Investment Initiatives » Can’t Anyone Think of Something More Original?

12.02.08

Can’t Anyone Think of Something More Original?

Posted in Blog at 12:29 am

As the global economy steadily grinds its way deeper and deeper into recession, panicky headlines no longer shout warnings of further bank failures. Instead, there is a mind-numbing procession of announcements of massive layoffs. Even though most businesses over the last twenty years had made a fetish of being “mean and lean,” and continually paring their head count to improve productivity, apparently they are still over-staffed enough that the only way they can deal with a business slowdown is by firing more employees. Whether it is manufacturers trying to avoid the problem of over-capacity, or health care businesses trying to—what? assume that poorer consumers simply cannot get sick?—everyone tries to get down that head count, and make one employee do the work formerly assigned to two or three. Far from being pleased that managements are doing their duty by reducing costs in the face of a downturn, the stock markets react to each major staff reduction with horror, and a further sell-off: either (a) things must be even worse than we thought or (b) the resultant rise in unemployment will further deepen the recession. Mass layoffs do not prop up a share price. They are purely mechanical, the first thing managements do whenever there is a threat to the orderly progression of the bottom line.

But it isn’t the stock market that “doesn’t get it.” For example, it seems to be a widespread belief that clients of fund managers, upset because their portfolios are down 40%, will be somewhat mollified if the manager keeps the cost ratio what it had been by mechanically cutting its staff in proportion to the decline in assets. That clients, already upset because of the decline in their net worth, might be further angered because key fund managers have been fired, they can no longer get through on the telephone, and paperwork has become snarled, seems not to occur to anyone.

Even in manufacturing, where the case for routine layoffs is strongest, customers can be unsympathetic to a premature shortage in supply, and will turn instantly to a competitor if production is not ramped up as soon as demand begins to recover. Moreover, r & d, often the first thing to suffer in the layoff process, may be continuing somewhere else, and the manufacturer is sometimes painfully disadvantaged in a recovery—or even during the slump—if a competitor has meanwhile invested in a better product. Another problem is that senior managers do not lay themselves off. Mass layoffs virtually always leave a company top-heavy, with too many managers supervising too few productive employees. If shareholders are sometimes pleased by mechanical cuts in costs, they quickly discover whether the cuts were wise, and reward or punish those companies accordingly.

Among the many intangibles which always suffer in a time of cut-backs, employee morale is given the least weight. Apparently, those who survive the layoffs are expected to be grateful, and further motivated by fear. This has not been borne out by experience. Contrary to the belief of some mechanistically-minded managers, employee morale does affect the long-term viability of many businesses, particularly those depending upon quality control, those depending upon innovation, or those depending upon quality of service. In the banking industry, a decline in employee loyalty, to the point where high-level personnel show no concern whatsoever for the economic survival of their employer so long as their own purposes are furthered, may be directly attributed to the casual attitude bank managements manifest with regard to employment security.

Obviously there are times when managements have no choice but to sharply reduce overhead. The problem is more endemic to some businesses than others. Still, it can be done well or badly, and leave most surviving employees either with the feeling that the decision was made reluctantly, with no alternative, or that it was made with no qualms whatsoever, as casually as a decision might be made to scrap unsold inventory. Some managers have built hugely successful careers slashing head-count at underperforming companies, collecting huge bonuses from the mechanical increase in profits, then moving on before anyone realized that they had done nothing to cure the underlying problem of an aging product line, or a poorly thought-out marketing strategy. Some such ‘turn-around specialists’ have left their companies with franchises virtually destroyed by inattention to anything other than sales per employee. Yet the financial rewards of being the one to implement such a strategy have been huge, as if it took any talent other than a thick skin and an easy conscience to decree an immediate, across-the-board 20% decrease in staffing. If nothing else, boards would be prudent to insist that senior managers who have to make such cuts should share a little of the pain, deferring large bonuses until business has recovered and the layoffs are well in the past.

The question also remains: Did anyone try to think of an alternative? In more ‘socialized’ Europe, where job security is sacrosanct, and labor relations are more important to senior managers than protecting share prices, managements have learned many surrogates for mass layoffs. Some of these devices require a bit of patience: it is amazing how much structural over-staffing can be corrected by two or three years of attrition, especially when accompanied by early retirement offers, and in the case of less-skilled workers, job retraining. Sometimes, reduction in hours can accomplish the deed, leaving the company ready to snap back into full production more quickly once the economy recovers. Employees about to be laid off might be given the option of working for a spun-off, otherwise about-to-be-closed subsidiary (assuming the company really wants to exit that business.) None of these alternatives may be available or strategically wise for a given company in a given set of circumstances. But it is doubtful that any manager in North America or the United Kingdom spends any time even trying to think of them. Layoffs and job uncertainty are just accepted as the flip side of economic growth and a free market economy. In times of prevailing prosperity, when the course of the economy is generally upward, periods of unemployment may be relatively brief; still, the bad taste may linger in affected employees’ mouths. When bad times persist, or a recovery is sluggish, long-term unemployment can become a serious problem, and lead to a substantial backlash, such as we are risking now. It would be interesting to see if layoffs were as favored a tool of management if senior managers got much larger bonuses from avoiding them than from decreeing them.

One of the puzzles of the five years from late 2002 to late 2007, was how much pessimism about the economic outlook was being expressed in popular polls, despite the fact that unemployment was very low, incomes were stable-to-rising, and consumption was very high. Even among highly-paid segments of the population there was a great deal of concern expressed for the future. Much of the reason was job insecurity. Particularly for older employees, those in their fifties and early sixties, the risk of premature ‘retirement’ was very real. One reason such individuals kept consuming anyway was that a strong stock market and rising house prices gave them a false sense of financial security. But nagging at the backs of their minds was the fear of long-term unemployment at the hands of an economy which increasingly regarded them as exactly as expendable as any piece of equipment used in production. The current political reaction to free market economics may be seen as an element of that fear. To reply simply that “Capitalism produces both winners and losers” and that those suffering a decline in standard of living are simply ‘losers’ is about as helpful to the long-term survival of the free market as to say “Let them eat cake.”

If the recession turns out to be as long and brutal as some fear, there is little which can be done by corporate managements to ameliorate the situation. In the financial services sector and especially on Wall Street, where firms have traditionally expanded and contracted like an accordion, there is the risk that many of the jobs spawned by the mortgage-swap-derivative bubble will never come back. Wall Street could do itself and the cause of capitalism a huge favor by not hiring so heedlessly in the next rise (whenever that is), so that the following decline need not be so severe and cause so much hardship. But most service businesses are not bond options dealers. It is difficult to believe that employment practices have ever benefited from the same genius of invention lavished upon the creation of new financial products, nor that half as much thought goes in to the downsizing of a firm as to the engineering of a complex merger.

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