Layoffs: A Company’s Strategy of First Resort
At Applied Materials in Silicon Valley, laying off workers has become almost as routine as dumping old hardware.
The manufacturer of chip-making equipment fired 2,000 employees--15% of its work force--in August, only three months after firing 1,500.
Applied Materials is hardly alone. U.S. firms announced in October plans to cut 91,500 jobs, the most in nearly three years. In the first 10 months of this year, job cuts totaled 523,000, nearly all of them domestic. That’s 200,000 more than the number of jobs eliminated in the same period last year, according to Challenger, Gray & Christmas, a Chicago outplacement firm that tracks job cuts.
The Challenger numbers show that downsizing continues unabated even though the unemployment rate has remained under 5% for 16 consecutive months.
If the economy remains robust, why are hundreds of thousands of workers still losing their jobs?
For many corporations, downsizing has become a strategy that is used in good times and bad. Senior managers, under considerable pressure from stockholders to increase profits, often take the easiest way by cutting employment costs.
“Because of pressures from Wall Street, companies are paying unprecedented attention to their bottom line,” said Diane Swonk, deputy chief economist at Bank One in Chicago. “Companies are being asked to produce not just good profits but extraordinary profits.”
Like at Applied Materials, which--two weeks before the August job cuts--reported profit of “only” $70 million for its third quarter this year, down from $145 million for the same period in 1997. Even in the best of times, the Santa Clara, Calif., firm has sent workers home. In 1996, the company fired nearly 10% of its work force, despite posting a record profit of $600 million.
Applied’s periodic layoffs are consistent with an industry that practices just-in-time employment, according to Jeffrey Pfeffer, a Stanford University management professor who has studied hirings and firings by semiconductor companies.
“There are some companies that wouldn’t hold workers one minute more than they’re needed,” Pfeffer said. “They will hold inventories of goods for a long time, but they don’t want to hold inventories of people.”
The latest firings confirm what “workers already know: that there is little long-term job security, and your ability to retain your current job is beyond your control,” said Peter Cappelli, head of the management program at the University of Pennsylvania’s Wharton School.
A poll released in September by Shell Oil Co. found that more than half of all working Americans have been downsized, have worked for a company that has merged or been bought out, or have moved to a different city because of their job.
That might explain why workers’ commitment to their employers is declining. More than half of U.S. workers--55%--said they would switch their jobs for a pay increase of 20% or less, according to a survey of 2,020 workers conducted by Aon Consulting, a unit of Chicago insurance company Aon Corp.
And many workers are figuring out that the best defense to a layoff announcement is having another job lined up.
After several prominent U.S. firms announced layoffs last month, 140,000 workers submitted their resumes in a four-week period to a Web site operated by Korn/Ferry Futurestep Inc., an executive search firm that recruits middle managers.
“Many workers are feeling exposed and are looking out for themselves,” said Man Jit Singh, who heads the Los Angeles-based search firm. “That is all part of working in the ‘90s. You have to look out for yourself or you get run over.”
For American workers, layoffs have been a fact of working life ever since attacks from corporate raiders provoked companies to downsize in the ‘70s and ‘80s. Companies tried to assuage shareholders by arbitrarily shedding workers to improve short-term profits and to make their businesses appear financially healthy.
That strategy continued during the ‘90s, especially by CEOs such as Albert J. “Chainsaw Al” Dunlap, who became the poster boy for the downsizing movement when he fired 11,000 workers from both Scott Paper Ltd. and Sunbeam Corp.
When the firings at Sunbeam failed to cure the appliance maker’s ills--Dunlap himself was ousted earlier this year--experts thought layoffs would taper off, especially in a tight job market.
But despite sustained economic growth, 3.6 million workers were laid off during the two years ended December 1997, from jobs they had held for at least three years, according to the Bureau of Labor Statistics.
The layoffs over the last several months have involved firms ranging from oil companies to pharmaceutical manufacturers to brokerage houses. Among them are Callaway Golf Co. (700 jobs), Atlantic Richfield Co. (900), Texaco Inc. (1,000), Monsanto Co. (3,500), Merrill Lynch & Co. (3,400), Gillette Co. (4,700) and Raytheon Co. (14,000).
Unlike the earlier massive job cuts--in 1996, for example, when AT&T; laid off 40,000 workers--recent job cuts targeted specific departments of a company.
“After the first round of layoffs and companies got down to efficient sizes, downsizing has shifted to be about the rest of the organization,” Cappelli said. “Companies are finding that it is easier to go to the outside market to buy talent rather than to retrain workers.”
Indeed, many of the firms that fired workers in a division are hiring for jobs elsewhere in the company.
Raytheon, for example, is hiring in some of its divisions even though the company is laying off 16% of its work force, said Barry French, a company spokesman.
Callaway Golf in Carlsbad, Calif., is hiring in its golf ball manufacturing division while firing workers in golf book publishing, driving ranges and interactive golf sites.
And Merrill Lynch, which is trimming 5% of its 65,000-person global work force by cutting jobs in higher-risk businesses such as bond trading and foreign stocks, notes that it will have 5,000 more workers than at the end of last year.
Executives of recently downsized companies say they need the flexibility to trim redundant workers and rearrange their work forces--especially in the face of mergers, the global economic crisis and routine company reorganization.
Applied Materials officials, for example, say their cuts followed a downturn in the semiconductor industry.
And Ely Callaway, chairman and chief executive of the golf company, said that even though it was “very sad” to lay off workers, “the future of our 2,300 other employees on the payroll is better off” with the recent restructuring.
Patrick Cleary of the National Assn. of Manufacturers said that while layoffs are painful, workers who lose their jobs are being quickly rehired by other employers.
“This is a big country. You can have downsizings and [hirings] going on at the same time,” said Cleary, vice president of human resources policy for the Washington-based trade group.
Still, workers who have been fired say their job loss is hard to accept.
Nancy Pfeffer, a senior policy consultant at Arco until the company announced layoffs last month, said she and many of her downsized colleagues find it difficult to sleep at night, wondering if they’ll land good jobs.
“Even though we know in an intellectual way that job security is gone, in an emotional way, especially for those who haven’t worked elsewhere, being downsized is a difficult thing to go through,” said Pfeffer (no relation to the Stanford professor).
Experts say they’re surprised that so many companies are using layoffs as a first resort, especially since studies have shown that downsizing alone doesn’t achieve the desired financial results.
Companies in the Standard & Poor’s 500 that merely eliminated jobs from 1980 to 1994 suffered long-term losses to profits and stock prices, according to research conducted by Wayne F. Cascio, a University of Colorado management professor.
The same research revealed that the most profitable firms were the ones that produced new revenue by increasing staff and other assets, developing new products and entering new markets.
“The bottom line is you have to grow your business,” Cascio said. “You can’t shrink your way into profitability.”
“Downsizings often lead firms into downward spirals,” said Theresa M. Welbourne, a professor in human resources policy at Cornell University, because “your high performers seek out other jobs, [and] that eventually has an impact on the company’s earnings.”
Ask Michael Pachter, who until a few months ago was Arco’s director of strategic planning. Last April, when Pachter heard rumors that the oil company was laying off people and offering buyouts, he volunteered to leave for “a handsome severance.” He got it.
Pachter, 42, has since taken his MBA, his two law degrees and his 16 years of Arco experience to his new employer, a mergers-and-acquisition firm in Seal Beach. The new job pays twice the “high-$100,000s” he earned at Arco. Nevertheless, Pachter said, he loved his job and would have kept it if prospects for Arco had not been so uncertain.
He said the layoffs taught him a valuable lesson.
“The layoffs at Arco certainly tell you all you need to know about loyalty: that you should watch out for yourself and not count on corporations to take care of you.”
Lynn Dozier, an Arco spokeswoman, said the firm’s recent layoffs will help it grow and prosper. Even with fewer workers, the company is still planning to increase its production “and achieve best-quarter performances in everything we do,” Dozier said.
But some companies say that it is sometimes more effective to keep employees on the payroll during tough economic times than to spend money and time recruiting and training new workers during an upturn.
For that reason, some firms avoid job cuts. Southwest Airlines, the Texas-based carrier and one of America’s most admired companies, has never laid off workers in its 27-year history.
Lincoln Electric Co., a Cleveland company that makes industrial electric motors and arc-welding products, betters that record: In six decades, the company has not laid off a single worker.
Richard S. Sabo, who is heading a year 2000 communications project at the firm, said he shakes his head in disbelief when he reads almost daily news reports about layoffs.
“There must be a better way,” he said.
Lincoln won’t fire workers, Sabo said, because it would take supervisors up to three years to train new people.
In bad times, Lincoln reduces work hours, reassigns workers to other departments and, as a last resort, freezes all hiring. In good times, instead of bloating its payrolls with more workers, the company uses overtime to handle an increased workload.
The upshot of Lincoln’s written no-layoff policy is a loyal and talented work force that requires little supervision, Sabo said. Of the company’s 3,500 workers in the U.S., some 1,500 belong to the Quarter Century Club, where membership is reserved for those with 25 or more years of service.
And Lincoln executives say they don’t have to worry about cutting workers to please Wall Street analysts. Shareholders have seen the value of their stock increase by almost 42% each year since early 1994.
Company spokesman Roy Morrow said Lincoln has raked in profit almost every year for the last several decades. The only recent losses came in 1992 and ’93 when Lincoln restructured its European operation, he said.
Lincoln Electric and other firms like it show that labor should not be treated as a commodity, because skills can’t be produced quickly or easily, said Pfeffer, the Stanford management professor.
“Companies that keep workers during tough times realize that workers are still their most valuable assets and their best chances to increase profits.”
* HAVE THEY PERFORMED?
Tracking the stocks of some downsized firms. C7
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LARGEST ANNOUNCED JOB CUTS IN 1998
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Company Jobs cut. AT&T; 18,000 Motorola 15,000 Raytheon 14,000 Seagate Technology 10,000 Xerox 9,000 BankAmerica 8,000 Travelers Group 8,000 First Union 7,480 Sunbeam 6,400 United Healthcare 5,400
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