Managers Who Cut Jobs May Miss Mark

Ask a manager to cut costs, and the words "head count" usually come up.

Labor costs loom large on corporate balance sheets - about 50 percent of operating costs in a service company. So it's not surprising that the payroll is the target of choice for managers looking to trim dollars.

But the focus on head count may be headstrong.

"I think companies are obsessed over labor costs," says Jeffrey Pfeffer, an organizational-behavior expert at Stanford University in Palo Alto, Calif.

Another management expert, Kim Cameron of Brigham Young University in Provo, Utah, describes one large high-tech company forced to squeeze $358 million from its operating budget.

After poring over stacks of spreadsheets, management saw no other way than layoffs.

"Many companies are saying the same thing: 'We don't have any evidence that there are costs anywhere else,' " Mr. Cameron says. "And Wall Street applauds that kind of thing."

But he argues that such factors as poorly trained workers or time wasted in meetings cost companies a lot more money. The challenge: Such costs don't show up on corporate spread sheets and can be time-consuming to fix. Patience and long-term commitment are often in short supply.

"It's harder and more ambiguous work to take out the costs over the long term that stand in the way of improved performance," Cameron says. "Eight out of 10 organizations go for the easy and unambiguous approach."

"Downsizing does one thing and one thing only: It makes you smaller," Mr. Pfeffer says. "It often does not reduce costs."

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