The dangers of downsizing

Indiscriminate layoffs can leave companies too downsized to compete

We're a high-tech company," says Cindy Childers, a top manager at Acxiom, the $1bn maker of highly sophisticated database integration software. "So when we started to consider cutbacks we realised we needed to create our own tools to help us with the process."

Indeed, along with thousands of other businesses facing slowing sales in this economy, Acxiom has faced drastic revenue shortfalls this year. Last spring Acxiom's chief executive, Charles D. Morgan, called a meeting with his top managers to discuss options. "We didn't want to do layoffs and mortgage our talent away," says Childers, "because we realised those associates are also our future." Instead, Acxiom imposed an across-the-board

5 percent pay cut in which employees would receive stock options in the dollar amount of the pay cut. In addition, employees who elected to take a pay cut in excess of 5 percent would receive twice the dollar amount in options of every dollar in excess of 5 percent. Using a custom online stock-option profit calculator, Acxiom employees could enter variables into the calculator such as home and child care costs, as well as see the potential profit of their options. The result was that a full 38 percent of employees opted for additional pay cuts.

Acxiom belongs to a school of thought that believes layoffs are bad business. This message hasn't exactly been well received in America's boardrooms. On the day of June 28 alone, Nokia, JDS Uni phase, and Williams Communications all announced massive cuts. At press time, according to statistics compiled by the outplacement firm Challenger, Gray & Christmas, nearly 1 million workers had been severed so far this year.

John Challenger, chief executive of the outplacement firm that bears his name, is among those contending that if the economy rebounds in the first three months of 2002--as many economists expect it will--the companies that did not slash their head count will be the ones to gain. "Most studies have shown that layoffs fail to prop up stock prices," laments Challenger. "That's just short-term. Then there are long-term problems like loss of morale of the remaining employees, a talent drain, and trying to recapture market share and valued employees once things turn around. There's operations chaos because when new people are hired they don't know how things worked before."

Vince Mabert, a professor of operations management at Indiana University, has studied several companies that have gone through layoffs and says that typically only half of those companies subsequently met their profit goals. "Sometimes there's no choice; you've got to lay people off," says Mabert. "But companies spend all these resources hiring people and training them. When it comes to letting them go, there is usually very little thought devoted to it; it's totally haphazard. Eli Lilly had open enrollment for people who wanted to be laid off, and there were really negative consequences because all the talented researchers left. And this is a company whose future revolves around research and development."

It's a phenomenon that's all too familiar to Adrian Savage. He recently formed PNA--a corporate consultancy focusing on employee value and retention. PNA is set to roll out a Web-based application to help companies assess the value of specific employees, helping managers reassign them instead of lay them off. Says Savage, "What's the first thing you hear from companies in good times? It's that their people are their best asset. I hear that all the time. Yet what happens the second something goes wrong? They cut the people! Why would you get rid of your most valuable asset? Sometimes it has to happen if there's no money to pay people, but it's usually done because it's the easiest thing to do." Indeed, Savage has been sounding the alarm to his clients. "The hiring crisis isn't over," he says. "It's just begun! Fifteen percent of the work force is retiring every year, so if you are just standing still in today's job market, you are losing."

Alas, even companies like Acxiom have not been immune to layoff pressure. In June, with an operating loss of $3m to $6m, Acxiom laid off about 400 employees, roughly 7 percent of its workforce. "We want these people back," says Childers, "and we're doing everything we can to make sure they will come back." Again, Acxiom looked to technology for help, and created an in-house Web site and database for laid-off employees. These employees will get top priority for all new jobs, as well as access to outplacement assistance and $5,000 loans that are guaranteed by the company.

PNA's Savage says Acxiom's strategy is on the right track. "You've got to be honest with people, and then they understand, and that does away with a lot of the ill will that can be damaging for a company," he says. "But study the issue, find out what other options are, find out what people you can't afford to lose, and don't just lay people off because it's the easiest thing to do."

Layoff Lessons

  • Consider pay cuts before layoffs. Get your tech team working on a simplified online calculator to show what a cut will mean to take-home pay. "You'd be surprised how little it is," says Alison Melson of Acxiom. "It made pay cuts a great success."

  • Find out whether there are other positions in the company where people can be of value. "Believe me," says Adrian Savage of corporate consultancy PNA. "You are going to need those people when things turn around."

  • If you must lay off, create a (former) employees--only Web site to be used as a résumé clearinghouse and job board. "We did it," says Acxiom's Cindy Childers. "And it's the first place we go when we need to fill something. It lets people know we really do want them back."

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