Downsizing doesn't work. Research shows this but what are the alternatives? Dr. Wayne Cascio has published an important book, Responsible Restructuring, which shows what successful firms do when faced with tough times.
David Creelman spoke to Dr. Cascio.
DC- Tell me about your research
WC- I have been doing research on restructuring for well over 12 years now. In 1995 the Department of Labor gave me a grant to find positive news in all the downsizing that was going on. I wanted to find companies that were doing it right. I found executives were divided into two camps. The larger of the two camps saw their employees as costs to be cut. The other group saw its people as sources of innovation and renewal.
DC- In good times everyone would say they their employees are assets, but as soon as there is pressure the accountants come in and say employees are a big cost and we need to cut back.
WC- The logic of downsizing appears compelling because there are only two ways to make money in business, cut your costs or increase your revenues. It is easier to cut costs than increase revenues. Increasing revenues takes real work.
DC- How do companies that see employees as sources of renewal respond when they are under economic pressure?
WC- I found, counterintuitive to companies that see their people as costs, that the best companies get people involved. They see their people as part of the solution instead of part of the problem. To restructure responsibly management leads by example. At Charles Schwab the co-CEOs each took a 50 per cent pay cut and they had a scale of pay cuts down from there depending on management level. Managers took pay cuts before they asked their employees to sacrifice a dime.
There is a mental set that senior managers have when they see employees as assets. They think about downsizing as the last resort instead of the first one. I studied a little firm in Vermont called Rhino Foods. They are a specialty-dessert manufacturer. When times got tough they used teams of employees to come up with creative alternatives to laying people off. One of the things the company did was lend its employees to customers, suppliers and local businesses. The company was then able to bring the employees back in the spring when demand picked up for ice cream.
I call this a warehousing strategy--a warehousing of employees. Cisco has been doing that too and also Accenture. At Cisco they take their stars and offer them sabbaticals. They will allow them to work at non-profits at maybe 20 per cent to 30 per cent of their salary, but employees keep all of their benefits and seniority. They keep their phones and e-mails and everything else as if they were working at Cisco. It takes some creative strategies to work around the obvious solution of cutting people. However employers that really had to scramble in the tight labor markets of the 1990s do not want to let people go because they know when the economy snaps back it will be hard to find people again.
DC- What other tactics have people used to avoid downsizing?
WC- Lincoln Electric makes arc-welding equipment in Cleveland, Ohio. It hasn´t laid off anybody since the 1930s. When sales fell 40 per cent they had to do something. Most of the people who work there have high school degrees or less. The company gave the shop floor workers an opportunity to retrain in sales and marketing. Ninety people came forward and said they would like to try. They called them the "Leopards" because their job was to find spots in the market that might provide opportunity for the company´s products.
These people went out and talked with customers, suppliers, and potential customers. They found there was an untapped market for light welding jobs, such as when a back yard barbecue breaks down and needs repair. That line of business now brings in $800 million of new revenue. That revenue exists because they took a creative approach to finding ways to grow the business.
DC- Leaders have to be careful not to fall into the trap of thinking now they know three or four new tactics. As I understand it the answer is not, "Here are some alternatives to downsizing, pick one." But rather, it is a process solution. It is management reaching out to employees and engaging them in figuring out what to do.
WC- It is important to recognize there is no cookie-cutter solution. There are a couple of counterintuitive things that the firms I studied do. In a downturn most companies are highly secretive about what is going on .They huddle in small groups and make decisions about whom to cut and how many to cut.
In contrast, responsible restructurers go out of their way to communicate with employees through a lot of different media. They try to promote business literacy and help employees understand how the business works, how it finances itself and how it markets its products. This gives employees a better grasp of possible solutions. When you do this, people really sign on as partners and are willing to look for some creative alternatives.
DC- This is consistent with the research showing that open book management generates significant shareholder returns.
WC- It sounds basic, but you see companies playing things so close to the vest that rumors spread and this generates a tremendous cost in productivity as things spiral down from there.
DC- Most HR managers are going to find themselves at firms whose first instinct is to keep things secret and cut employees. What can these HR managers do?
WC- First, HR managers need to be aware that there are alternatives to downsizing. One of the things I would do is learn what firms in the same industry have done because senior executives are highly receptive to hearing about comparisons with other firms. If you can find a firm in your industry that has bucked the trend of downsizing then you had better verse yourself in the specifics of what that firm did.
There is also a lot of academic research showing the financial benefits of alternatives to downsizing. In Responsible Restructuring I have a whole chapter summarizing studies on the financial effects of alternative approaches to restructuring. I worked with a finance professor and a market-research professor to look at the S&P 500 over an 18-year period. We found the downsizers who cut people and didn´t change anything else were never better off than their competitors, or the market as a whole, in terms of profitability or stock-market returns. The only firms that really grow over time are the asset upsizers. These are the firms that were growing their number of employees and their assets. That is the only long-term path to success.
DC- I suppose the problem is that people are so focused on the short term they forget the long term.
WC- I have had a lot of executives say it might be easier for privately held firms to do these things than publicly traded firms that report quarterly earnings. There is probably an element of truth to that, but it is a cop-out for publicly traded companies to say they can´t do these things because they have to answer to shareholders.
DC- It just doesn't make sense to go to shareholders and say you are going to do something that evidence shows is stupid because you think that is what shareholders want you to do.
WC- You are absolutely right. HR managers really need to understand these data if they are going to make a compelling case. You are not going to impress senior people on logic alone. You better have some data and numbers about what happens to financial results when companies downsize.
DC- Thanks. I hope anyone facing pressure to downsize buys your book.
Responsible Restructuringis available from Amazon.com.
Wayne F. Cascio is a professor of management and international business at the University of Colorado at Denver. He has taught at Florida International University, the University of California-Berkeley, the University of Hawaii, the University of St. Gallen, Switzerland, the University of Geneva, and the University of Hong Kong. During the academic year 1987-1988 he was a visiting scholar at the Wharton School of the University of Pennsylvania.
In 1999 he received the Distinguished Career award from the HR Division of the Academy of Management. He is past chair of the HR Division of the Academy of Management and past president of the Society for Industrial and Organizational Psychology. He has authored or edited six texts, he has published more than 80 journal articles and 30 book chapters, and he has consulted with more than 150 organizations on six continents. Currently he serves on the Boards of Directors of CPP, Inc. and the Society for Human Resource Management Foundation.
