American Executives Come to Grips With the Down Side of Downsizing : Business: The attempt to boost income and productivity by cutting workers may have cost firms billions, experts say, as morale worsens, loyalty vanishes, and overwork becomes the norm.

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.

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

Hammer estimates 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 that, 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 are 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.

Between 1983 and 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 also are beginning to recognize that without significant commitment from workers, the changes won’t be successful.

“Cost reduction by itself is not a winning strategy,” said Don Sacco, head of human resources at Nynex Corp. “We have to grow and we can’t grow without our employees on board. They implement our strategy.”

At Nynex, more than 20,000 jobs have been eliminated since 1988. Another 15,000 will be lost over the next few years. Just a few years ago, Nynex was considered a safe place to work, a guarantee of lifetime employment, Sacco said.

Many companies realize now they have not spent enough time preparing workers for restructuring.

“What is important to people doesn’t change just because executives try to ram (restructuring) down their throats,” Scott-Morgan said. “The resistance gets pushed undercover, where it turns to sabotage and treachery.”

Citibank went through radical cost-cutting beginning in 1991 to guarantee its survival. Now it’s in the midst of a more comprehensive effort to realign business.

“Like other companies, we had problems at implementation in the earlier phase of re-engineering efforts,” said Susan Evans, head of business evaluation at Citibank. “We would jump into designing a new process without spending enough time assessing the full problem. People didn’t always understand the changes.”

Now, she said, the bank spends more time training employees and evaluating projects.

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.”

You get the benefit of having people off the payroll but not much else, said David A. Hofrichter, managing director with The Hay Group, management consultants.

Moreover, executives often haven’t considered the conflicting messages between the existing corporate culture and the new vision adopted under a restructuring. Many restructurings, for example, emphasize teamwork, but the company’s rewards--more interesting projects, compensation, respect--often require an employee to stand out as an individual.

Companies, Noer said, also need to let employees grieve. “They are like survivors of other forms of human trauma,” he said. “The issue has been seriously overlooked.”