Corporate Downsizing Can Be Double-Edged Sword : Restructuring: It doesn’t always improve productivity--and it might end up costing money.

Millions of employee layoffs have helped corporate America cut expenses. But evidence is growing that the strategy known as downsizing produces destructive side effects that range from demoralized workers to job burnout.

Moreover, researchers and strategists say the attempt to strengthen profits and productivity through cutting layers of workers may actually have cost many companies billions of dollars. Nor is it clear that downsizing has made businesses as productive as initially hoped.

“Much of the downsizing of the last 10 years has been an enormous waste of time and energy, and in many cases has been spectacularly unsuccessful,” said Michael Hammer, a consultant specializing in re-engineering efforts. “I’m seeing many companies go that route and then regret it.”

To be sure, there is a powerful argument for cutting unnecessary workers in an age when technology can do the work of several people. If American industry is to remain competitive on costs, work force cutbacks are still seen as an obvious way to achieve the goal.

Indeed, on Wall Street, a main barometer of corporate performance, investors usually act favorably to word of cost-cutting. Stock prices often jump when companies terminate workers.

Others, however, charge that re-engineering has become a fad, with companies embracing the strategy without considering the consequences.

Hammer estimates that 70% of the corporate cost-cutting he has observed has not achieved hoped-for results. And a survey of top executives by the consulting firm Arthur D. Little shows about two-thirds are not satisfied. In hindsight, many said they should have planned more carefully.

Part of the problem, the study found, was a conflict between the executives’ objectives, motivations and expectations.

Still, Peter Scott-Morgan, associate director at Little and author of the book “The Unwritten Rules of the Game,” said not surprisingly, chief executives have been reluctant to address their failures.

“There has been a conspiracy of silence,” Scott-Morgan said. “But many feel the changes have been too slow or too patchy.

“The tragedy is that so many people are suffering and the reasons for which they have had to suffer not being achieved,” he said.

Beyond the obvious emotional and financial cost to employees is the less-publicized and not insignificant cost to companies themselves. American corporations are spending between $7 billion and $10 billion a year on re-engineering, Scott-Morgan estimates.

Many of America’s largest companies have been shrinking since the mid-1980s and the economic recovery has not slowed the pace. For example, after eliminating about 100,000 jobs since 1984, AT&T; is still dropping 1,000 a month, spokesman Burke Stinson said.

From 1983 to 1993, Fortune 500 companies eliminated 4.7 million people from their payrolls, or one-quarter of their work force, said David Birch, president of Cognetics, a Cambridge, Mass., business research firm.

Still, a study for the Census Bureau’s Center for Economic Study questions whether job cuts and improved productivity--a key rationale for many restructurings--necessarily go hand-in-hand.

“In many ways the message is that we need to be careful when we look at trends in the economy and then apply them to all industries,” said University of Maryland economics professor John Haltiwanger, one of the study’s authors.

An analysis of productivity at 140,000 factories during the 1980s found that while 55% of gains came where the work force fell, the other 45% came at plants with growing employment.

David Noer, author of “Healing the Wounds: Overcoming the Trauma of Layoffs and Revitalizing Downsized Operations,” said the anger and fear among employees who survive layoffs limit their risk-taking--and hurt productivity.

Part of the problem, Hammer and other strategists say, is that in their quest for efficiency, many companies have ignored the human side of the drama, that restructuring efforts are changing how employees view their work lives.

Previously, loyalty was a given: If you worked hard, you attained. An employee gave the company loyalty and received a steady job, service pins and a secure retirement.

“The new reality is that people come to the office understanding . . . that to rely on the paternalism of the company is a mistake,” Stinson said.

Although companies have found loyalty is hard to engender amid massive layoffs, they are also beginning to recognize that without significant commitment from workers the changes won’t be successful.

Executives also have not considered how restructuring affects the workload of remaining employees.

“All many companies are doing is eliminating people, throwing them over the side of the boat, and they aren’t eliminating work,” Hammer said. “Companies then have to work the remaining people harder and they become stressed and unhappy.”