BenefitsEngaged Workforce

Justifying the Pink Slips

Downsizing merely to appease analysts doesn’t make much sense. Only as part of a strategic plan do layoffs produce returns.

by Scott Golas

HR has long confined its responsibility within a company exclusively to the “operation” of people management systems. This narrow purview guarantees HR non-strategic status, since strategic implies accountability for a company’s results, even those outside the strict boundaries of your functional organization.

There is, nonetheless, a bold line connecting HR’s responsibilities to company performance. Few would deny that a company’s employees play a critical role in driving performance. Since these are the same employees hired, trained, developed, rewarded, and appraised by HR processes, this implicitly assigns HR responsibility for the “output” or results of the socio-technical systems these employees comprise.

Of course, HR cannot control every variable in the dynamic results equation, but few, if any, business functions have more than partial control over processes, decisions, and resources. Like all other critical business functions, HR must influence results through other people and other functions. HR cannot absolutely ensure correct behavior by managers, for example, nor can it force the executive team to make the “right” decisions on compensation, headcount, and HR budgets.

Consider this example of what, from the outside, appears to be a missed opportunity by HR to influence company performance. Retailer Circuit City recently announced a seven-percent cut of its workforce paid “well above the market-based salary range for their role.” According to laid-off workers, excessive pay in this case amounted to 51 cents per hour above the company’s defined market wages.

The decision was part of a series of changes to improve financial performance by realigning cost and expense structure. The 3,400-employee termination was described as a “wage management initiative.”

According to Peter Cappelli, management professor and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania, Circuit City’s decision to replace the terminated workers with lower-paid people is tantamount to saying, “We made a mistake in compensation by paying them more than they were worth for their performance, so we’re going to get rid of them.”

Research shows that if a company downsizes outside the broader context of a strategic plan, its stock price will, on average, drop five percent to six percent over several days. Still, some financial analysts love layoffs because they immediately improve a company’s bottom line.

By contrast, if large-scale job cuts are announced as part of a broader restructuring, a firm’s stock will rise an average of four percent in the days following. Contrary to popular wisdom, the broader Wall Street community does not always welcome job cuts for good reason.

According to Cappelli, research demonstrates that layoffs usually have negative effects on a company’s performance. Laying off workers to manage excess capacity, for example, can be a worthwhile, long-term strategy.

Generally, investors respect companies for divesting unprofitable or barely profitable businesses rather than strengthening them through large job cuts. Still, layoffs that are part of a strategic restructuring can also effectively send a signal that a company is “refocusing” its use of scarce resources, much like investors who reallocate their portfolios from poorly performing securities to more promising investments.

They can also send an important signal to customers, competitors, suppliers, and Wall Street. When Procter & Gamble cut thousands of jobs, its CEO said it signaled a cultural revolution there.

There is no denying that for many companies moving back-office functions from high-cost locations to lower-cost places such as Indiana and India makes strategic operational sense. In these cases, outsourcing can have the added benefit of creating more rewarding careers for employees in those roles, since their expertise has a high strategic value—not a back-office value—to the specialized outsourcing firm.

Each of these downsizing or layoff scenarios is under an umbrella of a larger strategy. Wharton professor Daniel A. Levinthal points out that Circuit City’s decision “sounds like a massive de-skilling” of the company. Because replacement workers will not know the merchandise as well, customers might not receive the best advice.

If you simply reduce the workforce across the board, you’re not being a responsible steward of company assets. Just as no one expects an organization’s proprietary technology to be outsourced without serious input from the CIO, HR needs to aggressively own and manage responsibility for the differentiating assets it represents.

Tags: Benefits, Engaged Workforce

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