually "softer." Often long term costs must be judged qualitatively and sometimes only in retrospect.

This is certainly true when companies consider writing-off many years of investment made in building the loyalty and skills of their human capital. Throughout this book we have been arguing for streamlining organizations, but in doing it in ways that pinpoint problems, maximize long term benefits, and lower the costs to the individuals losing their jobs and the companies losing them.

In Chapter Two we considered some of the visible costs, expected and unintended to demassing.

These costs were both human and economic and they affected both the ex-employee's and ex-employer's abilities to functional effectively after the cutbacks. One kind of hidden cost, typically hard to quantify, is incurred when a business loses many of its managers and high level staff professionals. These people, over the years, have acquired what the economist Oliver Williamson calls company-specific skills.

Why downsizing is the best option to reduce labor cost

These are learned on-the-job and they are concerned with the thousand and one things that it takes to get something done well in a specific company environment (or corporate culture).

The hardest of these to easily specify are those related to the effective collaborative relationships a manager may have built up over time. These can allow things to get done, quickly through personal trust, not bureaucratic procedure.

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Williamson maintains that when a manager with considerable company-specific talents leaves the firm, a loss of productive ability also occurs. And, to make things worse, this is a loss to both the company and the employee, since the manager often will have no use for these talents in his or her next place of employment.

When new employees are eventually hired they will have to be taught these skills, adding training costs that would not have been necessary if the old managers had stayed. This is not an argument for never losing any employee but just a reminder that turnover often brings with it overlooked costs.

The other general type of skills managers have are more portable.

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They have to do with applying standard analytic techniques, running a personal computer, knowing the ins and outs of a particular industry, etc. These talents, what Williamson calls firm-nonspecific skills, are purchasable in the labor market, though sometimes at a premium above what it costs a company to acquire these through training and executive development programs for those already hired.

One danger that may be present in the post-demassing work arena is that managers, feeling that job security is a notion of the past, may invest most of their efforts in acquiring transportable skills. To the extent many of them ignore the need to develop company-specific talents, they will be less able to leverage their other talents. And their company's managerial effectiveness will be impaired.

Considerations like these have influenced Hewlett-Packard, and other cautious downsizers, to give serious attention to ways to implement downsizing without layoffs.

Alternatives to layoffs
The simplest way to reduce the costs and pain of downsizing is to develop options to layoffs, both the voluntary and forced varieties.

A number of these exist; creative executives can certainly develop others. Some have been used extensively, but most are relatively underused.

Just as layoffs are not always necessary, alternatives to them are not workable in every downsizing situation. Which approach makes sense depends on both the magnitude of the reduction that must be made and on the amount of lead time that is available.

For companies with the most acute problem, those that need to reduce payroll by 15% or more almost immediately, few options are available other than deep, across-the-board terminations.

While businesses facing impending closure have limited options, relatively few downsizers are in need of such a drastic turnaround.

Businesses with an immediate economic threat, but one that requires less deep cuts, have more alternatives.

To reduce head count ( or preferably the more useful indicator of total human resource costs) by percentages up to the low teens, the available tactics include:

- "Pull" strategies such as extensive voluntary buyout or early retirement programs.

- Bringing contracted-out work back inside the company.

- Pay reduction and involuntary job change strategies.

The effectiveness of pulling work done outside the company back in house to keep otherwise surplus staff members busy depends, obviously, how much has been contracted out and how quickly it can be brought back.

It also depends, a lot, on the range of skills and flexibility of your workforce. As companies in Japan have learned, this is a form of musical chairs which may help one company but has the net effect of making the labor surplus somebody else's problem.

Pay reduction, as a layoff alternative, has been practiced with some success by companies in the rust bowl, Silicon Valley, and Japan.

In addition to the Hewlett-Packard efforts already considered, their neighbor in Santa Clara, California, Intel Corporation cut salaries by up to 10% to save an estimated $20 million from its 1983 payroll. Hitachi Ltd. responded to a 1987 pretax earnings decline of 40%, in part, by cutting managerial and executive pay. The 6800 Hitachi managers titled section chief and above each had 5% reductions; board members lost 10% of their salaries.

As with Hewlett-Packard, this was not the first time this tactic was used. In 1975 salaries were lowered for a nine month period from 5 to 15%.

Reductions such as these can also be used as preludes to early retirement offers. In addition to 5% pay cuts for its managers and professional staff, Hewlett-Packard imposed mandatory use of vacation time and forced unpaid time off before recently offering 1800 employees a generous early retirement window.

Other approaches can have the same net result as pay reductions.

Motorola Inc.


has used shorter workweeks as a key part of its employment security program, especially in the more cyclical parts of its business.

Signetics, a Silicon Valley unit of the Dutch electronics giant, Phillips N.V., has used shortened work weeks in slack periods to give managers and factory workers an alternative to layoff. Variations on this include job sharing where two employees divide the work of one job between them. They also divide the pay and benefits. Polaroid Corporation has been able to divide jobs so employees alternate on either half day or every other month schedules.

Most job sharing has been done with hourly workers, but a well designed approach could make sense for some staff professionals. At Polaroid and Pacific Northwest Bell Telephone, employees were encouraged to take unpaid leaves of absence for a pre-specified period, with their jobs guaranteed to be available at the period's end.

For some large organizations, sizable cost savings can be obtained by reducing paid vacation and holiday time. Others have tried to expand the length of the workday to avoid new hiring or make up for employees who have left.

A final approach to consider in these circumstances is mandatory redeployment to lower paying, vacant, jobs elsewhere in the company.

Most of these are temporary measures, often most useful for companies in cyclical businesses or ones with a high degree of confidence that a new product or marketing strategy will make a hockey stick business forecast come true.

Eventually continued salary reduction programs will cause good performing managers to look elsewhere, and those who stay to lose confidence in the company. These programs usually only work over multi year periods in times of national or regional depression, when employees have few other options. When repeatedly used, they can give false comfort to top management. One high technology firm used these tactics for many years to help maintain a stable earnings record.

While major layoffs were avoided, market share and product reputation declined considerably, partially because top management was kept from facing in a timely fashion the business reasons behind the company's decline.

Another danger of these programs lies in their execution. To be done in a way not suicidal to employee morale, they need to be applied evenhandedly. Hitachi has taken the safest approach; the higher you are in the hierarchy the greater percentage of pay you have to do without. Long term employee commitment can easily be destroyed by awarding top management large bonuses while asking others for pay give backs.

In situations where immediate action needs to be taken, but the magnitude of the percentage change is well in the single digits, other options are available.

In addition to scaled-back versions of the tactics already considered, these include:

- Narrowly targeted job buyouts and early retirement programs.

- Selective terminations.

- Reassignments to comparable jobs elsewhere in the company.

- Freezes on creating new positions, filling vacant jobs, salary increases, and bonuses.

- Mobilizing the troops.

Ohio-based manufacturer Nordson Corporation, and many other firms, have able to prevent or postpone layoffs through combinations of hiring freezes and caps on wage increases.

Shell, a planned downsizer, reduced its workforce from 37,000 to 34,000 in five years through a combination of selective dismissals and attrition. Attrition coupled with hiring freezes ("watching the front door as well as the back") has helped many companies slim down.

But for this formula to be helpful over the long haul centralized planning is needed to fill vacancies as they arise by reassigning people already employed. Without this overall monitoring downsizing will lead to some unit's payrolls shrinking while others increase by the same amount.

Selective dismissals involve mobilizing a downsizing mechanism most companies already have in place: their performance review system.

Performance ratings can certainly be an input into decisions about forced dismissals. Their use should help avoid the problem of good performers losing their jobs while marginal ones stay, but for them to be useful they also need to provide valid information. Many do not, usually because the systems are undermanaged in many companies or are used primarily as a way to make salary decisions, not to spot and correct performance problems.

Another form of mobilization makes use of participative management.

Instead of a few senior executives or headquarters staff trying to make detailed cutback and work rearrangement decisions about individuals far away in the hierarchy, they turn the problem over to those whose jobs are at stake ("the troops"). Chapter Four highlighted how this was done in a drug manufacturer. It also illustrated a limitation of this process: it tends, in the short run, to produce smaller cost savings.

But the philosophy behind it is still a useful, but unfortunately under exercised. It can help build a very committed workforce, a key to long term competitive success, but building this needs to rest on an economic analysis that there will be a possibility of a competitive future for the business that these people can share.

Mobilizing the troops works best when the company's economic problem is amenable to a near term, group pulling-together solution.

This is illustrated by the way a West German food retailer approached managing an acquisition.

When Deutscher Supermarkt Handels-GmbH bought a troubled supermarket chain it had two options. It could restore its economic health by traditional turnaround measures: closing stores, laying off employees and drastically cutting costs and reducing assets. Or it could take the path its chief executive, Hugo Mann, chose. He conducted a careful analysis of both sides of the profit equation and found that a turnaround could also be achieved if sales were increased by 5% company-wide.

Soon after the sale was completed he presented the managers and employees of the chain with the challenge: find ways to increase sales by that amount and no one would be out of work.

This encouraged teamwork and mechanisms were put in place to implement ideas for creative ways to attract new customers, encourage the current ones to buy more items, and to differentiate the stores from their competitors'. The approached worked, sales and profits increased and Mann's careful analysis of the business's economics brought greater revenues than the asset stripping strategy would have provided.

Mobilizing the troops, even if underused, is an attractive strategy for many executives.

Hospitals Target Labor Costs, Layoffs to Reduce Healthcare Costs

It can focus on cost cutting as well as sales growth (or both) to forestall layoffs. But for it to be effective certain internal conditions, as well as external economics, must be present:

- Strong and focused leadership from the top must be provided.

- All employees involved must trust this leadership enough to become very committed to improving the business for the long haul, not just preserving their current job for the time being.

- Mechanisms must be put in place to short circuit the ordinary, business-as-usual haphazard ways new ideas are developed, considered and tried.

Without all three of these in place, mobilizing the troops is a nice sounding slogan that can lead to misplaced expectations all around.

Longer-to-implement alternatives
The more time a company has to execute its downsizing plan, the more options it will have available to reduce workforce size and limit the need for costly and painful layoffs.

More opportunities will also be available to preserve and refocus past investments in training and culture building. The time available is sometimes limited by events outside the company's immediate control, but more often than not these events can be anticipated and dealt with on the company's schedule not the outside world's.

Alternatives to Employee Layoffs to Reduce Business Costs

Doing so, though, requires a close linkage between the people who plan corporate strategy and those who plan for its organization and human resource requirements. This is the point the process usually breaks down; too few companies build these bridges to the extent necessary. Too few take the view that organization development is a strategic activity, at least to the extent this is done at Hewlett-Packard, IBM, Shell and TRW.

Taking a longer view of downsizing only works when a company is prepared to manage time well.

Many demassing and across-the-board layoffs happen because executives fear that any prolonging of the streamlining process will cause more management and human relations problems than are worth tolerating. They feel it is best to "get it over quickly, once and for all." They are usually correct that successive layoffs over several years will have a greater negative affect on morale than one big one that "puts the problem behind us." But this sort of reasoning ignores other, non-layoff, options that take time to execute.

It also ignores the possibilities of using adversity to the company's long term advantage through "mobilizing the troops" strategies.

Using time to the company's best advantage does not mean doing belabored analyses to keep from making hard decisions. It certainly does not mean creating a period where an information void is created.

This only allows employee's worst fears (about both what may happen to them and what they feel top management's capabilities to act competently) to fester. Keeping this from happening requires the company to build and maintain employee trust through continual two-way communications. Just as doing a good job managing one day's cash flow may do little to insure there will not be problems tomorrow, top management must continually shape reasonable expectations by letting people know where they stand and where the company is going.

The psychology here is to drive the bad out with the good, replace rumors with authoritative information. Provide legitimate outlets for grumbling and insecurities to be expressed upward, not just in organizing-destroying ways through the informal communications channels. Manage your situation with the directness and honesty Esmark worked at doing.

Having "bought" some lead time, through careful strategic planning and well managed employee communications, what new downsizing options present themselves?

It's useful to consider actions requiring one to three years to complete and those taking longer.

One to three year options range from spinning-off entire business units to letting nature take its course through partially managed attrition.

Why downsizing is the best option to reduce labor cost

The largest potential reductions can occur when plants or entire divisions are sold off. The leveraged buyout has become a popular form of divestiture in which a part of the business is sold to its managers in partnership with sources of loan funds.

Employee buyouts, using employee stock ownership plans to finance the sale and turn all workers into part-owners are also increasingly common. Neither is a panacea for businesses with difficult economics, or weak managers, as the situation of General Motors spun off roller bearing company in New Jersey illustrated.

Its business and management problems led to the unlikely situation of Hyatt-Clark's owner-employees going on strike against themselves. The third spin-off option, and the most traditional, involves selling part of the company to another firm to whom it has more value or potential. None of these moves in themselves will solve the problem of an overstaffed organization. Many in fact, as considered in Chapter Two, lead to significant layoffs. But many also avert even deeper cutbacks that would have been required if the unit remained with its parent or was closed down.

Another mechanism that can achieve relatively large reductions in this intermediate time frame is the use of a series of voluntary buyout or early retirement windows.

These can be useful when a particular company's demographics indicate that several years must pass before the majority of employees reach the minimum age allowing them to take advantage of early retirement benefits. Planning for a series of windows can create expectations in some employees ("well I can always wait until the next offer") that run counter to the plan's objectives; in these cases it is more appropriate to offer the plans to different organization units at different times.

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Legal constraints and differing company age distributions require these be planned very carefully.

More moderate targets can be realized in this time period through measures such as:

- Mobilizing the troops.

- Selective terminations.

- Retraining for inside work.

- Retraining for outside jobs.

- Loaning staff.

Both the troop mobilization and selective termination strategies are appropriate for situations requiring immediate action to produce relatively small cutbacks or cost savings.

Greater reductions or cost savings are possible using these same methods if they are managed over a longer time period.

Allowing more time permits the results of training and retraining investments to payoff. People who are surplus in one areas of operations, but who still have a lot of the "company specific skills" that Williamson described, are retrofitted for work in areas where either:

- New recruits would have to have been hired, or

- Newly created jobs that "pay for themselves."

An obvious way to limit growth is to replace new hires with retrained current employees.

But companies seldom think about creating new positions when faced with the need for cutbacks. An important economic principle about value added is often lost by companies caught up in downsizing. It states that there is nothing wrong, even in a situation of overall retrenchment, with adding a new position if the value contributed by that job exceeds its costs.

For companies that want to prevail, not just shrink, and have business possibilities that will make this potentially realizable this can be a viable alternative to laying off talent already on board.

The key difficulty here is being able to wait for these new jobs to contribute the value that exceeds their cost. This takes a measure of financial strength and executive foresight. When Mazda had limited success selling rotary engine automobiles almost two decades ago, many workers were redeployed from offices and factories to the domestic sales force.

Selling a car in Japan is a very labor intensive, time consuming operation. Adding more resources sold more cars, and helped buy the time needed to develop better products and find a long term financial partner. IBM, in addition to the early retirement program already mentioned, has more recently engaged in a major redeployment of talent it did not want to lose. It consolidated five headquarters marketing staffs into one and dealt with the resulting employee surplus by moving 2500 people to its field offices in sales and systems engineering jobs.

Almost twice this number of workers were simultaneously shifted from manufacturing facilities and laboratories to field positions. Putting these people closer to the company's customers is intended in part to help defend and rebuild relationships that have been threatened by aggressive competitors. These job reassignments are accompanied by major training investments: many of those going into sales jobs received three week classes as part of a ten month program to refresh their customer relating skills.

Retraining managers and staff professionals for work outside the company is a less tried option.

Many are able to find work with the skills they have; company-specific skills, critical to many managers to get things done, need to developed in their new homebases. Job finding and resume writing skills have been provided by both downsizing employers and outplacement services, but they are, hopefully, of only temporary need. Some corporate training facilities and tuition reimbursement programs allow employees to retool for career shifts.

The initiative here has usually been with the individual employee, but some companies may discover this as a useful adjunct to planning a gradual streamlining.

Loaning staff outside the company is another tactic that has received only limited use.

It implies, usually, keeping surplus staff on the payroll at least temporarily but having them work directly for community associations, government agencies or trade associations. Another alternative location for them, that might have a greater direct business benefit to the loaning company, is to place these people with suppliers, subcontractors or customers.

To the extent the downsizing objective is other than cost reduction, this option offers ways to unclutter organization charts. These can be holding areas for talent needed for the long term but for whom places to contribute will not be available until more attrition occurs.

More commonly, this is used as a prelude to retirement. If cost reduction is still important, expense-sharing agreements may be negotiated with the recipients.

When more modest reduction objectives have to be met, and there are still several years in which to achieve them, methods including attrition, converting staff to consultants and marketing staff services outside the company can come into play.

Managing attrition, hopefully with better results than the frustrated A.T.&T.

manpower planner in Chapter Two had, can be the least pain-causing way of downsizing. As learned by Shell and others who have used it successfully, it does not work by itself. It must be carefully managed. Hiring freezes, which usually accompany it, tend to become hiring postponements. To get the most mileage from attrition investments need to be made in skill inventories and retraining programs so as openings arise they can be filled from the internal labor market.

This market has to be an efficient one with mechanisms in place to allow for relatively easy movement of transferees. Managers need to be more willing than usual to part with their best people, if moving them will help stabilize the overall company size. Costs and inconveniences should be fairly shared by all organization units.

When hiring freezes must be violated, there should be general understanding for the reason behind the partial thaw. The cooperation, and trust, of the workforce needs to be enlisted, especially when they are expected to be geographically mobile and willing to abandon old and comfortable skills for new jobs.

In the U.S.

government, where civil service regulations can contribute to an efficient internal labor market, the Health and Human Services Department was able to eliminate 1264 jobs from the office of its secretary without firing anyone.

This 30% reduction was accomplished by a mix of early retirement for senior employees and a redeployment of surplus staff to other parts of the department. In Japan an even larger reduction has been planned..

Downsizing Doesn't Equal Productivity Increases or Long-term Cost Savings

As the Japanese government prepares for the privatization of its national railroad methods are being devised to reduce employment from 307,000 to 183,000. A nationwide job opening search was conducted to find places throughout the public and private sectors for the thousands who cannot be accommodated by traditional early retirement programs.

The overall objective is to prune back the company without dismissing anyone.

In is no secret than even in companies with strong commitments to "no layoff policies" attrition results from the involuntary or semivoluntary job shifts required to maintain them.

At IBM an observer estimated that as many as 20% of those requested to move to field sales and marketing jobs may decide to leave the company instead. Other companies have been less above board than IBM in dealing with surplus managers. They offer them reassignments ("try the Anchorage office for a few years...") calculated to have the same impact as directly terminating the managers. Done repeatedly this kills the possibility of more constructively using the redeployment tactic.

Converting headquarters staff employees into external consultants can save on office space, support staff, payroll taxes, equipment and supplies.

Here, as with benchmarking, Xerox is the industry leader. Its London-based subsidiary, Rank Xerox Ltd., set up a program for specialists in areas such as human resources, pension administration, planning, and procurement to trade their full time jobs for two day a week consulting assignments. Long term contracts provided them with a measure of security and their consulting fees for the two days often came close to their former paycheck size.

Help was given to them in becoming independent businessmen and they were encouraged to find outside clients. Low cost furniture and office equipment were offered and a personal computer loaned so the new consultants could easily tap into Xerox databases to do their assignments.

Why downsizing is the best option to reduce labor cost

Eventually Rank Xerox hopes 25% of its headquarters professional staff positions will be converted to consultancies such as these. As companies are losing many years of accumulated company-specific experience through early retirement programs, approaches like this are becoming more attractive.

Xerox and a number of other companies are also using the converse of this approach: they keep the staff specialists on the full time payroll but encourage them to sell their services to customers outside the company using the time they have left over from their in house responsibilities.

The revenues generated can help cover some or all the costs of what would otherwise be an overhead operation. The mechanics of this and its non-financial benefits are reviewed later in Chapter Nine.

Several of the downsizing options available to businesses able to wait at least several years before their implementation is complete. Greater gains through attrition strategies can be achieved than possible in shorter time periods.

The time is also available to develop free standing, spin-offable, businesses from some staff departments, as considered later in this book.

But the greatest gains can come closing down entire segments of a business. Doing this on a gradual schedule allows for the possibility of a redeployment of most of their staff. Some companies, such as Siemens and Sony, have also used analyses of the capabilities of staff that may be surplus in their main businesses to guide their diversification into new business areas.

Such surplus talent based diversification may seem like putting the cart before the horse, but for companies concerned about making the most out of an already large investment sunk in building their human resource capabilities, this can make some sense to at least explore.

Well orchestrated size control
In the 1970s and early '80s, IBM was one of the best examples of a company that manages people flow with the same high degree of attention that is given to cash flow.

Why downsizing is the best option to reduce labor cost

It joined hundreds of other companies in offering an early retirement incentive that enabled it to more than double its customary attrition rate. The recent redeployment effort outlined above was not a new experience for IBM.

Economic troubles from 1969-72 required the movement of over twelve thousand employees from plants, offices and laboratories short on work to others needing their talents. Five thousand of these required retraining and a shift in their careers as they assumed new jobs in computer programming or sales. And only a few years after this, three thousand additional employees took new jobs as part of a continual effort to "keep the circuits balanced."

A significant amount of management attention, at all levels of the IBM hierarchy, is required to make these movements work.

In addition, the company has been able - through the no-layoff practice these moves support, and its other personnel policies - to maintain a high degree of employee trust in management. This trust level, in turn, allows IBM to make requests of its employees that would be very unlikely to be entertained by workers in firms that have not paid IBM's attention to winning their commitment.

Walton Burdick, who is in charge of IBM's human resources function, feels very strongly that full employment practices must involve a mutual commitment based on mutual trust. He notes: "People have to be willing to be retrained. And reassigned. And redeployed. And in some instances, though not all, relocated." At IBM, you protect your job by being flexible. The company's role is to provide resources, including spending a half a billion dollars on employee education in 1985, that the employees need to maintain the flexibility.

What this means on a day-to-day basis is a series of interlocking practices that provide a carefully graduated way of matching company responses to increasing surpluses.

The sequence is controlled from the Armonk headquarters, but the practices are managed locally. Incentives are built into the system for branch locations to solve their own problems before headquarters moves in. The sequence works something like this:

First, company size and workload are continually monitored.

When staff or management surpluses occur, IBM's habitual attention to human resources planning has already provided considerable lead time to plan responses and prepare people. Surpluses are characterized by size, expected duration (a problem for a year or two v.s. a situation expected to be permanent), and the types of talent affected.

Second, to the greatest extent logistically and technically possible, work is moved before people are.

In some manufacturing situations it is possible to shift production from one location to another to balance the overall workload; for sales and customer service work, this is obviously more difficult.

Third, what IBM calls "the buffer workforce" is reduced or eliminated. This includes temporary workers (hired for specific periods of time with the understanding that their contracts may not be renewed) and overtime for regular employees.

Fourth, then pre-recruiting programs such as internships, coop programs and summer jobs are reduced.

At this stage employees may be encouraged to take unused vacations or to consider temporary leaves of absence.

Fifth, the "side door" is closed by limiting transfers from other parts of the company into facilities where surpluses exist.

Sixth, the "front door" is shut by limiting or freezing new hiring in these and other locations. Both side and front door closings are intended to maximize the help that can be provided by attrition.

Seventh, workers in locations and job categories of surplus will be asked to consider voluntary relocation to other part of IBM.

Within IBM movement from surplus white collar staff jobs to factory work is encouraged when necessary. In one effort called the "Voluntary Assignment in Manufacturing Program" the risk of volunteering was reduced by giving those who accepted the chance to, if they wished, return to staff jobs in their speciality after nine or twelve months.

Eighth, employees finishing leaves of absence for education and other reasons will be diverted to other IBM facilities.

Ninth, early retirement and other "special opportunity" programs are offered.

Tenth, services that have been contracted out locally are brought back in-house and done by the surplus workers.

Having high technology employees doing building painting and ground's upkeep is not the most useful way to employ their talent, but it can have a strong symbolic value to demonstrate IBM's commitment to them.

Production that has been contracted out is also brought back in to the extent feasible in this step.

Eleventh, an overstaffed facility can be declared "open." This allows other IBM locations to aggressively recruit its workers to join theirs; it also allows employees potentially subject to being displaced to select three alternative work locations they will be willing to move to.

The management at these locations must either take these workers or do a considerable amount of explaining why not.

Twelveth, employees are transferred involuntarily to comparable jobs at their current location.

Thirteenth, employees are involuntarily moved to lesser jobs in these locations.

Fourteenth, workers are required to relocate to wherever jobs are available in other IBM facilities.

Many of these alternatives are possible because even in times of non-surplus, IBM continually rotates its people and encourages multifunctional careers.

Later we will consider how this kind of movement is vital for downsized companies that want to stay slim. From option nine onward, headquarters approval is needed before these steps may be taken. IBM does not always go through every step or follow this exact sequence, but these items indicate the cafeteria of layoff options they keep available.

IBM is concerned about the musical chairs common in Japan that option ten can involve. More than one IBM supplier has been disappointed when told by IBM that they want to limit the business it receives because its workforce may become too dependent on IBM for their own job security.

Still companies such as Seagate Technology and Tandon Corporation have had to make sharp cuts in their workforces after IBM reduced their orders.

Most companies admire IBM's management prowess, but some feel it has gone overboard in the extreme lengths taken to make full employment a reality.

Others, including IBM, feel the benefits gained easily outweigh the costs. Obviously companies with more limited scopes of operations, fewer locations, and fewer similar jobs will not be able to make use of all these. But many can customize a sequence that fits their situations and achieves many of the objectives that IBM's approach does. At the least IBM's practices represent a reference point worth considering, just as People Express' have lessons about how to manage with minimal layers.

Both layoffs and layoff alternatives are hard for many companies to effectively implement.

This is often because they have little experience managing situations of declining size and retrenchment. Most management attention since World War II has gone into managing growth, increasing production capacity or expanding to meet new market demands.

Building organizations, not taking them apart, is the task in which their executives have acquired talent. The purpose of this chapter is not to single out or belittle companies that have had problems shrinking their size. Companies that have handled cutbacks poorly have usually done so out of ignorance of alternatives, not from some malicious desire to unfairly punish their now ex-employees. Managing workforce reductions in ways that do not also cause job security crises is an art U.S.

businesses are only slowing acquiring.

Just as lessons about effective downsizing are just now being painfully learned, few executives have been able to build experience in the new management style that is required to successfully, and safely, make their new, lean corporate structures operate. The next chapter lays out some key features of this different way of getting things done.


© Robert M.

Tomasko 1987, 1990, 2002