'Ready-Fire-Aim' Layoff Strategy Backfires on Corporate America
Downsizing is helping widen the gap between the rich and poor, many analysts say
OAK BROOK, ILL. — DARREL PENROD lost his job a few months ago and, as a consequence, he now worries he might also lose custody of his sons.
Since Xerox Corporation laid off Mr. Penrod on Oct. 10, his former wife has repeatedly threatened to get custody of their two boys, Darrel and Dustin.
His job loss is a story that sounds all-too familiar. Penrod worked for Xerox for 16 years, earning $17 an hour repairing copiers at a plant in Oak Brook, Ill. He, his mother, and his brother were among 260 employees discharged when Xerox abruptly shut down the factory. Penrod says that because of the possible custody dispute, the layoffs could end up harming his two boys the most.
''The layoffs have hurt all three generations of my family,'' he says.
Penrod's hardship is felt by millions of American workers who have lost their jobs over the past decade because of the popular management strategy known as ''downsizing.''
Companies that once imposed major layoffs only in a slack economy now consider retrenchment routine, even during one of the strongest economic expansions in decades. For many American corporations, job cutting is now the rule.
''Downsizing has become a systematic, ongoing corporate activity carried out without regard to current economic performance,'' says Eric Rolfe Greenberg, director of management studies at the American Management Association (AMA) in New York.
In its zeal to jack up profits, corporate America has apparently underestimated the costs of downsizing on the work force. As a result, the mass layoffs are stirring unrest by pushing millions of Americans out of the middle class and widening the gap between rich and poor, according to economists and federal officials.
''Downsizing is brutalizing the work force,'' says James Champy, a leading management guru.
Nearly 700 US companies discharged more than 516,000 workers last year, according to Challenger, Gray, and Christmas Inc., an outplacement firm in Chicago. Many companies plan to press on with more staff reductions. Of 713 large companies the AMA surveyed in June 1994, 1 in 4 plans to shrink its head count by June of this year. This is the highest percentage ever recorded in eight annual AMA surveys.
For example, Xerox, maker of office-electronic equipment based in Stamford, Conn., has logged robust profits for several quarters, but the company still aims to complete a plan to cut at least 10,000 employees by early next year. Xerox is downsizing to overcome ''fierce competition,'' raise profits and productivity, speed products to market, and become more responsive toward its customers, says company spokesman Judd Everhart.
But rather than improve performance, downsizing often backfires because most managers disregard the maxim for an invigorating downsizing: Fully engage employees in a sweeping company streamlining, while gradually and meticulously reducing staff, experts say.
Instead, executives often ignore their workers' views and abruptly cut headcount in order to reap a short-run reduction in cost and fatten the bottom line.
Eventually, downsizings that involve hasty layoffs usually haul down growth and productivity, management experts hold. Such staff cuts also disrupt work and hurt the morale, loyalty, and productivity of remaining employees.
Slapdash downsizings have sown anxiety, disillusionment, and languor throughout the work force, according to a recent survey of 100 corporate human-resources executives by Cambridge Human Resources Group Inc. in Chicago.
''Companies still are just rearranging the deck chairs on the Titanic, not making fundamental changes for the long term,'' says Kim Cameron, a professor of organizational behavior at the business school of the University of Michigan in Ann Arbor. He has studied downsizing at more than 90 companies since 1986.
In studies of downsizing, absolute conclusions on their impact are difficult if not impossible to reach. However, evidence so far indicates that most companies suffer more than they gain from the strategy.
A survey by the Society for Human Resource Management late last decade showed that downsizing harmed the productivity of half of 1,468 companies. Moreover, fewer than one-half of the companies the AMA surveyed after a downsizing reported higher profits; and only one-third of those surveyed logged improved worker productivity, Mr. Greenberg says.
Some managers downsize in a desperate bid to save a company in crisis, analysts say. In a flash, managers decimate the ranks through layoffs, buyouts, early retirements, and firings. In the short term, ''grenade style'' downsizing is a fillip for company balance sheets and stock values, Professor Cameron says. For example, a day after announcing layoffs in 1993, the stock price of Xerox and six other major firms jumped an average of 5.5 percent, he adds.
''Managers at some troubled companies have to take short-term, expedient actions like downsizing and achieve stability or Wall Street will kill them,'' says Mr. Champy, author of the recently published book ''Re-engineering Management'' (HarperBusiness). He advocates corporate ''reengineering'' -- streamlining the way work is done -- and says improvement need not require massive layoffs.
Other managers, experts say, downsize in response to the uncertainties from growing global competition and dizzying advances in technology.
Finally, some executives who downsize are simply aping a management fad, says William McKinley, a business professor at Southern Illinois University at Carbondale.
''Today, if you lead a major corporation -- even if it is highly profitable -- in order to maintain legitimacy in the eyes of important corporate stakeholders, you really almost have to downsize,'' Professor McKinley contends.
Although executives appreciate the immediate corporate gains from downsizing, they tend to avoid talking ''on the record'' about a strategy that entails extensive layoffs. Indeed, management experts have identified more than 30 euphemisms corporate America has posed for downsizing, from ''building down'' and ''compressing'' to ''reduction-in-force'' and ''slimming.
BUT a downsizing that may please corporate directors usually happens at the expense of workers such as Penrod. Should Penrod find work, he says he expects to earn a fraction of his former pay. As his 22 weeks of severance pay runs down, he has sought work at the same skill level and pay as his previous job.
Full-time workers who were laid off or left a job between 1990 and 1992 found full-time work that paid on average 23 percent less, according to a recent Census Bureau survey of 20,000 United States households.
The shake up in jobs and the collapse in wages are partly the result of a seismic shift as manufacturers use more high-tech automation and require fewer workers.
In the emerging ''information economy,'' brainpower outweighs muscle power as never before. As many highly skilled Americans flourish, less-skilled workers tied to the shrinking industrial economy must work harder for the same income.
Moreover, the North American Free Trade Agreement and similar treaties pave the way for US companies to move capital and jobs to countries with cheaper labor.
The major changes in technology and trade are helping to cause greater inequality in income among Americans than at any time since the Great Depression.
The Clinton administration has repeatedly warned that the steady loss of well-paying, semi-skilled jobs could further polarize society and provoke strife between the nation's haves and have-nots.
''If American business continues to pursue short-term profits at the price of insecurity and falling living standards for a large portion of our society, it will sooner or later reap the bitter harvest of popular rage,'' Labor Secretary Robert Reich told the Democratic Leadership Council in November.
Already, the administration has learned first hand about the political hazards posed by jeopardized jobs. Middle-class voters, resentful over stagnant or eroding living standards, helped install the Republican-dominated Congress.
The alternatives to such disruption is to ensure that benefits from a downsizing last by reducing staff through a gradual long-range plan, experts say. Management must promote teamwork by canvassing employees for ideas and retraining them whenever possible. An open, cooperative streamlining approach can retain worker support, they say, even when gains in efficiency begin to make jobs redundant.
Before padlocking its Oak Brook plant, Xerox refused to give workers more influence over decisionmaking or a chance to improve efficiency and avoid joblessness, say former workers.
''If they wanted us to be 20 percent more productive, we could have been,'' Penrod explains, ''but they didn't give us any warning or any options.''
Xerox declined to meet with workers because productivity at Oak Brook was irrelevant to its plan to shut down the plant and consolidate its work at a factory in Webster, N.Y., Everhart says.
Shut out by Xerox, the workers and their families are struggling. Bill Griggs, who worked at Xerox for 14 years, must find a new way to support his daughter, who was born just two weeks before he lost his job. Carol Farries, who spent 26 of her 50 years repairing copiers at the Oak Brook plant, must overcome a bias against older workers.
''I'm too old to find another job and too young to retire,'' Mrs. Farries says.
Beyond involving employees, managers can also sustain staff support for downsizing by promoting company growth and nurturing ''industrial foresight,'' a vision of new products and how to create, shape, and dominate new markets, says C.K. Prahalad, a professor at the University of Michigan business school.
Still, masterstrokes in innovation and marketing are so rare that most workers cannot expect that their companies will discover a gusher of steady profit.
Indeed, Mr. Prahalad and other experts say that both blue- and white-collar workers must expect job insecurity to dog them their entire careers.
The challenges from swift technological change and rising foreign competition make it imperative for workers to continually upgrade their skills and watch for new job opportunities.
''Workers must see themselves perpetually in a job search,'' Greenberg says.
The Clinton administration says it wants to reverse the trend of shrinking wages for low-skilled and unskilled laborers and promote job security through worker retraining programs. But the prospect for a new retraining effort is shaky in a Republican-run Congress aiming to uproot many social-welfare programs. Even a generous retraining program might be beyond the grasp of harried, unemployed workers such as Penrod.
''I've got to care for my two children alone, find a job, and then work: I don't know how I'd have time for retraining,'' Penrod says.