Chapter 2 Demassing: A Blunt Response Trends driving cutbacks Demassing Unintended consequences High human costs Missing real problems Revolving door syndrome Squashed innovation Broken bargains
Demassing: A Blunt Response
Excerpt from Downsizing: Reshaping the Corporation for the Future
By Robert M. Tomasko
More than one million U.S. managers and staff professionals have lost their jobs from 1979 to 1987
This Conference Board estimate covers a period of sharp economic downturn, but more than half these job losses occurred after the 1981-82 recession. Data collected by the Bureau of Labor Statistics are no more comforting. They indicate that unemployment among managers and administrators is at its highest level since the Second World War. And the government statistics do not even include the thousands of professionals and managers who have stopped job hunting because they took early retirement or decided to go into business for themselves. One head of a executive search firm estimates than over a third of U.S. middle management positions have been eliminated during this period; other reports suggest that from 1000 to 2500 management jobs per company have been lost in many of the Fortune 500 businesses.
In most of Europe such actions would be unthinkable. French and German social structures are tighter and business communities smaller and more ingrown. In countries such as Holland, most corporate executives know each other much as people who live in small towns do. In much of the rest of the world firing people because of poor performance is a concept only slowly being adopted. But firing middle managers and professionals because the company unintentionally overstaffed - this is unheard of in most economies where jobs are protected by custom or law.
In the U.S. psychological inertia is usually stronger than social structure. Guilt has been one of the biggest barriers in the past to managers laying off other managers and high level staff. As difficult as it has been for many executives to give orders to close down factories when foreign competition seemed undefeatable, or terminate large teams of engineers at the end of a contract, firing numbers of their peers and subordinates has usually been near impossible. It has often been relatively easier to mandate cutbacks that were implemented by managers several layers away. But it has taken severe outside pressures to overcome the guilt executives feel about terminating people they have worked with over many years, seen every day, and perhaps grown close to them and their families.
In this chapter we will consider what these pressures are and look at practices such as job buyouts and outplacement that are making it easier to succumb to them. These pressures and practices are helping executives make organization changes that might have been unimaginable only a few years ago. We will also examine the consequences - both intended and unintended - of these major mid-level reductions, called demassing by the booming outplacement industry. But first lets consider some of the reasons why outplacement has become one of the growth industries of the 1980s and '90s.
Large scale pruning
Cutbacks at Eastman Kodak Company went well beyond its Rochester, New York, home office. About 13,000 employees from all job levels in Kodak's worldwide operations found their jobs cut, either after they accepted a voluntary separation offer or were let go. Salaries of some executives who stayed were also reduced.
Several years ago the Brunswick Corporation's new chief executive, Jack Reichert, was advised by his investment banker to abandon his sports and recreation businesses which had become too mature and too cyclical. Unwilling to attempt to become a corporate restructuring chameleon, Reichert decided instead to abandon an overgrown corporate structure. Soon afterward Brunswick shed:
- The chief operating officer's position,
- The entire group level of management,
- Almost 60% of its headquarters staff, and
- Three divisional organizations.
The results: red ink turned to black, sales increased, and decision making speeded up. And more Brunswick managers came to believe Reichert's philosophy that wealth is created at the operating level, not at headquarters. Brunswick's strategic position had not changed, but its ability to cope with it had improved significantly.
This wave of management reductions has not been limited to companies in mature industries. Many high technology businesses have been affected as well. Tektronix planned a workforce reduction of 10% along with an equivalent percentage salary cut for all officers. Hewlett-Packard offered 1800 employees an early retirement program. One of its competitors, Victor Technologies Inc., found that it had built an elaborate regional organization bigger than its sales could support. The result: a layoff of several hundred employees. Xerox's disc drive subsidiary, Shugart, closed down all its operations after prolonged poor competitive performance. Some observers blamed Shugart's performance on increased competition, others on its organization which did not allow it to get new products into production quickly enough. This cutback came not long after its parent, Xerox, eliminated several thousand managerial and administrative employees in a multi year "leaning" effort.
Nor has even the entertainment business been spared from managerial streamlining. With two of the major television networks having new owners dedicated to running lean operations and the third with new management, all are reducing the size of their workforces. The often glamorized, sometimes aloof and free spending television bureaucracies have run head into declining revenues and soaring programming costs. Even CBS's in-house medical unit was disbanded along with several thousand layoffs in the three networks. In publishing, Time Inc. spent $13 million to save $12 million annually by reducing 5% of its positions. Jobs as senior as assistant publisher were eliminated. And few of those laid off will be able to move to jobs on Madison Avenue. The advertising industry is facing its own turmoil with shrinking margins and a wave of mergers leading to lost jobs.
Japanese companies, mistakenly thought by many to be havens of lifetime employment, have also been facing workforce reductions. A combination of competition from other Asian nations and declining sales growth due to a strong currency have forced layoffs in the mining, shipbuilding and steel industries. In a subsidiary of Hitachi several thousand jobs were eliminated. At Sumitomo Metal Industries Ltd. capital spending has been cut by a third and the workforce by more than 20%. Profit declines in some consumer electronics makers are even causing some of Japan's best known businesses to make retrenchment plans.
Unlike other upswings of the business cycle the economic recovery of the mid-1980s did not halt the cutbacks of managers or staff specialists.. If anything their pace accelerated in the second half of the decade in an increasing number of industries. A number of persistent trends in the business environment promise to sustain this pace. Let us review nine of the more significant ones.
Strong Overseas Competition. Companies in Brazil, Korea and Taiwan are joining those of Japan and West Germany to provide strong price and quality competition in many industries once dominated by American firms. Global competition is showing every sign of intensifying well into the 1990s, forcing many U.S. companies to compete by cutting payroll costs and in some cases abandoning entire industry sectors. As many of these overseas based companies establish manufacturing operations in the U.S. they are providing close-at-hand examples of high performing, leanly staffed organizations. When Marvin Runyon moved from a Ford vice presidency to head Nissan's new Smyrna, Tennessee plant he found it was possible to run his automated assembly plant with only five management layers - several fewer than was common to do the same job in Michigan.
Back in Detroit, business as usual has hardly been the rule at Ford. For 29 consecutive quarters, each closed with fewer salaried employees on Ford's payroll than the previous quarter. Cutbacks like these helped improve its net income to the point where it reported 1986 earnings results that exceeded General Motors', a company with twice Ford's sales revenues.
Globalization of American Companies. Another response of American companies to the globalization of the marketplace has been to set up overseas operations to manufacture for U.S. customers. Initially these exported production worker jobs, but as more growth takes place outside the U.S. than within for many companies, supervisory and management jobs are also being "exported." Growth in staff positions is also increasing abroad. India's highly trained and cost effective technical talent is making Bangalore a center for computer programming and technology management. Both the French Alps and Riviera are becoming attractive locations for electronics R&D, as several global-minded U.S. companies have found. So are some Caribbean islands and China for data processing. As satellite-linked computer networks increasingly become multinational, it is possible to have design engineers in several nations working simultaneously on a project and keeping each other updated through their desk top terminals. The combination of advanced communications technology and overseas low cost professional talent is making it possible to decentralize operations once thought to be headquarters bound. It also has encouraged many corporate recruiters to cast a wider net for professional talent than ever before.
Decline of Manufacturing, Growth of Service and Innovation. While it is unlikely the U.S. will abandon its factories for an economy based on fast food merchandising, software production and corn growing, the upheaval of the last decade suggests some aspects of the economy are much more globally competitive than others. Among the strongest "sectors" are distribution and retailing, and R&D-based new product development.
Each cuts across a variety of traditional industry definitions but each has a common prerequisite for success: minimal corporate bureaucracy. Technology based innovation thrives in flat organization structures with few rule books and controlled entrepreneurship. The razor thin profit margins of most retailers create an environment hostile to management layers and expensive staffs. And some industry watchers predict at least 10% of these retail management positions will be gone by 1990. Department store chains such as the May Company and Macy's have already reduced staff and reorganized.
Many factories will remain to produce these innovative products that flow through a slimmed down distribution network. But increasingly these will be showcases of computer technology and automated manufacturing with workforces of broad gauged technicians, not hourly laborers. Few levels of supervision will be needed as self managing teams handle many routine decisions at shop floor level. Computerized logistics management and engineering design equipment will eliminate the need for many traditional plant staff jobs.
Declining Energy and Commodity Prices. Sharply falling prices of oil, some chemicals and minerals, and even silicon semiconductor chips for microprocessors have led to major staff reductions in these industries. While some of these price depressions reflect temporary or cyclical conditions, the pressures they have put on many commodity-based companies to reduce their administrative scale of operations are likely to linger after prices stop falling. Even if they rebound, many commodity sellers have realized how low revenue can go and how little overhead they must be prepared to support.
Some of the largest reductions have occurred in the oil business. For some of the large international companies the pruning back is driven both by OPEC price cuts and unsuccessful attempts to generate earnings from diversification. An Exxon employee relations vice president admitted the bulk of cuts there involved middle managers and professionals, some coming from elimination of synthetic fuel and office automation projects as well as from belt-tightening in the oil business. At Phillips Petroleum Company, which in one year reduced total employment by 12%, supervisors and managers were cut by 21%.
Exxon's cutbacks focused on organization as well as staffing. Fourteen major operating organizations were consolidated into nine units, and a layer of management removed from its international operations. Now Exxon's foreign affiliates report directly to the U.S., instead of through overseas regional offices.
Computer chip makers, such as United Technology Corporation's Texas-based Mostek Corporation, contributed to this state's managerial recession. When its electronics parts became price sensitive commodities, this company laid off 2600 employees. A fifth of these were managers.
Deregulation: Phase Two. The deregulation trend which throughout the 1980s has reshaped U.S. airlines, financial services, phone companies, trucking and railroads is starting to enter a second, more difficult phase for many companies. Deregulation's early promise of expanded growth opportunities has been replaced by a second phase of often brutal competition and over-capacity driven price cutting. Many companies operating in deregulated business environments initially made limited staff cutbacks to attempt to become leaner and meaner. But as competitive intensity increased the cutbacks deepened and are becoming driven more by concern for pure survival. The resulting industry shake-outs, mergers and bankruptcies are continuing to drive staff streamlining and other cost cutting efforts.
At times it is the attacker as well as the defending company that makes cutbacks. MCI Communications Corporation reduced its overall workforce by 15% as it shifted its strategy from increasing market share to growing profits. MCI, the second largest U.S. long distance telephone company, faced increased competition from its original competitive opponent , American Telephone and Telegraph, as well as from several smaller new entrants into this deregulated industry. These layoffs covered all levels of MCI's workforce, including senior management positions.
Even more severe reductions took place at MCI's chief competitor. Thousands of management positions at A.T. & T. have been cut from its well over a quarter million person workforce. Compounding the need to lower costs because of heightened competition, A.T. & T. is also consolidating several of its major operating units. These in house mergers, of groups totaling over 100,000 employees, can cause as much disruption and job switching as do combinations of two independent companies.
Acquisitions and mergers are common during the second phase of an industry's deregulation. Texas Air Corporation's purchase of Eastern Airlines resulted in a major streamlining of the surviving Eastern executives. Eastern's complement of corporate officers was reduced from 47 to 16. Nine senior vice presidents were demoted to vice presidents, and most former vice presidents took on lesser titles. Northwest Airlines, the surviving but higher labor cost partner in the Northwest-Republic consolidation, planned to lay off almost one thousand employees and relocate many others.
Pressures for Earnings Growth in Mature Markets. We have already considered the maturing of many American markets and industries. As, in strategic planning jargon, more "growth stars" become "cash cows," investors' expectations change. They look more for regular earnings growth than for skyrocketing stock price appreciation. For many companies in stalemated strategic positions these expected earnings increases can only come from continual cost (i.e., headcount) reductions.
The first move of a newly appointed CEO in a large, profitable manufacturer was to announce a 5% across-the-board staff reduction. His primary motivation: to make sure that his first year as chief executive was not marred by the company's first earnings decline. Another business, the spice maker McCormick and Company, planned a 4% cutback of its workforce as part of a plan to boost profits and speed new product development.
Much of the U.S. chemical industry has been plagued with overcapacity and foreign competition. While many companies are trying to shift from bulk, commodity products to selling specialty chemicals and the results of biotechnology research, the need to scale back operations is still often present. The Olin Corporation eliminated 700 salaried jobs to implement a plan to close or sell uncompetitive businesses.
Stock Price Driven Strategic Planning. One response of many companies to stalemated growth prospects was to shift attention from market share to stock price as the key strategic performance indicator. This "value based planning" has led to the de-conglomeratization of many businesses as they determine their stock's price-earnings multiple is being held back by one or two lackluster divisions. Called "industry restructuring" this movement has resulted in a wave of shut downs, divestitures, leveraged buyouts and other forms of taking companies private. Many of the spun-off or bought-out divisions, now free standing companies, find they must reduce management and staff overhead significantly to remain viable when weaned from their corporate parent. And many of the parents find that restructuring leaves them with a smaller base business to support staff overhead, also resulting in downsizing. More than one chief executive has found that going lean and mean has meant losing his staff of economic advisors as well as his private jet.
Part of the Control Data Corporation's restructuring effort was the spin off to public ownership of its Commercial Credit Company subsidiary. Sanford Weill, Commercial Credit's new chief executive soon put together a plan for streamlining its organization structure to save $4.5 million annually. Ten percent of its Baltimore headquarters staff jobs would be cut to increase efficiency and eliminate some duplication of effort.
Merger and Acquisition Frenzy. The most commonly observed result of industry restructuring's popularity is the boom in mergers and acquisitions. Company combinations, whether they be General Electric's acquisition of RCA or the merger of railroads that formed CSX, almost inevitably result in staff and management redundancies. Merged companies seem to only differ in how and when they deal with surplus staffing. The rise of the junk bond supported corporate raider has also led to increases in downsizing; some by companies they have taken over and slimmed down, others by businesses trying to avoid unwanted suitors by cutting costs to shield their autonomy through increased earnings and stock prices.
The earlier examples of Eastern and Republic Airlines illustrate the downsizing resulting from consummated mergers. But often just the threat of a takeover can have the same result. An attempt by GAF Corporation to increase its ownership in Union Carbide Corporation coupled with the threat of massive expenses related to the Bhopal disaster pushed Union Carbide to eliminate about 15% of its white-collar workforce. Expenses related to buying back a portion of its common stock to fend away Ted Turner's attempted acquisition forced CBS Inc. to reduce its workforce.
The banking industry has also seen an acceleration of merger activity. The experience of the Crocker National Corporation illustrates what sometimes happens. It was acquired by Wells Fargo and Company in what was at the time the largest bank merger in history. Wells Fargo, a legendary cost cutter, hoped to increase Crocker's annual profits by a factor of four just by reducing expenses. The effort began as soon as the sale was final. Nearly all Crocker's executives and almost 1600 managers immediately were told to find work elsewhere. Plans were also prepared to additionally cut back twice that number of Crocker positions during the next two years.
Privatization. This is a practice that has been receiving increasing attention in the third world where much of these countries, economic infrastructure had to be government created. At the prodding of the World Bank and other international financial institutions, some developing countries are turning control of their national enterprises over to the private sector. Called "privatization," this is intended to keep these oil companies, airlines, state-owned factories and telephone companies more attuned to the marketplace than to bureaucratic procedure. It is a phenomenon not limited to the developing world, though.
The U.S. government is starting to identify parts of it that can be spun-off to private ownership. The director of the Office of Personnel Management has proposed that many of the 600,000 federal jobs that duplicate ones in the private sector (ranging from data processing to vehicle maintenance) be spun-off in into businesses partially owned by the former government workers who filed them.
This has also been a key element of British industrial policy. Recently, formerly government-owned companies making fast cars (Jaguar) and supersonic planes (British Aerospace) have gone public. This is a trend likely to persist into the 1990s in the U.K., as well as in the U.S. and other countries. Successful implementation of privatization projects frequently mandates management and staff streamlining as goals shift from providing employment to increasing earnings. In preparation for an anticipated privatization, British Air cut its workforce by 40%, including reductions of both executives and middle managers.
- Relatively large reductions (5-15% + of the middle level workforce),
- Widespread cutbacks that affect many, if not all, divisions and departments,
- Deep reductions that usually cover several levels of the organization,
- Priority on lowering costs by lowering headcount, and
- Emphasis on completing the program as quickly as possible.
The nine economic forces reviewed above are driving demassing in a variety of companies and industries. For some of these businesses demassing has been seen as the only way the company's economic survival, and the jobs of those who remained, could be insured. But for other firms demassing has been a convenient way to postpone earnings declines due to poor management decisions, not bloated staffing. One executive even admitted, privately, that his main purpose in announcing an across-the-board staffing cut was to get poor performers off the payroll, a result he was not able to build into his annual performance appraisal system.
For whatever the reason, more executives are summoning the will power to demass their companies than ever before. The severe guilt that used to accompany such moves has been lessened by the existence of:
- Outplacement services,
- Job buyout programs, and
- The "bandwagon effect."
Outplacement services have made it easier for many executives to say "good-by." They have provided them with a way, through the fees paid to the firms providing them, to temporarily extend their concern for terminated employees beyond their last day at work. Outplacement services for laid-off managers typically include some immediate counseling after they learn they no longer have a job followed by a several month coaching and follow-up program. Lessons in job hunting, career replanning, interview techniques and resume writing are frequently provided. Some also provide job seekers with office space, telephones and limited secretarial help to facilitate their searches.
Harvard Business School human resources expert D. Quinn Mills calls outplacement an example of companies acting in their enlightened self interest. It can help the morale of the employees remaining, and might help reduce some of the negative community impact that layoffs often have. Quinn sees services like these eventually being extended to non managers.
The industry that provides them has been growing understandably fast. Outplacement has grown about 35% annually since 1980. The forty three firms doing it then have quadrupled in number and the industry size grown to over a quarter billion dollars in fees billed each year. It originally was founded to provide customized counseling and placement help to senior executives that companies wanted to remove gracefully. Coupled with generous termination settlements they helped calm many troubled waters. Psychologically they provided a safe place for discharged executives to release their anger about their former employer while reformulating career plans. Demassing large groups of middle managers has turned many of these personalized services into more assembly line-like operations. Group lectures have replaced individual counseling and private temporary offices have turned into soundproofed dividers on long tables.
While middle level termination settlements are typically less generous than those provided to released top managers, a variety of job buy-out programs have joined with outplacement to facilitate demassing. The two most common are early retirement offers for long service managers and lump sum cash payments for more recently hired ones. The widespread use of both these has eased the consciences of many executives as they authorized cutbacks. They feel the people leaving are at least getting "something" for losing their jobs, maybe not as much money as if they stayed but a more generous settlement than that provided to workers in some near-bankrupt industries. They also find that some of these offers make good economic sense for the company. A number of companies, such as DuPont and Time Inc., have found these buyout programs have relatively fast payback periods. Chapter Seven will consider their economics more closely.
A third factor contributing to some executives yielding to economic pressures and initiating demassing is harder to quantify. It is a bandwagon-like effect that has resulted from so many companies in so many industries cutting back middle management. Demassing is no longer a phenomenon of only the very troubled steel or auto businesses. Everyone seems to be doing it. And when this happens it is harder for some companies to face their corps of investment analysts without at least admitting they have studied possibilities for eliminating some staff.
The old social barriers to downsizing have weakened. Public officials' criticisms of corporate bureaucracy, congressional concerns about industrial competitiveness, and best sellers exhorting lean and mean management have even backed executives committed to the idea of lifetime employment into a corner. On the other hand, some top managers have even become eager to talk publicly about their staff reductions because it "demonstrates their resolve to keep a short rein on costs." Demassing is clearly in style and faddishness has contributed to its momentum.
" Maybe we did manage to strengthen our bottom line, but at the cost of many stunted careers and hurt people. At times I wonder if it was really worth it."
" Too many of the managers we've kept don't seem to be working up to their potential. Many seem chronically insecure - even though we've told them they're too good for us ever to let go. I don't think our credibility with them is too high. And the team spirit we depend on to move products out the door in crunch times, it really seems to have disappeared. Nobody trusts anybody anymore."
" Our last layoff seemed like a misguided attempt to stem the negative tide starting to engulf the company, rather than facing the reality of where our real problem lies: our dearth of new products and fresh ideas."
" We were surprised by how many senior circuit designers took us up on the early retirement offer - twice as many as we predicted. Some of our new product work is at a standstill and we're making plans to hire away some experienced engineers from a competitor."
" Nobody is going to stick his neck out to promote a new idea here anymore. Security seems a lot more important and most of us feel that keeping our jobs means hunkering down and focusing only at the work in front of us."
Let us consider the issues behind these too commonly heard
Words are often used to distance us from unpleasant happenings. This kind of self delusion may be necessary temporarily to get through a difficult time, but its continued use creates more problems than are solved. The danger in thinking of people as backfill, as Thomas Horton, President of the American Management Association, has noted, is that sooner or later we may start to treat them that way.
There are many human costs of demassing. Brunswick has been able to restructure its organization and improve financial performance, but for a price. One frustrated former member of its headquarters staff has noted the "trauma" many of the several hundred who were terminated felt. He expressed considerable disappointment that more efforts were not made to help those laid off, especially those, like himself, over fifty. The head of the nation's largest outplacement business, William Morin, is concerned that middle managers are becoming unemployed in such numbers that even the best outplacement advice may not do them very much good. He says: "Unfortunately, a lot of people are going into jobs they have no interest in. That's a crime and a waste of skills." The reality seems that for many losing jobs in declining industries, the likelihood of returning to do similar work in a large company is near nil.
A former Exxon employee said it seemed that: " Management broke the unwritten promise that Exxon would take care of its employees... When I left, I felt I was going from the womb into the piranha tank." Self esteem is sometimes shattered, even though the only performance mistake many feel is that they looked after the company's welfare more than their own. The disappointment of losing a job, sometimes summarily, and the bleak prospects some feel they have of finding ways to reuse their skills, can lead to depression, drinking and drug problems, family difficulties, and other damaging mental and physical disorders. Even at A.T.&T., a company that has often done an extraordinarily good job of assisting those it lays off, employees have had to deal with the suicide of one of their former colleagues. A.T.&T. is, unfortunately, not alone in this regard.
The consequences can be financial as well as psychological. For many laid off managers their severance payments run out before new jobs are found. One study by the American Society for Training and Development indicated that a third of the displaced managers over thirty five find jobs that pay less that what they previously earned; these laid off managers often needed five years to get back to the pay level they had left.
In addition to the toll demassing takes on those losing their jobs, problems can surface with those left behind. Those charged with doing the actual firing may feel guilt and depression, and the colleagues of those who left may need to get over the resulting feelings of grief and loss. Some, but not many, companies are aware of these problems and have instituted programs to help these groups. Companies that do not are risking building feelings of permanent insecurity into their middle levels. Surveys by Opinion Research Corporation indicate a significant drop in feelings of job security among middle managers. In a 1982 survey 43% felt very secure in their jobs; four years later only 27% felt that way.
Missing real problems
This kind of problem is eventually correctable, usually with time passing after the cutbacks end and the strategy settles in place. A.T.&T., it is important to note, is going through more change in a few years than most companies experience in their entire history. But another type of problem can have longer term adverse effects. It occurs when executives substitute demassing for a direct assault on their businesses' real problems.
Making major workforce cutbacks is a dramatic sign that the company is changing. But it does not always signal that the appropriate problems are being addressed. Weak competitive performance can be due to high management overhead built into product prices. But it can also be caused by bad quality, lack of a differentiated product line, poor market positioning, attempting to sell outdated technology, inadequate logistics and customer support, and failing to negotiate the best prices for raw materials, just to indicate a few possibilities. Companies where management expenses are a relatively small proportion of total product costs can sometimes get more value by finding ways to obtain better results from their middle managers and staffs, than they can by only reducing their size.
For some companies the greatest danger of demassing is the false sense of security it provides. Valuable time may be lost if top management feels earnings declines will be arrested by early retirements and a reorganization, when their real future problems will result from a lack of new products in the development pipeline. Competitors may steal much of their market share by introducing new products as they are still recovering from the demassing.
Revolving door syndrome
After a few more months enduring the life of Sisyphus, he requested a transfer to a less complex job: managing one of these advanced communications technology groups.
Other human resource planners in businesses facing fast moving environments share this A.T.&T. manager's revolving door dilemma. As fast as managers are laid off, new ones seen to be needed. Sometimes this occurs because people are let go, but the work they did remains. This happens when the focus of demassing is on body count reduction, assuming the organization and work remaining would somehow take care of itself. It seldom does, and many companies that approach downsizing this way find it hard to stay slim after the immediate economic pressure lets up.
The other form of revolving door that can occur in demassing results from the use of untargeted early retirement and job buyout plans. Since these offers must be made to groups of employees, not individuals, companies often have difficulty predicting how many will accept. Some companies have faced the embarrassment of letting people go and then finding they have to hire them back or employ them as consultants to keep key projects moving along. Sometimes new employees need to be hired, adding the expenses of recruitment, selection, orientation and training to personnel budgets that were originally intended to be cut.
Innovation also requires corporations that tolerate diversity and nurture innovative mavericks. Demassing programs can leave companies with an atmosphere of mistrust and insecurity hardly conducive to employees feeling it is safe to deviate from the straight and narrow. They may unclutter the organization chart, but they may also eliminate enclaves that have harbored some creative contributors. One of the several thousand managers who lost his job in General Electric's major cutbacks has warned: "Employees [now] end up spending more time worrying about their job security than creating, innovating, and most importantly growing the business."
Studies of companies that are especially good at making money from innovation indicate that such businesses often have two organizations functioning at once. One is that which is described on the official organization chart. The way it distributes power and authority is usually oriented toward smoothly running the already established business. But in many companies a second, shadow, company also exists. Its orientation is toward the future, toward planning and developing products that will provide the next decade's positive cash flows. Its members may hold two positions simultaneously, one their official job, the other their role in what may be a hidden or semi-official skunkworks.
Unfortunately when staff reductions take place, decisions about who stays and who goes are more often made based on the necessity of their official job. Their role in the shadow organization of innovators tends to be ignored. Even though it is becoming popular for executives to look the other way while bootlegged projects are undertaken, many of these half sanctioned efforts to develop new products are unintentionally disrupted by major cutbacks. Care needs to be taken that getting back to "today's" basics does not ignore what it will take to develop tomorrow's.
While many stock market analysts have praised the cost cutting efforts of Kodak's downsizing program mentioned earlier, at least one has warned that saving money will not be enough to restore it to its earlier growth trajectory. For this, he feels, Kodak will need a better flow of new and innovative products. Another analyst who follows the chemical industry felt that the Celanese Corporation had gone as far as it could go through downsizing alone. While several years of reducing capital spending, cutting its workforce by almost half, trimming R&D, and selling off businesses based on innovative technologies helped the company's income and stock price to soar, these actions may also have cut short its life as an independent business. As if to underscore the analysts concerns: at the end of 1986 Celanese directors agreed for the company to be purchased by the West German chemical giant, Hoechst AG.
Most innovations originate in one form or another with customers. But companies with cost-cutting myopia are likely to miss these. Apple Computer Inc. offers an example of a company that went through a severe downsizing - shedding a fifth of its workforce and a co-founder - without crippling its ability to profitably innovate. By reorganizing to balance its focus on creative product development with close attention to the uses its customers were making of the products, Apple was able to strengthen the market position of its Macintosh personal computer. The Chrysler Corporation under Lee Iacocca has shown a similar ability to safeguard innovation while streamlining as it introduced the minivan and brought back the convertible.
Creating new problems
Fear and apprehension often proceed survivor-guilt as managers spend considerable time in advance of the actual layoffs anticipating them. Morale and initiative-taking can be weakened long before top management finalizes any layoff plans. At times executives realize this, but instead of communicating information about the company's situation and the status of their planning to deal with it, they try to maintain employee spirits by denying anything is wrong. This approach seldom works and can lead to even lower morale as managers' worst case anticipations fill the void created by the absence of authoritative information.
Because demassing, in many companies, has been based on needs to make deep cuts in payroll costs, rather than as a campaign to weed out poor performers, good as well as weak contributors have lost their jobs. This can leave some strong managers, laid off because there was no more work for them to do, with undeserved doubts about their own abilities. It can also leave remaining good performers unsure that the way to survive and advance in their particular company is through continued hard work. The chief economist of the American Society for Training and Development, Anthony Carnevale, has suggested that developing better political skills may replace some managers' concerns with improving their productivity.
Some of these problems are short term in nature and can be alleviated through combinations of clear communications, consistent management and individual counseling. But there are also long term consequences of demassing that can tick away like a time bomb in many companies.
For many mid level employees psychological contracts have had to serve the purpose that employment agreements have facilitated for senior executives. They are the understandings, both explicit and implicit, that exist between employees and employers. They are shapers of people's beliefs and expectations, and can be powerful sources of motivation (and demotivation). The key word here is "expectation." Plant floor workers at GM have been conditioned by years of cyclical cutbacks in production to have limited expectations about job continuity. This has helped prepare some for eventual plant closings and the need to build a career in another industry. These workers have very different expectations of what to expect from their employer than do middle managers who might have received their college education from General Motors Technical Institute, worked nowhere else in their careers, and have felt they had every reason to believe there would be a job at GM for them as long as they performed adequately.
This expectation is far more widespread than just at GM. A survey conducted by Louis Harris and Associates of middle managers at 600 large corporations asked them if they assumed, when they started working for their current employer, that they could stay as long as they liked as long as they were doing a good job. More than half these managers believed they could.
According to management psychologist Harry Levinson, people tend to select a company to work in based on their expectation that the company will help them meet their psychological needs. Over time people stay, in part, because a good, comfortable match has been created. When the rules change in the middle of people's careers, as they have in many banks, insurance firms and telephone companies, people react in many ways. Initially they feel anger and frustration because a bargain seems to have been unfairly broken. Some adapt quickly to the new situation, perhaps they were never really comfortable with the old rules anyway. Others try to resist, becoming part of Roger Smith's "frozen middle." This strategy is seldom viable for the long run. Most eventually adjust to the new reality, one way or another, though this is not usually a very comfortable process.
When what they are adjusting to is the realization that good performance, long service and corporate loyalty no longer insure job security, the consequences are not particularly favorable to their employers. This message has been driven home by waves of demassing, and the "new contract" being offered can narrow the scope of the employer-employee commitment to the short term and the immediate work at hand. It will be harder for loyalty to remain a "bankable" commodity. Sixty-five percent of the managers in the survey just mentioned feel that most salaried employees are less loyal to their employers than they were ten years ago. It will be easier to call management "just" a job. Rex Adams, Mobil's Vice President of Employee Relations, fears the management and professional workforce of the late 1980s will contain many hired mercenaries more interested in building resumes, not companies. To the extent this means turnover will increase, so will total employment expenses. And eventually so will the number of management layers, by the process outlined in the last chapter. Leaving some companies right back where they started.
The future does not have to be this bleak. Many companies still have time before feelings harden and attitudes resettle to keep from converting their mid level workforce to a group of loosely affiliated hired guns. In later chapters will consider some actions that can be taken. But first, it is important to consider that employees have ways outside the company to meet their natural needs to be dependent and taken care of. Some are able to find this kind of security in their family and other relationships. Demassing though, especially when its causes are unclear and it is felt to have been done unfairly, can also lead others to rely on unions and the government for help.
Blue-collarizing middle management
Managers are feeling increasingly caught in the middle. They lack the job guarantees and severance agreements provided to many union workers. They also lack the bargaining clout of executives to negotiate employment contracts and golden parachutes. Traditionally they took care of job security by getting a job with an established blue chip company, but they find this tactic is no longer very effective. Where do they turn?
Here is one scenario, not favored by many executives. The new leadership of unions such as the Communications Workers of America, the United Automobile Workers and even parts of the Teamsters takes advantage of the organizing opportunity offered by disenchanted middle managers. Their promises: job security coupled with large cash settlements if layoffs are necessary, limits on "excessive" overtime and relocations, union-supervised job posting and career planning, job rights defined through tightly written and followed position descriptions - all in addition to collectively bargained salary and benefit packages. An increasing number of white collar workers, the scenario assumes, find that these promises, along with a less tangible offer of long term loyalty, fill a void created by their employers.
The other half of the scenario involves some state legislatures, and possibly Congress, less concerned with insuring international competitiveness than reducing middle class unemployment, enacting European-style employment legislation. The restrictions on management to terminate and move employees and the extra costs it would mandate would far outweigh the earlier benefits companies received through large scale payroll reduction efforts.
While neither half is very likely, neither one is impossible. The complete scenario represents what may happen when society's outer limit of toleration is reached for continued demassing. The direction of whatever responses occur within this limit will still be unfavorable to many companies. They will most likely be toward limiting management's freedom to staff and organize, because this freedom will be judged to have been abused.
Avoiding the body count mentality
As we have seen, reductions achieved in this manner can also have unwanted, unproductive consequences. These costs are borne by the companies cutting back as well as by those losing their jobs. Fortunately not all companies have taken this approach to downsizing. Some have done a more effective job in managing their organization size on an ongoing basis. When they have downsized they have done it in ways that help minimize human costs and maximize long term economic benefits. In the next chapter we will review some of these practices. They can be useful for companies still needing to prune back management bureaucracies. Companies that have already "demassed" might find them guides to helping stay slim.
© Robert M. Tomasko 1987, 1990, 2002