Downsizing and layoffs are bad for business and bad for the US

There a lot of things in life that are counterintuitive. For example, when we lose control of a car on ice, we are told that we need to turn our wheels into the slide in order to gain traction. We’ve been told by Wall Street, time and time again that layoffs are necessary in order for a company to stay competitive. Corporate layoffs happen so often that Forbes has a Layoff Tracker. In February, ABC announced that it needed to lay off personnel in order to keep up with cable news and the Internet (yes, I know… it didn’t make any sense to me either). Pfizer, BFGoodrich, Continental Airlines, Human and Ford Motor Company are among the major companies who announced layoffs in February. Since November of 2008, America’s 500 largest companies have laid off close to 700,000 people.

Southwest Airlines, based in Dallas where I grew up, was always thought of as a cute and interesting airline. They started about 40 years ago and just flew flights inside Texas. They would fly between Dallas and Houston, Dallas to San Antonio, San Antonio to Austin, etc. Nobody really paid them much attention. Currently, Southwest Airlines is the largest carrier in the United States. They have more scheduled domestic flights than any other carrier. They are bigger than American Airlines, Delta Air Lines and United Airlines. Southwest Airlines is the only major carrier that has never had involuntary layoffs. They’ve never downsized. According to MorningStar (may need a subscription), “we still think Southwest has one of the strongest balance sheets in the industry.” Never downsized. Even after 9/11, they didn’t lay off one worker, but the company still has one of the strongest balance sheets in the industry. How can this be?

Unfortunately, there’s no way to do a traditional blind study looking at corporations and downsizing. But there appears to be a growing body of literature suggesting that downsizing is not helpful. One study looked at over 100 companies that laid off workers between 1979 and 1997. The study found that the larger the layoffs, the larger the negative stock returns to that company. Another study looking at productivity found that productivity decreased after layoffs and not increased as we’ve been told time and time again. Another study looking at 122 companies found that downsizing reduced subsequent profitability.

Now let’s think about this. You have a job at some giant mega-corporation, a Fortune 500 company. Five years ago, they had their first layoffs. You were spared. You were told by the corporation and they had to get rid of “dead weight.” Three years ago, the company decided to have a second round of layoffs. Where’s the dead weight now? If you got rid of all of your dead weight two years earlier, now you’re getting rid of essential personnel. How is that beneficial? After these layoffs, you and the remaining coworkers have this feeling of dread. Some people had just been laid off had worked just as hard as you do. A year later, there’s another announcement and more layoffs. Now, how motivated are you and your coworkers to give 110%? When you have a presentation that is due, for example, how likely are you to stay after hours and put in that extra effort? As a matter fact, you and your coworkers might be bitter towards management. You’ve seen their salaries increase over the last five years while yours has remained stagnant.

Cities and towns which at one time were dependent upon these large corporations to provide jobs, now cannot even depend on the corporations to stay in town. You’ve lost the stability of your city or town. Your tax base is unstable. How can you make a reliable city budget when you’re unsure if the corporation will stay in town or lay off half its workforce in a couple years?

If downsizing has negative effects on corporations, employees and cities, then why do CEOs continue to insist that downsizing is helpful… not just helpful, but essential to the survival of the corporation? Wall Street has fallen in love with the phrase, “lean and mean.” This is in spite of the fact that lean may make them unable to do the same quality work as they were able to do five years ago. We have all seen the effects of downsizing, yet we have closed our eyes and pretended that this practice is necessary. Two years ago, Dell computers was having a problem with some of their laptops spontaneously igniting. That didn’t happen five or six years ago. I switched from Gateway to Dell over 10 years ago because of Dell’s excellent customer service. Now, I can describe Dell’s customer service in multiple different ways, but “excellent” is not one of them. (I did buy a Dell Computer, one of their fast XPS computers, and it was shipped with the wrong processor.) Every one of us has a tale about a corporation that we used to trust to do X, Y or Z. the corporation was reliable. They delivered an excellent product. Now, not so much.

If we’re looking for ways to revitalize America, if we are looking for a way back, maybe corporations need to invest in a stable workforce here in the United States. To quote one former head of human resources, “If people are your most important assets, why would you get rid of them?”

Much of this post is based on an article by Jeffrey Pfeffer, Lay off the Layoffs, published in Newsweek.

0 Responses

  1. Probably if they took just half of the pay of all the outrageously overpaid ceo s and executives et al, there would probably not be layoffs nor a recession.

    How many people get laid off, just so one CEO can keep his 7 figure salary?

  2. What an interesting take on downsizing and who it is good for.  It reminds me of the most often-quoted peice of financial advice I’ve heard that “…for most Americans, your house is your greatest asset”.  I believe that this fallacy has kept most americans from acheiving true financial independenc.  Your house is your biggest liability.  On a balance sheet, the equity in your house shows up on the asset column however, the mortgage on your house is in the liability column.  Those ‘homeowners’ who choose to use the ‘equity’ in their house for cash increase the liability that their house represents.  Due to home equity loans, many homeowners actually own more on their house than their house is worth which TRULY makes this a liability.  However, for the BANK, the average American’s home DOES represent an asset!  Every month, a mortgage payment makes money for the bank.  Every mortgage payment (look carefully at your mortgage statement…) gives much more money to in the form of interest to the bank than accrues in equity to benefit the owner.  Hardly an asset.  Why does this analogy relate to how downsizing is good for corporations?  I think it is because the definition of the corporation is not the shareholders, the community, the employees of the corporation or the customers.  Downsizing inures to the benefit of SENIOR MANAGEMENT!  The Board compensates senior management for hitting certain financial benchmarks.  These are measurable benchmarks of financial ratios such as days cash on hand, current ratio (which measures assets to debt ratio) an other financial ratios that can be manipulated most easily via layoffs.  When the Board meets and looks at these targets, the top management comes out looking great!  The board room is so far removed from the W-2 employee that when the company ceases to perform the service for which it was performed, the Board of Directors – who ultimately has responsibility for oversight of the company – has no clue.  Americans must return to the values of the late 19th and early 20th century and realize that their most valuable asset…is THEM!  Americans work harder and harder to work for a corporation that may cut them out.  More Americans are being forced into entrepreneurship and, because they have no idea that they are their best asset, they are terrified.  The tax laws of this country has never favored the W-2 employee who must make money, pay taxes and live off the rest while the business owner makes money, pays expenses and pays taxes on what is left over.  Corporate downsizing will result in the death of the corporation.  We are seeing corporations die.  Management will take the rest of the remaining assets and America’s greatest product will once, again be service, innovation and hard work.  Personnally, I think it’s about time.

  3. If the corporate execs continue to draw huge salaries, the layoffs will continue. We will have lost our standing in trade and become a Third World nation. These execs are doing just as the unions did, demanding more than they should and the subsequent downfall was the very loss of those jobs. Somehow business needs to change its perspective and look down range and long-term.

  4. This is when they move the company production overseas or south of the border just to keep the bottomline high. Regardless of how anything is made.  My dad was a General Manager who worked for ITT  companies until 6 months before his 20th year and was laid off . His retirement pension was reset to the 15 year amount as per contract. This was back in the 80’s and were known to do this to upper personsel. My dad had just won an award from the government for international trade. But the company got the prize because they had just laid him off to hire a cheaper person to take over.

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Errington C. Thompson, MD

Dr. Thompson is a surgeon, scholar, full-time sports fan and part-time political activist. He is active in a number of community projects and initiatives. Through medicine, he strives to improve the physical health of all he treats.

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