When is it restructuring, and when is it just a layoff?
A recently-announced study from the venerable Boston Consulting Group suggests that a lot of companies are getting set to make the same mistakes that nearly crippled them in the last major recession. That is, a lot of companies are cutting irreplaceable people in order to cut operating expenses, rather than restructuring themselves to weather and emerge from the recession in a competitive form. Actually, this mistake seems to be as old as capitalism; I’ve seen references to severe layoffs from the mid-19th century.
The BCG report has not yet been released, but apparently it describes a common sequence of events. A company discovers that despite the optimism of the marketing department, they are not immune to the new recession after all. They then discover that for a variety of reasons (this time including the problems in the capital markets) they have a serious operating-income problem. So they decide to cut back expenses.
So far so good. But now the great mistake rears its head: where to cut back. The obvious thing to do here—the answer that would have landed you the A on your management exam back in the MBA program—is to pull out a clean sheet of paper. Asses your strengths, competitive situation, and opportunities. Write a new business plan based on the new situation. Implement it. But unfortunately for their shareholders, a lot of managers aren’t thinking about a new business plan. They are thinking about not making their numbers, and the only knob they have left to turn is direct expenses. So they look at the expense budget, and the line with the most digits says Salaries & Benefits.
To be fair, managers try to cut anything that doesn’t sound short-term first: free coffee, training, recruiting, "frills." Then they cut into the meat of the company.
The BCG report, however, based on a survey of literally thousands of European managers who have been through previous recessions, offers some warnings. The study asked managers what they tried last time, whether it helped, and its effect on employee commitment to the company. They learned, not surprisingly, that cutting back on company events, coaching, or training all had severe negative impacts on the employees’ willingness to stick with the company. Laying off employees and reducing salaries were even worse. Only reducing recruitment and terminating temporary employees seemed to have done little harm last time.
So who cares about employee commitment when you are in the jaws of a recession? Well, it’s the employees who will have to step up to get you through the recession. The board and the investors sure aren’t going to. And, as the BCG points out, eventually recessions bottom out, and at that point the most scarce and crucial resource for the company will not be cash—it will be skilled employees. If everyone you have left is waiting to jump ship, you will be as dead in the water as all those ships tied up in San Francisco harbor, unable to get crews, during the Gold Rush of 1849.
So what to do? You can’t make your numbers by just slashing recruiting. In fact, the report points out, with an aging workforce and scarce young candidates for positions like design engineering, recruiting may be a valuable competitive weapon in a recession. You may not want to cut that. One point the BCG data make is that layoffs based on performance—not tenure, politics, or uniform 20 percent staff reductions—appear not to harm employee commitment. But the BCG has a bigger point in mind.
The report says that there are two positive scenarios in which a company survives this recession. Either they return to their previous level of business activity, or they return to their previous rate of growth but at a smaller size. In the first case, the company must restructure during the depths of the recession in order to achieve a much higher than normal growth rate during the recovery. This will require a flexible, scalable organization that can withstand huge growth over a period of a year or more, and it will take huge commitment from the key employees.
In the second case, the company will have to adjust to being the right size for a smaller business opportunity. For this it will also have to fundamentally restructure–not simply shrink all of its existing activities. Once again, success will depend on keeping the right key people, in positions where they have the resources to do what is necessary in a rapidly-changing environment. But it will have to happen in a smaller organization, sized to execute only on those objective that are now achievable.
Either way, the key word is restructuring, not reducing. Executives must envision the set of probable outcomes from the recession, design company structures that fit each of these outcomes, and manage cost reductions in a way that leaves the company with the right internal structure for the developing situation. Hitting the bottom of the recession with an organization-chart full of "to-be-recruited" marks simply means the company will not recover. Sorry, but it’s that simple.
In finest BCG fashion, the report presents a twelve-step program, complete with an easy-to-remember mnemonic diagram, to help executives through this process. What they don’t provide, and what most executives will run out of before the bottom of this recession, is the will to act on the data. And so once again we will see companies that fail to emerge from the recession even though they made it to the recovery phase. And we will see companies after the recovery that are zombies—taking up space and consuming resources, but no longer able to execute a plan more complex than to simply walk straight ahead. We’ve seen it before, and we’ll see it again.
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