Rob and our other editors discuss the best philosophy for tough decisions.
Last week, I praised HP's executive team for sharing the pain with their employees (I'm on a best practices role this week and am using others as examples for the new U.S. President). This week, Susan Hall's piece on the aftermath of layoffs made me realize that I haven't really addressed why you do a salary reduction over a layoff, or why companies should consider another alternative. I spent much of my early life in tech cleaning up after acquisitions of failing channel partners, rebuilding after layoffs, and generally fixing problems caused by managers who didn't seem to understand that employees aren't machines you can turn on and off or decide, on the current whim, to embrace or ignore. I'm fascinated and perhaps a bit frustrated that year over year I watch executives do layoffs and then seem surprised that rather than making things better, they often simply postpone what appears, in hindsight, to be a foregone conclusion of company failure. Susan's story, which goes into detail on why layoffs are difficult for those who stay, is on point because it presents the argument that often, people left behind wonder whether they aren't the unlucky ones. (In more cases than not, my answer would have been "yes.") This is generally because they feel betrayed by their own management at a time when that management, for reasons connected to its own survival, needed that loyalty reinforced.
Layoffs: The Last Resort of Incompetent Management
In a normal market, and this clearly isn't a normal market, a company doing a layoff is admitting that its management was incapable of building a working team and has chosen to go back to the drawing board. But a layoff isn't surgical. It is catastrophic. It would be like using a saw to cut off major portions of a race car in order to keep it in the race; the result won't win but maybe it will finish. But if the goal is to win, and generally that is the goal of any management team, the saw approach is clearly an additional problem to overcome. Looking back at the result of layoffs generally confirms the opinion that the promised benefits are seldom realized.
A company is a team, and a team is a complex structure. There are dependencies among members, among groups, and even among companies. If the firm is well run and hits an economic problem, the result should be a surgical approach that alters the makeup of the company to address that problem. The goal, however, is to ensure that the management response doesn't do more damage than the economic problem did. This is a goal that I think many companies forget in doing a layoff. Some argue that this is because CEOs intentionally ignore the negative results. Myopic CEOs generally don't lead successful companies.
Surgical Downsizing: You Can't Have Your Cake and Eat It Too...
You can remove substantial cost from a firm surgically. Most complex companies have units that weren't performing well before a problem, and other units that are carrying the company. Yet during most of the layoffs I've seen, the firm will cut both. The result: even more damage to the marginal division and damage to the unit that was performing well. If you want to minimize the collateral damage, it is better to eliminate units and/or, as HP did, reduce salaries than it is to execute a layoff. By removing a low-performing unit, you concentrate the damage where the impact isn't as great. By reducing salaries, you leave your teams in place (though vulnerable to competitive hires) and, assuming you do as HP did and leave incentive pay alone, you have the motivational tools to overcome the collateral damage of the actions. In addition, you can sell or even spin out (with an employee/management buyout) an underperforming unit. But a layoff is simply an additional cost which is, if you think about it, counter strategic to an effort that has as a primary goal cost reduction. When IBM spun out its Lexmark unit, it initially did vastly better than it did inside IBM. And, prior to the market downturn, the IBM PC Company did vastly better as part of Lenovo than it did in IBM, allowing the company to downsize and the related units to do better than they otherwise would have. Just remember, there are almost always better choices, from the standpoint of the company and its employees, than a layoff.
Wrapping up: It's About Choices
Bad economic conditions, like good, are all about choices. If you make wise ones during an upswing, then undo much of that good work in a downturn, that is truly stupid. If you can use both an up- and a down market to constantly tune a company rather than catastrophically carving it up like a turkey, you'll find the firm and the employees will be better for it. Layoffs are only to be done if there is no other reasonable choice. I maintain that the reason there is no other reasonable choice is because executive management generally didn't do their jobs. One of the first things a turnaround manager does is a layoff, drawing emphasis to the competence problem that brought them into their job in the first place. They are often left with no other choice, but sustaining management, if they wish to continue, should always have another choice.
You have choices of where to buy from and whom you work for. From my perspective, it is always better to buy from and work for smart companies than those that have executive teams that are intellectually challenged. For all our sakes, please make those choices wisely.