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13 Myths and Facts About Downsizing

  “What you think you know about layoffs might hurt your business”

Myth 1: Jobs are secure at firms that are doing well financially

Fact: Preemptive layoffs by large firms are common. Today’s job cuts are not solely about large, sick companies trying to save themselves, as often the case in the early 1990’s (e.g. IBM, Sears). They are also about healthy companies hoping to reduce costs and boost earnings by reducing head count (e.g. Goldman Sachs, AOL). They are about trying to preempt tough times instead of simply reacting to them. These layoffs are radical, preventative first aid. On the other hand, small companies, especially small manufacturers, tend to resist layoffs because they are trying to protect the substantial investments they made in finding and training workers.

Myth 2: Companies that are laying off workers are not hiring new ones

Fact: Companies are tailoring their complements of skills. When it comes to layoffs, appearances can be deceiving. At the same time as firms are firing some people, they are hiring others, presumably people with the skills to execute new strategies. laid off more than 20 employees at its online enterprise in early 2001, but subsequently added as many new hires and even grew by more than 25 percent. Hewlett-Packard shed some marketing jobs while adding new positions in sales and consulting. Fully one-third of businesses that downsized since 1994 wound up restoring some of the eliminated positions, and nearly 50 percent created positions to meet emerging needs, according to recent study by career services firm Lee Hecht Harrison.

According to the American Management Association’s year 2000 survey of its member companies, companies that employ one-quarter of American workforce, 36 percent of firms that eliminated jobs in the previous 12 months said they had also created new positions. That’s up 31 percent in 1996. The Society for Human Resources Management found similar results in a 2001 survey. As companies lose workers in one department, they are adding people with different skills in another, continually tailoring their workforces to fit the available work and adjusting quickly to swings in demand for products and services. What makes this flexibility possible is the rise of temporary and contract workers. On a typical day they allow companies to meet 12 percent of their staffing needs. On peak days that figure may reach 20 percent.

Myth 3: Downsizing employees boosts profits

Fact: Profitability does not necessarily follow downsizing. Data from the S&P 500, 1982-2000, showed clearly that profitability, as measured by the return on assets, does not necessarily follow downsizing, even as long as two years later. Survey data support this conclusion.Thus the 2001 Layoffs and Job Security Survey, conducted by the Society for Human Resources Management, reported that only 32 percent of respondents indicated that layoffs improved profits. Even massive staff cutbacks at firms such as Eastman Kodak, Apple Computer, and AT&T have not produced increased earnings years later.

Myth 4: Downsizing employees boosts productivity

Fact: Productivity results after downsizing are mixed. The American Management Association surveyed 700 companies that had downsized in the 1990s. In 34 percent of the cases, productivity rose, but it fell in 30 percent of them. These results are consistent with those reported in another study of 250,000 manufacturing plants by the National Bureau of Economic Research. That study concluded that the productivity-enhancing role of employment downsizing has been exaggerated. While some plants did downsize and post healthy gains in productivity, even more (including many of the largest facilities) managed to raise output per worker while expanding employment. They contributed about as much to overall productivity increases in manufacturing as did the successful downsizes.

Myth 5: Downsizing employees has no effect on the quality of products or services

Fact: For most employers, downsizing employees does not lead to long-term improvements in the quality of products or services. Poor labor relations has affected product quality in one tire-manufacturing plant at Bridgestone/ Firestone. However, that example alone does not address the question “Does employment downsizing per se affect product quality?” In its1996 survey on corporate downsizing, job elimination, and job creation, the American Management Association reported that over the long term, that only 35 percent of responding companies increased the quality of their products and services after laying off employees. However, among those that did increase profits. While there is a strong relationship between improvements in the quality of products and services and increases in profits, downsizing the workforce is not the way to get there.

Myth 6: Downsizing employees is a one-time event for most companies.

Fact: The best predictor of whether a company will downsize in a given year is whether it has downsized the previous year. One of the clearest trends is that downsizing begets more downsizing, as ongoing staff reductions are etched into the corporate culture. On average two-thirds of firms that lay off employees in a given year do so again the following year. Among companies that laid off employees since 2000, according to the 2001 Layoffs and Job Security Survey, 45 percent rehired laid-off employees full time, and 17 percent rehired laid-off employees as consultants. Fully 56 percent have hired new employees since the layoff.

Myth 7: Since companies are just “cutting fat” by downsizing employees, there are no adverse effects on those who remain.

Fact: For the majority of companies, downsizing has had adverse effects on the morale, workload, and commitment of “survivors.” It has often been said that employee morale is the first casualty in a downsizing. Survey data bear this out. Right Associates found that 70 percent of senior managers that remained in downsized firms reported that morale and trust declined. Study after study found similar results. A recent national survey found the following among survivors: feel overworked (54 percent), are overwhelmed by workload (55 percent), lack time for reflection (59 percent), don’t have time to complete tasks (56 percent), and have to multitask too much (45 percent).

Between 1993 and 1995, an Australian bank, identified simply as Onebank, implemented a “restructuring improvement program” (yielding the ominous acronym RIP). It’s objective was to improve the banks competitiveness by reducing costs, instigating a sales culture, and installing new technology. RIP eliminated 350 branches and 10,000 employees, although 4,500 new jobs were created in central processing sites. RIP involved a “spill and fill” process in which all staff lost their jobs and had to compete for the jobs remaining in the new structure. It was like a giant game of musical chairs, with about 20 percent fewer chairs than people.

An academic’s survey of the bank’s middle managers (to which a remarkable 80 percent responded) revealed an almost complete turnaround in attitudes towards their careers. The survey found a decline in the managers’ commitment at all levels: to their job, to their branch or department, and, most of all, to Onebank and its goals. This is true even through 83 percent considered RIP essential for the long-term future of the bank, and 76 percent said they were fully committed to making it a success.

How had the restructuring changed the nature of the managers’ jobs? More than 30 percent of the managers said they now had more staff reporting to them, 64 percent had increased responsibility, 69 percent had a wider range of duties, 77 percent worked longer hours, 83 percent experienced increased street, and 85 percent had increased workload overall. Against all that, however, only 37 percent said they’d received a salary increase. Is it any surprise that 49 percent felt a decreased sense of commitment to Onebank or that 64 percent experienced decreased job satisfaction? Asked about their level of commitment and their views on working for the bank, the managers offered 8 positive and 390 negative comments.

Myth 8: Most employees are surprised to learn they’ve been laid off. They ask, “Why me?”

Fact: Downsized employees often express sympathy toward an employer’s reasons for layoffs, and many refuse to personalize the experience. From the perspective of the employees, layoffs have a new character. More managers are briefing employees regularly about the economic status of their companies. This raises awareness and actually prepares employees for what might happen to them. To many, the layoffs seem justified because of the slowdown in economic growth, the plunge in corporate profits, and the dive in stock prices. While it used to be (and still is) traumatic to be laid off even once, some employees can now expect to go through that experience twice or even three times before they reach 50.

Myth 9: At outplacement centers, laid-off employees tend to keep to themselves as they pursue jobs.

Fact: Outplacement centers have become America’s new hiring halls–gathering places for those between assignments. There seems to be a new matter-of-factness about downsizing. As the managing principal of the New York office of outplacement firm Right Associates put it, “These people are not ashamed, but they do feel dislocated, and there is anger. They were on track and now they are trying to get back on track.” Right has redesigned its offices to accommodate this new trend. Instead of enclosed offices and cubicles, where the downsized of the 1990’s kept to themselves as they perused jobs, there are many more glass walls and open gathering places where the downsized of the 21st century get to know each other. They socialize, and they even re-create office buzz. Said the managing principal, “It took a while to recognize this had become important.”

Myth 10: The number of employees let go, including their associated costs, is the total cost of downsizing.

Fact: In knowledge-based or relationship-based businesses, the most serious cost is the loss of employee contacts, business foregone, and lack of innovation. In knowledge- and relationship-based businesses, the company’s most important assets walk out the door every night. The Economist magazine noted that people are not interchangeable. They all have different skills and add value in different ways. “Down-sizing can have a devastating impact on innovation, as skills and contacts that have been developed over the years are destroyed at a stroke.”

Knowledge-based businesses, from high-technology firms to financial services industry, depend heavily on their employees–their stock of human capital–to innovate and grow. They are “learning organizations”–collections of networks in which inter-relationships among individuals (i.e., social networks) generate learning and knowledge. This knowledge base constitutes a firm’s “memory.”

Downsizing is especially hazardous to learning organizations. Because a single individual has multiple relationships in such an organization, indiscriminate, nonselective downsizing has the potential to inflict considerable damage on the learning and memory capacity of organizations. That damage is far greater than might be implied by a simple tally of the number of individuals let go. When one considers the multiple relationships generated by one individual, it is clear that restructuring that involves significant reductions in employees can inflict damage and create the loss of significant “chunks” of organizational memory.

Such a loss damages ongoing processes and operations, forfeits current contacts, and may lead to foregone business opportunities. Which kinds of organizations are at greatest risk? Those that operate in rapidly evolving industries, such as biotechnology, pharmaceuticals, and software, in which survival depends on a firm’s ability to innovate constantly.

Myth 11: Violence, sabotage, or other vengeful acts from laid-off employees are remote possibilities.

Fact: They are less remote than you think, and the consequences may be severe. The good news is that the 2001 Layoffs and Job Security Survey, conducted by the Society for Human Resources Management, reported that 86 percent of companies have not experienced discrimination charges, and 93 percent have not experienced workplace violence. The bad news, however, is that the most common precipitator of workplace violence is a layoff or firing.

What do Xerox, Fireman’s Fund, and the US Postal Service all have in common? They have employees who died violently while at work. Violence disrupts productivity, causes untold damage to those exposed to the trauma, is related to workplace abuse of drugs or alcohol and absenteeism, and cost employers millions of dollars. In a stressed-out, downsized business environment, people are searching for someone to blame for their problems. With the loss of a job or other event the employee perceives as unfair, the employer may become the focus of a disgruntled individual’s fear and frustration. Under these circumstances, some form of workplace aggression–that is, efforts by individuals to harm others with whom they work, or have worked, or their organization itself–is likely.

In France, laid-off workers at bankrupt household appliance maker Moulinex SA threatened to blow up their factory if their demands for more severance pay were not met. A sign in black marker at the entrance to the plant said it all: “Money or BOOM!” Their demands were met. The French labor ministry and the unions agreed on a deal to give workers who were with Moulinex for more than 25 years a severance bonus of 12,200 euros (about $10,785) and the rest of the workers 4,600 to 7,600 euros (about $4,050 to $6,690).

Among white-collar workers, the cyber saboteur has a emerged as a new threat among disgruntled ex-employees. Recently axed workers have posted a company’s payroll on its intranet, planted data destroying bugs, and handed over valuable intellectual property to competitors. Although exact numbers are hard to come by, computer security experts say it is fast becoming the top technical concern at many companies.

Of course, fired workers have exacted revenge on their former employers in the past. But this time, they’re capable of great damage, because more than ever, companies depend on computer networks that are vulnerable to electronic sabotage. With more than 30,000 Web sites filled with hacking tools that any grade-school child could use, today’s brand of getting even is far easier for alienated workers to pull off. It’s also far more costly for companies. The FBI estimates the cost of the average insider attack at $2.7 million.

Myth 12: Training survivors during the and following layoffs is not necessary.

Fact: Training survivors is critical to success subsequently. The American Management Association survey on corporate downsizing, job elimination, and job creation clearly supports this conclusion. In firms in which training budgets increased after downsizing, 63 percent reported that productivity increased over the long term, and 69 percent reported that profits increased. In firms in which training budgets decreased after downsizing, only 34 percent reported that productivity increased over the long term, and only 40 percent reported that profits increased. A similar pattern also emerged over the short term. One explanation for these results is that two-thirds of reported job eliminations are connected to organizational restructuring or business process reengineering. Workers who receive training are far more likely to improve their productivity, which, in turn, leads to increases in profits.

Myth 13: Stress-related medical disorders are more likely for those laid off than those who remain.

Fact: Workers at downsized companies are just as likely to suffer adverse health consequences. Among employees who remain after a downsizing, more than half report increased job stress and symptoms of “burnout.” The physical toll on workers translates into a financial toll on employers. Based on an analysis of 3,896 disability cases, Northwestern National Life Insurance Company calculated that the average cost of rehabilitating an employee disabled because of stress was $1,925 ($2,850 in 2001 dollars). If he or she is not rehabilitated, companies will need to hold in reserve an average of $73,270 ($108,450 in 2001 dollars) or more to cover payments for employees disabled by job related stress.

Another study of 300 large to midsize firms was conducted jointly by Cigna Insurance Company and the American Management Association. Over the five-year period of the study, stress-related disorders among workers at downsizing companies showed the greatest increase among all kinds of medical-related claims, including those for mental health and substance abuse, high blood pressure, and other cardiovascular problems. The percentage increases across companies varied from 100 to 900 percent–that is, as much as a ninefold increase. The same survey revealed that although supervisors comprise 5 to 8 percent of the American workforce, this group is at a greater risk of being laid off and of developing stress-related disability.

While research has revealed a variety of negative health consequences associated with layoff victims, this is not necessarily true for those who accept voluntary buyout packages. In a recent Australian study, 71 individuals who had accepted voluntary buyout packages (after 7 to 44 years of service, with an average of 25 years) were contacted 2 to 7 years after leaving their firms. Almost 90 percent were married, and about half had dependant children. Surprisingly, 61 percent considered their health to be about the same, and 29 percent considered it to be “better” or “much better.”

Other research has shown that one’s financial situation is a major factor in how people perceive and respond to job loss, both physiologically and psychology. Financial incentives, which often accompany voluntary severance agreements, may well moderate the ill effects of job loss. As one set of authors noted, “evidence is mounting that events viewed as uncontrollable and undesirable are more likely to be associated with psychological and physical distress.” The findings of this study suggest that rather than considering themselves as “victims,” individuals who are offered voluntary buyouts may see themselves as having the opportunity to make choices about their future prospects that are not available to the “survivors.” As a result, they experience less distress later on.

Reprinted with permission from “Responsible Restructuring, Creative and Profitable Alternatives to Layoffs,” by Wayne F. Cascio, Berrett-Koehler Publishers, Inc., 2002. Workforce Online, October 2002.


blog ezecutivos vai publicar artigos em inglês sobre carreira

A partir deste mês o Blog Ezecutivos passa a publicar artigos em inglês, sobre temas atuais e de autoria de experts em carreiras, que orientam executivos na contramão do outplacement. Os textos buscam também ativar o seu network e dar dicas para as situações clássicas de downsizing (demissões conjunturais para readequação da empresa ao mercado, geralmente após fusões, aquisições, incorporações e até fechamento de negócios).  Estes artigos serão publicados, mensalmente, na seção “Acontece no mundo”.

Esta é uma parceria entre o Blog Ezecutivos e a Maxxima Gestão de Carreiras, empresa baiana e pioneira na implantação de um novo modelo de consultoria em Recursos Humanos, com foco em programas destinados à transição e desenvolvimento de carreira. Quem está a frente da Maxxima é o consultor Daniel Magno, que também passa a contribuir com artigos de sua autoria, com exclusividade para o Blog Ezecutivos.

Confira amanhã o primeiro artigo em inglês com o título: “13 Myths and Facts About Downsizing”, de Wayne F. Cascio.


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