ASQ - Team and Workplace Excellence Forum

Online Edition - January 2002


Issue Highlight — Teams Are Awesome!
-In Teams Are Awesome! -- We offer you the power, energy, and innovation that come out of teams working together to improve their work, their work environment, and, as often as not, themselves. They truly inspire awe. Here we present four teams selected at random from those who have entered AQP's Team Excellence Competition.

Ten Compelling Reasons Why Your Company Shouldn’t Downsize

The media regularly report stories of corporations—both large and small—downsizing their staff. When this occurs, most people instinctively focus their attention on the newly laid-off workers, as they are the ones most acutely experiencing the immediate effects. However, we should also examine the negative effects downsizing has on a company. While it’s true that downsizing may provide a decrease in operating expenses in the near term, the long-term impact may not be so positive.

Therefore, business leaders need to carefully consider the long-range effects that present cost cutting will have on their organizations. As few as 10 years ago, most layoffs were a temporary solution to increasing costs. Not so today. The new order is that of permanent severance. For many, the proverbial pink slip has turned to bright red.

In previous decades, the cuts were heavily weighted toward blue-collar production personnel. Today, with our heavy reliance on 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 40s, 50s and 60s have borne the brunt of the reductions, as their higher-cost compensation and benefit packages are targeted for maximum near-term, bottom-line savings.

Consequently, these changes have set into motion what could become a veritable time bomb for companies that decide to pursue cost reductions through massive staff cuts. The following are the 10 most common consequences that could hinder your company’s future growth.

1. Lack of a recallable employee pool.

Today, many severed employees are not only informed that their release is final, but they are also 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 are choosing to become entrepreneurs, thereby, forever removing themselves from the available labor pool. We entered 2001 experiencing labor shortages across most industries, which were particularly acute for highly skilled and technology workers. At the moment this scarcity may have temporarily abated, but its root causes remain and the scenario is certain to revisit us as soon as the economy enters the next upturn.

2. Poor morale and lack of trust among younger employees.

Employee loyalty—or the lack of it—is a hot topic these days. Based on younger employees’ attitudes about workplace loyalty, it’s evident that terminating large numbers of more senior employees who have faithfully served the corporation for many years has a profound long-term effect on younger, newer employees. The message is clear and they understand. The reward for loyalty is to be axed when you are older than 50 and unlikely to find another comparable position. Because of the tightening job market younger employees may not bolt today, but they will remember. When the economy improves, they will likely seek a future where they feel more secure.

3. Loss of knowledge and experience base.

Many companies and even industries are currently developing knowledge bases in order to capture and access organizational information resources. Yet, no matter how effective these databases are, they will never be a substitute for the knowledge, experience, and wisdom that rests in the organization’s veterans. Although this is true in terms of deductive knowledge, it is even more important for the organization’s continuity and history. People need to feel a sense of belonging to more than just the present. They also need a sense of past and future. Without this, there are no ties, no traditions, no continuity, and often no shared ethics and values.

4. Loss of corporate culture and available mentors for existing and new employees.

The current corporate culture in many organizations is in a state of dispossession. While change is usually a good thing, there are some things that simply should not change. Every organization needs to have incontrovertible statements that transcend the fluctuating business climate and current trends. For example, “In this company we do ______ because we believe it to be fundamentally right.” These values can and should be committed to pen and paper, but they should not be passed on in this manner. Rather, they should be 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 are able to maintain the soul of the organization.

5. Loss of established customer service and customer contact points.

In any business relationship, there are certain people with whom you like to interact. You may call a vendor or supplier hoping to speak to good ol’ Joe, whom you have done business with for years. Image your shock when you hear that Joe is no longer employed there. “Why?” you ask. 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.” Although the organization’s investment in these relationships does not show as a line item on the asset portion of a balance sheet, do not underestimate their value, especially when the global search for new suppliers and vendors is made instantaneous via the Internet. Without relationships, price rules, and the only price that matters today is the lowest one.

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 work force will not yet be 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 the new hires frequently equal one to several years of the terminated workers’ cost to the organization.

7. Possible need to bring employees back as independent contractors at a higher total cost.

The shrinking labor pool together with a high percentage of the middle-aged and older terminated employees who either begin their own businesses or opt for early retirement will mean that many of those who remain and are willing to return to former employers will want to do so under their own conditions. Many choose to do so as independent contractors, preferring a greater degree of control over their own lives. Many companies initially prefer this approach, believing they may only require the services of the former employees for a limited time. Frequently, the weeks and months become years, and the independent contractors, who know the inner workings of the organization, remain and cost the company significantly more than if they had stayed on the payroll.

8. Not fully accounting for the hidden costs.

There are very real costs associated with mass layoffs that 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 co-workers result in an attitude of surrender to cutting corners wherever possible.

9. The loss of future sales.

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 erosion.

10. Diminished market position and status as market leader.

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 is amazing. However, as soon as the economy dips, the slashing begins with little thought to the negative and immediate impact it can have on years of careful work and millions of dollars invested to build that image.

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 are essential to restoring profitable long-term growth. It is that kind of sustainable growth, not temporary savings that should be the primary goal of every corporate business leader.

JOHN DI FRANCES is the managing partner of DI FRANCES & ASSOCIATES, LLC. For more information please visit his Web site at: .

January 2002 News for a Change Homepage

In This Issue...
Fish Philosophy and Teamwork
Connected But Not Connecting
Thriving Through Teamwork
Ten Compelling Reasons Why Your Company Shouldn’t Downsize

Peter Block Column

Brief Cases

Return to NFC Index

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