Strategic Framing

The layoff announcements keep coming and are unlikely to stop anytime soon.  This week,among other news, we learn Alcoa will layoff over 13,000 employees and Macy’s is closing stores.  Most of the media attention focuses on the plight of those who lose their jobs.  This is appropriate since those laidoff due to industry-wide economic forces have a difficult time finding new jobs, as those in the financial services industry can attest.

Another group of people with a challenge after layoffs are the managers left with the task of motivating and focusing the nervous and possibly demoralized remaining employees.  Managers can act to can make the post-layoff period a time of momentum building and innovation.

1. Vision and Mission work.  Every employee knows times are difficult and everyone is asking themselves the question ‘Will our organization survive?’  Don’t pretend this private questioning isn’t happening.  Confront it head on with a conversation about the mission of the organization.  What makes the company special?  How do the economic difficulties create opportunities to re-ignite the vision?  How can each employee contribute to the mission? A vision is not a luxury during a time like this.  Employees are looking for a reason to believe in the future of the organization.  Give them one or, even better, create one with them.

2. Invite Innovation through Flexibility.  Your employees know the business as well as anyone.  Give them the autonomy to help solve the organization’s challenges.  Share what you know about industry headwinds and future trends.  Invite your employees to find solutions or new market niches to exploit the changes in the industry.

3. Initiate new Communication Channels. Find a way to institutionalize new internal communication modes.  Make it clear that employee ideas are welcome and create a new forum to report out to your employees and hear back from them.  This could be a weekly video conference, a monthly meeting, a company wiki.  The structure the works depends on the culture of your organization.

4. Start a new strategic planning exercise. A good strategic planning process trains participants to think strategically and think differently about their industry.  If your goal is to get employees throughout the organization to innovate, then you want them to be able to innovate in a strategic manner.  Initiate a strategic planning exercise as a training and employee development task.  The main goal is not to create a new strategy but to get your employees to better understand the current strategy, help modify the strategy to match the new environmental constraints, or  help guide their innovative thinking.

5. Build an internal expertise and knowledge development network. The destruction of informal knowledge networks is a hidden cost of any layoff.  Often the informal knwoledge is not even recognized until it disappears after the layoffs.  The post layoff time is ideal for building a snapshot of the expertise network within the organization and using this to identify mentors and opportunities for employee development.

The bottom line is to give employees a sense that they have some control over the future of the organization and that the future of the organization is strong.  Since the recent past of the organization did not go so well, the only way to create some positive momentum is to take real, visible action demonstrating why the future will be different.

I’ve received a few inquiries about layoffs and future financial performance.  Several years ago I did research in this area and my general findings were that layoffs tended to have more negative than positive results.  The real driver of a link between layoffs and future firm performance is found in management reaction to the layoffs as well as in the way in which the layoffs are implemented.  My general rule was to avoid investing in companies which layoff more than 5% of their workforce in a given year.   Such large scale layoffs introduce a complex array of firm level risk.  It is often wise to wait and see how well executives manage that risk before jumping in as an investor.  In today’s recessionary environment, I would consider shifting that rule of thumb up to 10% of the workforce but I’d still be wary of any large scale layoffs.

In a study of Fortune 500 firms, Peter Chalos & Charles Chen (Journal of Business Finance & Accounting, 2002) found evidence that different types of downsizing strategies have different performance implications. Layoffs related to plant closing led to slightly negative market reactions, layoffs related to cost cutting (renengineering processes, aligning cost structures with market realities, etc.) did not show a significant market reaction, while layoffs related to revenue refocusing (dropping underperforming or unrelated product lines) led to positive market reactions.

Most public announcements of layoffs (and discussions in 10-K footnotes) state one of these 3 reasons for the layoffs. This research suggests that you can use this information as a preliminary guide when assessing impact of the layoffs on future performance.  Most recently announced layoffs fit the second type of layoff, aligning cost structures with market realities.  These types of layoffs are frequently industry wide events and do not reveal much firm-specific information valuable to outside investors.

In a forthcoming post, I’ll outline some ways companies can use layoffs as a springboard for strategic change.

Each day brings new layoff announcements.  In the past week, we’ve learned that the layoffs in the banking and financial services sector are not limited to North America and Europe as banks pare their staff in Asia.   In recent days, media companies (AP, New York Times), law firms, manufacturers (Boeing), bottlers (Pepsi), and tech companies (HP, Sun) have announced layoffs.

So are all layoffs bad news from an organizational performance perspective?

The short answer is yes.  The long answer is some types of layoffs are much more difficult to overcome than others.  In addition, every layoff action, no matter how small, has the potential to do long-term damage to a company if not managed properly.

Start by assuming layoffs are a bad sign. Layoffs mean management made bad decisions in the past, demand for the company’s products and services are declining, revenues will be dropping, and the company is going to lose some key personnel in the near future. Now cut management some slack if layoffs are industry-wide, seasonal, or clearly due to a unique and unforeseeable event. 

Some have argued that current events were foreseeable but I think we can all agree the extent of the economic damage was not anticipated. 

As for the industry-wide excuse, the need for layoffs may be unavoidable (as is the case in most financial service firms right now) but the way in which the layoffs are managed is entirely at the discretion of management.  Seven years ago, the telecom equipment industry was devastated by a sudden drop in demand.  Each company suffered but for some companies the suffering was made worse due to self-inflicted wounds from poor management of layoffs.  Layoffs dragged on, strong employees were recruited away, employee morale plummeted.   One company, Cisco, seemed to manage the process better than its competitors.  Cisco announced its layoffs in one big action and committed to ensuring the company was strategic about how the layoffs were implemented and which parts of the organization were effected.  By making one large layoff announcement rather than slowly bleeding employees on a quarterly basis, Cisco reduced the length of the internal post-layoff recovery period.  This is one example of turning an industry-wide slump into a competitive advantage.

The Bottom Line: Layoffs are an admission that the company made poor decisions in the past. They are not a sign of strong management. They can get a company back on track but they will not make a company great. Companies do not cut costs to become industry leaders, they innovate.  However, skillful managing of the layoff process can enable a company to recover from an industry slump before its competitors.

Layoffs are in the news again and in a big way.  Each day brings a new headline about large company layoffs.  This week, the big news was Citigroup’s announcement that they will reduce headcount by 52, 000 over the next year. Despite what some headlines screamed, Citigroup is not laying off 52,000 employees.  Some of these reductions will come from attrition and asset sales.  Nevertheless, the pain is real at Citgroup and the layoffs are significant.

Back in 2005 and 2006, I spent a lot of time researching and writing about layoffs.  Over the next few weeks, I will revisit some of these findings on this blog.  Layoffs are a type of strategic change.  Obviously, they are not the type of change managers hope for.  I’ve never watched a strategic change presentation with a slide that said “Year four: reduce headcount by 25%”.

For now, here are links to two of my media interviews about layoffs from 2006-2007.  The first interview considered the investor implications of layoffs and was published in The Wall Street Journal.  The second interview discussed layoffs in the pharmaceutical industry and was published on ere.com.

Why Investors may do Well with Firms that Avoid Layoffs by Herb Greenberg, The Wall Street Journal, published on Sept 9, 2006. (subscription required to read full article)

Awaiting Pfizer Cuts, Business Expert says Pharma Sales to go through ‘Painful Transition’ by Elaine Rigoli, ere.net, published on January 17, 2007.