After nearly three decades of corporate restructurings and reorganizations, the contemporary firm can’t avoid the “mean and lean” stigma. What events have contributed to this development and what types of Reductions In Force (RIF) have corporations adopted? This article discusses the common corporate restructuring practices corporations have used and are using around the world.
It should come as no surprise that different terms for the concept of Reductions in Force (RIF) have appeared in the managerial lexicon over the past few decades. These include downsizing, job separation, re-engineering, rightsizing, and workforce imbalance correction (Gandolfi, 2006). While scholars and HR professionals have long been debating the technical differences among the various concepts, it is obvious that, from an employee’s perspective, they all share at least one thing in common: the final outcome is a layoff.
Employee layoffs are not a new phenomenon. Historically, businesses have always been under pressure to adjust their workforce levels to anticipated or actual changes in labour demand. While RIF practices were particularly prevalent among blue-collar and semi-skilled employees until the 1980s, they were largely reactive. Since the mid-1980s, the layoffs that have occurred have been strategic (Littler, 1998). Today, it is recognized that the utilization of RIF is not confined to a particular phase of firm’s business cycle, but that such practices can be used even if the economy is thriving. Thus, there has been a distinct de-coupling of RIF strategies from economic cycles (Littler & Gandolfi, 2008).
Admittedly, over the past three decades, the world of business has experienced a tremendous amount of major change. Some of the most noteworthy and profound changes include technological developments and breakthroughs, the deregulation and privatization of entire industries, as well as industry- and firm-specific changes. Some of these changes have been revolutionary and given rise to the emergence of a new globally interconnected economy (Macky, 2004). In the wake of the corporate mantras of profit maximization and shareholder value, firms are continually trying to improve their performance in terms of their efficiency, productivity, profitability, and competitiveness (Cravotta & Kleiner, 2001). As a direct consequence, new management theories and concepts, sometimes cynically referred to as management fads, regularly emerge and are frequently, and at times desperately, adopted by firms trying to gain a leading edge.
Given the high levels of RIF now occurring in the financial services industry, a discussion of the commonly utilized corporate restructuring practices seems especially timely. This article will discuss these practices.
Reductions in force (RIF) – typology
A multitude of RIF strategies and techniques has surfaced over the last three decades. While some approaches and tactics have produced promising results, others have failed to yield any benefits. The discussion below reviews some of the strategies that have been adopted by corporations over the past 30 years.
Large-scale redundancy programs
In the 1980s and 1990s, large-scale redundancy programs were in vogue with many large-sized firms, who saw these programs as solutions to their problems. Prominent firms who made deep employee cuts included AT&T, British Telecom, General Electric, General Motors, and IBM (Kinnie, Hutchinson, & Purcell, 1998). Such programs and the ensuing mass layoffs of employees earned large corporations a reputation for meanness, a reputation shaped by individuals’ perceptions of the necessity and fairness of RIF being carried out. Redundancies, also called mass layoffs and collective dismissals, led to the fundamental breach of the employment relationship, the old psychological contract (Fineman, 1999). Over the same time period, there was considerable interest in the lean firm, a concept derived from the notion of lean production (Womack, Jones, & Roos, 1990).
Japanese management concepts
Beginning in the 1980s, Western-oriented firms began to adopt Japanese management tactics, including lean manufacturing, total quality management (TQM), just-in-time (JIT), and team working. Such tactics, it was claimed, made it feasible for firms to increase the production of goods and services with fewer resources. The underlying philosophy was that for companies to be able to survive and become globally competitive, they needed to be efficient, productive, and profitable. As a result, headcount as a ratio to output/production was used as the primary metric of performance, in order to fulfill the “more with less” maxim. As an inevitable consequence, payroll, which is often the largest cost for a firm, moved into the limelight (Cravotta & Kleiner, 2001). While there have been a lot of success stories associated with the lean firm, the concept has drawn considerable criticism, particularly with regard to the treatment of HR-related issues (Kinnie et al., 1998).
Voluntary separation plans
Firms facing pressure to cut headcount-related costs originally responded with a number of approaches, and in a mostly reactionary fashion. Some of the earliest approaches included early-retirement and voluntary-separation plans. The former frequently included attractive bonuses for employees with a certain number of service years and age. While some companies reported successes in implementing the early retirement plans, the successful adoption of voluntary separation proved to be much more controversial.
By design, voluntary severance packages entice employees to accept severance packages. However, the problem with such voluntary-layoff plans is that a firm risks losing its most marketable, high-performing, and innovative performers. If the credo “people are a firm’s most valuable asset” holds true, then a firm is in jeopardy of losing critical talent and expertise as well as institutional knowledge and memory. Empirical evidence shows that firms have reported decreased levels of payroll costs and productivity (Gandolfi & Neck, 2008). Moreover, some companies have stated, cynically, that they were left with “deadwood” after the introduction of voluntary separation plans. This experience demonstrated very powerfully that all people have different skills and add value in various ways, and are thus not easily interchangeable. While the adoption of these early approaches had limited success, they were nonetheless popular with many firms and perceived as being relatively ‘fair’ by individuals (Cravotta & Kleiner, 2001).
Thereafter, what is probably most widely publicized and implemented RIF to date, the across-the-board layoff, emerged. These “grenade-type” layoff strategies (Cameron, 1994) were adopted for every organizational entity within the firm by a defined percentage cut, such as 5 percent or 10 percent, irrespective of the entity’s individual performance. While most companies achieved immediate cost and headcount savings in the short term, firms were forced to contend with questionable medium- and long-term financial effects, as well as the painful human consequences of layoffs. The latter included decreased levels of employee motivation, morale, commitment, and loyalty, and increased levels of employee burnout, stress, and distrust (Gandolfi, 2006). There is a vast body of literature covering the human effects of layoffs on victims and survivors. It was during this phase that high-profile executives, such as Albert J. Dunlap, former CEO of Sunbeam and popularly known as “Chainsaw Al”, and Jack Welch, former CEO of General Electric, rose to prominence. Both Dunlap and Welch adopted uncompromising restructuring tactics that radically transformed their companies, producing large wealth for shareholders, and stigmatizing their firms for being lean and mean.
Assessing and focusing on core competencies
The strategy of assessing and focusing on core competencies was a strategy aggressively pursued by many companies in the latter part of the 1990s. At its most basic, a firm is seen as a series of processes that are either core or non-core (Cravotta & Kleiner, 2001). The objective is to concentrate on core processes, or core competencies that could potentially give the firm a competitive advantage. As a result, the non-core processes (non-core competencies) can be outsourced to third-party suppliers who can provide the same processes and outputs at costs savings or improved quality. The outsourcing of functions inevitably leads to reductions in employee headcount which, in turn, generates higher levels of employee efficiency and productivity. The effectiveness of this strategy has been hotly debated. While proponents claim that outsourcing provides cost savings, others argue that the firm once again loses its most valuable assets, talented people with marketable skills.
Downsizing and variations of it (e.g., compressing, resizing, etc.) have regularly appeared in the media and the popular press. In the 1990s, downsizing enjoyed a surge in popularity and became a strategy of choice for many firms. Downsizing purports to reduce the scale (i.e., size) and/or scope of its business in order to increase a firm’s overall business performance. The implementation of downsizing has frequently shown to result in employee layoffs. As time progressed, management scholars and HR practitioners began to question the effectiveness and alleged successes of downsizing. This was due to the empirical finding that the highly anticipated financial benefits rarely materialized (Sahdev, 2003). Downsizing has produced considerable adverse human consequences for all parties involved (Gandolfi, 2008). By the end of the decade, the notion of downsizing was intrinsically linked to a lean and mean corporation (Cascio, 2003).
The term “rightsizing” also emerged during the 1990s. While most HR practitioners see rightsizing as a synonym for downsizing, management scholars have delineated the difference between the two concepts. In principle, rightsizing requires the company to link staffing levels to organizational goals. Rightsizing may involve reducing the workforce (i.e., downsizing), eliminating functions, redesigning systems and policies, and reducing expenses. However, rightsizing can also increase a workforce (i.e., upsizing) in certain areas (Halley, 1995). Thus, companies reorganize, reallocate, and ‘right-size’ employee levels in line with existing business plans, goals, and objectives. Rightsizing requires the firm to prioritize and concentrate on the core/value-adding competencies that give the company competitive advantages and eliminate the non-core/non-value adding components. Rightsizing is seen by some as a multifaceted attempt to reshape the total organization (Halley, 1995).
Business Process Re-engineering
In the early-1990s, strategists Hammer and Champy introduced the concept of re-engineering, a tactic also known as business process re-engineering (BPR). The key to BPR is that it requires firms to look at their business processes from a ‘clean slate’ perspective and determine how they can best construct these processes to improve the conduct of business. BPR constitutes a complete re-alignment of the firm and requires that the company to be built from the bottom up. Consequently, BPR seeks to abolish those functions that do not directly add value to the bottom-line. Hammer and Champy (1993) defined BPR as:
“The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance such as cost, quality, service and speed”.
Davenport (1992), a BPR theorist, stated that the main difference between BPR and established approaches to organization development, including continuous improvement and TQM, is the following:
“Today firms must not seek fractional, but multiplicative levels of improvement – 10x rather than 10%”.
Therefore, BPR seeks radical change rather than continuous improvement. While BPR has provided positive returns for many Fortune 500 firms (e.g., P&G, Dell, GM, etc.), it was strongly criticized for its strict focus on efficiency and technology and disregard of people. Both Hammer and Davenport later admitted that using BPR for cost reductions alone was not a sensible goal and that layoffs should not be the focal point. Hammer (cited in White 1996) stated:
“I wasn’t smart enough about that. I was reflecting my engineering background and was insufficiently appreciative of the human dimension. I’ve learned and that’s critical”.
In response to the widely published harsh criticisms, the BPR fervor in the U.S. began to wane, giving rise to the emergence of the holistic notion of Business Process Management (BPM). While BPR has produced considerable workforce reductions, BPM has yet to make a mark in the corporate landscape.
One of the more visible signs of the effects of RIF is that the organizational structures of many firms have become flatter on the organizational chart. Technically speaking, firms have removed entire layers of middle management in order to speed up communication, reduce headcount, and increase the levels of efficiency. This strategy became known as de-layering and constitutes a form of downsizing/restructuring (Littler, 1998). Management writer Tom Peters (1989) recommended that a company should have no more than five hierarchical levels. While technological developments have rendered a lot of traditional middle managers redundant, firms with flatter structures provide decreased opportunities for personal advancement and a lack of definite career paths for employees. Empirical evidence shows that de-layered firms are likely to lose many highly talented individuals. De-layering, also known as management compression, has also contributed to a firm’s reputation for being lean and mean.
The root: The core-periphery model
Interestingly, many RIF tools and techniques that were fashionable in the 1980s and 1990s originated in the core-periphery model which was popularized by Atkinson (1984). The model and its associated practices distinguish between activities that are central or core to the business and those that are peripheral or non-core. While core personnel enjoy permanent, long-term contracts, the peripheral employees include fixed-term, casual, and in-sourced personnel (Purcell, 1996). Adopting this model means that peripheral personnel in services (e.g., IT, security, catering, and payroll) can be made redundant and their jobs put out to tender by outside contractors relatively easily. In contrast, core employees can be reduced, causing a reduction in the overall headcount. As well, their jobs moved to sub-contractors who do not appear on the payroll (Kinnie et al., 1998).
RIF as managerial fads
Thus far, this overview showcases the various RIF strategies and tactics that have surfaced over the past three decades. Empirical evidence suggests that while some firms have reaped important benefits, others have not. It is clear from the discussion above that firms have adopted a variety of techniques in their on-going quest for improved organizational performance. This poses the question as to whether some of these management ideas are solid concepts or whether the theories can be touted as fads. By definition, managerial fads are characterized by the following four elements (Benders & van Bijsterveld, 1995):
- The management idea is an absolute necessity for the modern firm
- The concept, technique, or tool promises considerable improvements
- The strategy is universally applicable, and
- The idea thus becomes abstract, vague, and ambiguous.
It is beyond the purpose of this paper to determine whether some of the presented RIF tools are fads. Nonetheless, while it is clear that some of the management theories and thoughts do have faddish tendencies, a focus on actual outcomes of the implementation of RIF seems more pivotal. What does empirical evidence suggest? What insights have been gained over the years? Some of the key lessons learned may include the following insights:
- RIF, layoffs, and layoff-related concepts are not a new phenomenon
- A focus on organizational efficiency may not lead to improved effectiveness
- RIF (e.g., layoffs) used to be adopted as a last resort in a mostly reactive fashion
- RIF (e.g., layoffs) are now being implemented strategically and proactively
- RIF have broad-based consequences – financial, organizational, and social effects
- Across-the-board layoffs have tangible and intangible implications and consequences and
- Proactive, strategic layoffs demonstrate a lack of corporate creativity on the part of managers.
Importantly, it must be understood that regardless of whether an organization conceptualizes and designates its RIF as downsizing, layoffs, rightsizing, or re-engineering, the adoption and implementation of workforce reduction strategies will inexorably produce considerable financial, organizational, and social/emotional effects. While some RIF outcomes can be anticipated and are tangible, others have unexpected, long-term consequences that are difficult to measure.
Contemporary RIF practices
Unequivocally, the active adoption of RIF strategies and approaches has enjoyed continued popularity in this new millennium despite the many failures reported in the 1980s (i.e., reactive RIF) and the 1990s (i.e., proactive RIF). Technically speaking, the 1990s did not end in 1999, but rather with the technology bust in 2001 (Littler & Gandolfi, 2008). There is ample evidence suggesting that the RIF tools utilized in the 1990s have remained popular in the first years of the new millennium (Macky, 2004; Gandolfi, 2008). As in previous decades, numerous synonyms and euphemisms for the notion of RIF have emerged. At present, some of the fashionable terms include “smartsizing”, headcount reductions, and redundancies (Story & Dash, 2008).
Traditional across-the-board layoffs
There is strong empirical evidence suggesting that large firms in particular have continued to embark on across-the-board job cutting since 2001. This is evident in the announcements of layoffs and plant closures in the U.S. and elsewhere. In 2005 and 2006, for instance, some of the large U.S. carmakers and car suppliers announced major restructurings, including GM (30,000 jobs), Delphi Corporation (24,000 jobs), and Ford Motors (Maurer, 2005). Notably, in 2006, Ford unveiled its restructuring plan, the “way forward”, which will shut down 14 manufacturing plants in the U.S. and cut between 25 and 30,000 jobs from 2006 – 2012. This latest restructuring represents 28 percent of Ford’s global workforce (Vlasic & Hoffman, 2006). In 2007, Pfizer announced that it would close three U.S. research centers and two manufacturing plants in Michigan in an attempt to eliminate 10,000 employees (Martino, 2007). Similar announcements were made in the same period by AstraZeneca (7,600 jobs), Bayer (6,100 jobs), Johnson & Johnson (5,000 jobs), and Amgen, which announced RIF of 2,600 or 14 percent of its workforce (Martino, 2007). Also in 2007, Dell shed 8,800 jobs (Ogg, 2007) and Motorola laid off 10,000 employees (Deffree, 2007). Most recently, the finance industry has been severely affected by deep job cuttings and restructuring activities (Elstein, 2008).
Case in focus: The subprime mortgage crisis
Since late 2006, the global economy as a whole and the U.S. economy in particular have been impacted by the subprime mortgage crisis. As a consequence, financial services firms have been forced to cut personnel in the wake of the current credit crunch. Table 1 depicts an overview of cutbacks at securities firms worldwide and in New York City (NYC) between June 2007 and May 2008. The latter figure is important since each Wall Street job creates two others and, while Wall Street jobs only account for 5 percent of NYC’s jobs, they produce 25 percent of its wages. Since mid-2007, banks have announced plans to cut 65,000 employees (Story & Dash, 2008). This figure is likely to rise given the projection that more layoffs will occur in the ensuing 12 months (Elstein, 2008).
Table 1 Announced cutback at securities firms as May 2008
|Firm||Total cutbacks worldwide||Estimated number in NYC|
|Bank of America||3,700||1,000|
Source: adapted from Elstein (2008)
In November and December 2008, various banks announced major cutbacks. These include but are not limited to Citigroup (50,000 employees), Bank of America (35,000 employees), Credit Suisse Group (5,300 employees), UBS (4,500 employees), JP Morgan Chase (3,400 Washington Mutual employees), Goldman Sachs Group (3,250 employees), and Barclays Capital (3,500 Lehman Brothers employees).
Stealth layoffs appear to be a current RIF practice in corporate America, though it is seen by some as a new managerial fad (Crosman, 2002). Instead of announcing or explaining layoffs, managers are not allowed to openly discuss corporate layoffs in meetings, memos, or e-mails, out of fear that negative publicity will ensue. Therefore, firms avoid negative press coverage to a large degree, while creating an atmosphere of distrust and unease among employees, leading to low morale and the defections of talented people (Crosman, 2002). IBM has been known for making stealth layoffs, small job cuts across a range of departments that keeps it out of the public eye (Richtmyer, 2002). In 2002, IBM unveiled a strategy called “resources actions” and eliminated workforce redundancies (Wolf, 2002). Thereafter, IBM announced three job cuts within four months; these subsequently became known as stealth layoffs (Wolf, 2002).
In a similar fashion, the current layoffs in the financial services industry have also been touted as stealth layoffs (Story & Dash, 2008). Previously, across-the-board layoffs in the finance industry were typically conducted with sharp, deep employee reductions at once. For instance, after the 1987 U.S. stock market crash and the global financial upheaval in 1998, employees were typically dismissed en masse (Story & Dash, 2008). In contrast, in this current crisis, it seems that employers embrace the following RIF practices:
- Firms are making small cuts
- Firms are making multiple cuts over the course of weeks or even months
- Firms keep employees in the dark about the size and timing of layoffs
- Rounds of layoffs blur into one another.
The ‘demise’ of the Wall Street effect
In this current decade, there seems to be an awareness and realization that there is no strategic value in making RIF-related announcements. In other words, the ‘Wall Street effect’ that was so prevalent in the 1980s and 1990s no longer applies to the same degree. Anecdotal evidence suggests that downsizing, layoffs, and restructuring announcements no longer generate stock market shocks as was the case in the previous decades. In fact, there is a noticeable absence of downsizing and RIF-related language in the press, media, and corporate announcements. Thus, corporate restructuring plans, including downsizing, rightsizing, outsourcing, and plant closures, are no longer effective signals for capital markets in this current climate (Littler & Gandolfi, 2008).
After three decades of restructurings and reorganizations, the modern firm has continued to engage in RIF-related endeavors despite questionable results and an abundance of lackluster reports from restructured companies around the globe. This article has established that most RIF tools have their root in the core-periphery model and found that while traditional RIF strategies have remained fashionable to some degree, nonselective layoffs and stealth layoffs currently enjoy a surge in popularity. Unequivocally, each RIF strategy produces its own set of consequences which have practical implications for all constituencies. RIF tools have been portrayed as a necessary response to inexorable market forces, yet RIF strategies, such as downsizing often represent a conscious strategic choice by management and, as such, deserve to be evaluated just like any other strategic decision.
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