Layoffs, Strategy and the Bimodal Hump

If you haven’t exercised your neck muscles lately, read the first few paragraphs of the article Short-Circuited: Cutting Jobs as Corporate Strategy and shake your head in disbelief as you scratch Circuit City off of your shopping list for a while.
After the story of Circuit City and their egregious approach to layoffs, the article states:
“…we have learned a lot about good practices and bad practices [in eliminating jobs] by watching companies in action.”
What did they learn?
Research has shown that if a company announces a downsizing without a broader reference to a strategic plan, its stock price will, on average, drop 5% to 6% over the next several days, according to Useem. By contrast, if large-scale job cuts are announced as part of a broader restructuring, and a strategic plan is laid out, the firm’s stock will rise some 4%, on average, in the days following the announcement. Useem says the research shows that, contrary to popular wisdom, Wall Street does not always welcome job cuts for their own sake.
Translation: say “Oops! We screwed up and we’re gonna have to let some people go” gets you bad marks with Wall Street while saying “Ooops! We screwed up and we’re gonna have to let some people go, but it’s part of our strategy!” gets you high marks with those same folks.
The authors conclude that Wall Street isn’t rabidly demanding job cuts in the name of improving financial performance:

“The tough-minded, big institutional equity market is actually skittish and worried about downsizings that are simply short-term cost-cutting measures without a broader plan described behind them,”

How can layoffs as a means to reduce cost be anything other than a short-term measures? The laid off workers will only save you money that one time. Choosing to retain, retrain and reduce cost in the other 90% of the cost of goods sold is the true long-term strategy that brings lasting success to Toyota and other organizations focused on building great people and processes, not just product.

Downsizing can also send an important signal to customers, competitors, suppliers and Wall Street. “Years ago, Procter & Gamble cut thousands of jobs,” Hrebiniak recalls. “They called it ‘cost savings,’ but the CEO also said P&G was sending a signal that this was a sign of a cultural revolution at P&G: to eliminate inertia, to wake people up to the focus on new markets and products and innovation, to get rid of dead wood. So layoffs can represent a refocusing.”

“Cultural revolution” is an unfortunate analogy, in the light of history. If you can’t wake people up except by using the sound of gunshots from the people you are executing, you’re really bad at waking people up. Layoffs are not strategy, they are a failure of strategy.
It may be the choice of words by Wharton management professor Lawrence Hrebniak that make it impossible to sympathize with the chief executive of Citibank:
“He’s getting pressure from shareholders,” Hrebiniak says of Charles Prince, Citigroup’s chief executive. “He’s feeling no love. He’s got to show he’s doing something to cut costs, improve margins, make some more money. So it may not primarily be a move to restructure at all; it could be a move to get critics off his back.” If Citigroup does decide to cut 15,000 jobs, it would represent nearly 5% of its workforce of about 327,000.

Given such callous ivory tower fare, it is tempting to launch into a 2,000 word proletarian rant. Instead, I’ll say it with pictures. Yesterday a new word entered my vocabulary: the bimodal hump. Or bimodal distribution, if you prefer. I prefer the hump.
In the typical scenario the incomes of people who are laid is reduced while the income of people who did the laying off increases. The way layoffs are used to improve stock prices in the short term enriches very few people, while causing disruption to the lives of many. In any case, no process is improved.
When layoffs become common business practice in a society, the distribution of wealth shifts away from the normal towards one that is bimodal.
Let’s put a human face on this. The two humps are for the increasingly rich and increasingly poor. When layoffs are done as part of a strategy to increase shareholder value, people who were living in the middle of the normal distribution (the middle class, the working class, etc.) find themselves shifted to the left (less income) even as the number of very rich grows. We might even say that the people who have been laid off have been “humped.”
There is nothing wrong with capitalist free market systems rewarding a small number of individuals very well for their superior performance. Layoffs as strategy is not superior performance, or even management but the lack thereof.
In the interest of full disclosure, I have personally terminated and laid off people in to keep a small business viable. That experience does not rank as a “strategy” in my book. It was a failure of strategy and a source of learning, not to be repeated. All of the points the article makes are valid. What is disappointing is that effort was put into writing about layoffs as strategy, rather than strategies to avoid them.
So for all of the CEOs out there shopping for some modern art with the millions pocketed from layoff strategies, here’s an artist’s rendering of your handiwork titled “The Bimodal Hump”.
Bidding is now open on this piece, for the next 30 days or until the reserve price is met, but only from qualified CEOs who have been enriched by their layoff strategies.

5 Comments

  1. Ron

    April 6, 2007 - 6:00 pm

    Jon, my recent comments on my blog about you being a closet Six Sigma guru are looking more and more accurate. Today it is bi-modal… tomorrow you may be discussing leptokurtic and platykurtic kurtosis. Be careful Jon… it’s a slippery slope my friend. Ha! Seriously, great post as usual.

  2. robert edward cenek

    April 10, 2007 - 4:08 pm

    Great post!!
    Here is an excerpt from my weblog, the Cenek Report.
    A major piece missing from the recent coverage of the layoffs at Circuit City is that this is not the first time that they have completed a “wage management initiative” – an interesting choice of doublespeak directly taken from their March 28, 2007 press release.
    In fact, the electronics retailer unveiled and implemented a similar cost cutting move at least once before, as reported in the February 6, 2003 edition of The Wall Street Journal. The firm announced then that 3,900 commissioned sales staff were being retro-recruited and replaced with less expensive newbies. Lackluster financial performance – and a need for a revamped sales strategy – were provided as official explanations.
    Circuit City’s most recent staffing lobotomy signals the presence of more systemic and chronic performance issues that layoffs alone will not cure. The firm’s press release underscores their need to reduce SG&A expenses, and to eliminate non-value added work, laudatory goals, but it has seemingly “made the same mistake twice,” and may be caught in a downward, inescapable vortex.
    Other bloggers, and the popular press, including the New York Times, have thoroughly detailed the employee relations fall-out that can be expected, which are certainly obvious and need no further chronicling. What has not received enough attention however, is the long trail of research, such as that undertaken by Kim Cameron of the University of Michigan, and Wayne Cascio of the University of Colorado, that convincingly calls into question the long term effectiveness of workforce management strategies that rely heavily or exclusively on labor cost reduction as a transformational strategy. The odds for improved business performance increase significantly only when cost reduction and improvement touch all elements of the business, not just the workforce. Maybe Circuit City will employ that thinking going forward.
    robert edward cenek, RODP
    http://www.cenekreport.com

  3. Mike Royo

    August 9, 2007 - 5:20 pm

    I am curious how Toyota handled the size of their workforce in Japan once they decided that they wanted to build cars in the US. I am familiar with what they did in the US but don’t know if they adjusted the workforce size in Japan.
    The company I currently work force is seeing large growth in China and is building a large facility there to service the Chinese market. However, there have been significant plant closures in the US as a result. This is happening at a time that Lean is being implemented in the NA plants. How would Toyota have handled this??

  4. Jon

    August 10, 2007 - 12:07 am

    Toyota has seen more or less steady growth and has been able to largely maintain employment or grow employment in Japan. The factories they build overseas are not so much for lower labor cost as to bring supply closer to the point of consumption, and to overcome import restrictions the US placed on cars.
    However, there is a dark side to Toyota’s control of labor cost in Japan. In the factory there is a large number of seasonal or temporary workers, who by law can work up to one month shy of 3 years as temps before they must be hired on as full time or let go. The result is the erosion of a sense of loyalty to the company long-term.
    But this sort of thing is more or less a worldwide phenomena in the developed world.

  5. Chetan

    December 29, 2008 - 5:20 am

    People always hate to talk about when they are laid off. But as it has become every day’s news headline since Yahoo started it with cutting 1500 of its task force last year, now a need of platform has been in demand where people can express their selves in words how they are feeling about their company, whey the got laid off was that justified or not.
    And every thing they want to tell anonymously. And http://www.layoffgossip.com is providing you that platform.