MAKING COMPANIES EFFICIENT
The year downsizing grew up
Reprinted from The Economist, December
There are better ways to do it, even
where it is still unavoidable.
Downsizing, it seems, has got itself downsized.
At the start of 1996, mass sacking by American companies was causing
a hullabaloo in the United States. Pat Buchanan, railing against
”job-destroying” corporations, romped home in the Republicans’
New Hampshire primary. Robert Reich, Bill Clinton’s labor
secretary, said that those firms which devastated communities by
moving jobs abroad might face punitive taxes. Magazines splashed
stories about ”killer bosses” who paid themselves millions
while laying waste to their workforces. The New York Times, in a
series of seven hefty articles, declared that ”job apprehension
was intruded everywhere, diluting self-worth, splintering families,
fragmenting communities, altering the chemistry of workplaces...and
rubbing salt on the very soul of the country.”
In this mood of doom, AT&T’s announcement
last January that it was sacking 40,000 came as a special shock.
It was not just that the culprit was ”cuddly old Ma Bell,”
rather than some fly-by-night sweatshop in the South. Much worse,
AT&T was prospering; the man who wielded the knife, Bob Allen,
was prospering with it, having just seen his pay go up to $5m a
year; and Wall Street greeted the dismal news by boosting the company’s
And yet, a few months later, the subject was
almost forgotten. Bill Clinton and Bob Dole mentioned downsizing
in the presidential fight about as frequently as Dubrovnik. Pat
Buchanan’s peasants returned to their six-packs and cheese
whiz. The New York Time’s series, repackaged into a book,
drew little interest. ”Downsizing” remained a reliable
topic for comedians, but as subject of economic analysis it had
suddenly gone flat.
There are two reasons for the waning of interest.
The first is that the people who made the loudest noise about the
problem at the start of the year have now taken a closer look at
The headlines may be full of household companies
announcing gigantic lay-off 50,000 at Sears, 10,000 at Xerox, 18,000
at Delta, 16,800 at Eastman Kodak, 35,000 at IBM, on top AT&T’s
huge contribution. But the wider figures tell a different story.
The unemployment rate came down from 7.1% of the workforce in January
1993 to 5.1% in mid-1996. The economy continued to create many more
jobs than it destroyed, providing 8.5m new places for workers in
1993-96. And the employment growth was concentrated in jobs paying
above the median wage rather than in hamburger flipping. In 1992-96
over half the employment growth was in jobs paying in the top third
of wages (and the number of hamburger-flippers actually fell). For
all its downsizing, America was far better at generating decent
jobs than Europe with its loyalty to jobs for life.
The second reason is that many big firms have
had enough of downsizing for the moment. Three enthusiastic downsizers
over the past decade have been IBM, General Motors, and Hughes Electronics,
a division of General Electric. IBM slimmed itself down from 406,000
employees in 1987 to 202,000 in 1995, one of the most dramatic workforce
reductions ever. Over the past year it has been recruiting 21,000
people, more than in the successful 1970s. General Motors cut its
workforce from 800,000 in 1979 to 450,000 in the early 1990s. In
the past year, it set out to recruit 11,000 people. Hughes Electronics
has reduced its workforce by a quarter in the past decade but in
1996 was set to add 8,000. After the downsizing, re-enter upsizing.
From panic to planning
For all that, it would be wrong to think the things were over. Downsizing
has spread from private to public sector and from workers to managers.
Older white-collar workers were considerably more at risk of losing
their jobs in 1991-92 than in the previous recession in the early
1980s. And the victims seldom have any easy time of it: two studies
by Henry Farber of Princeton University and Ann Huff Stevens of
Rutgers suggest that even people who get another full-time job earn
on average 10% less than they did in their previous jobs.
The past decade has seen downsizing evolve
from an act of desperation into a calculated choice. The first downsizers
were failing companies: many of them had no choice but to go in
for repeated bloodletting as their business shrank and morale collapsed.
But more recently a new sort of company has taken the practice:
successful firms that use job cutting as a way to pursue a wider
General Electric led the way, removing 104,000
of its 402,000 workers in 1980-90 even though it faced no great
crisis. Others have started to do the same. Compaq cut its workforce
by 10% in 1992, despite healthy returns, because it thought the
computer market was bound to stay intensely competitive. Goldman
Sachs cut its workforce by 10% not once but twice, to increase productivity.
Procter & Gamble sent away 13,000 workers even though it was
the best-performing company in its business. AT&T sacrificed
40,000 not because it was desperate but because it wanted to divide
itself into three smaller, sharper companies.
The transformation of downsizing is the result
of two trends in management thinking. One is the realisation that
size in itself is no longer a source of competitive advantage. The
past decade has seen the humbling of a series of giants: Du Pont,
Salomon Brothers and Westinghouse, as well as General Motors, IBM
and Sears. Rather than celebrating their size, big companies have
taken to hiding it, they try to imitate the agility of their smaller
rivals by shrinking their headquarters, slashing away layers of
management and braking themselves up into smaller units. Some have
gone the whole hog and broken themselves up into separate companies.
In 1995 ITT, America’s quintessential conglomerate, showed
AT&T the way to do that.
The other new management fashion is to focus
on your “core competencies”: the things that you- and
you alone- can do better than anyone else. J.P.Morgan, an investment
bank, has constructed an index measuring a company’s focus
on a scale of 1-100. American companies that decided to “clarify”
their business (jargon breeds jargon) by focusing on the one thing
they did best outperformed the market by 11% in the next two years:
firms that diversified underperfomed by about 4%.
Naturally, the fashion for focus has led to
the epidemic of “outsourcing”. It is now routine for
companies to have their catering, cleaning, building maintenance,
security, computer systems and even their mailrooms run by outside
contractors. Many are going even further. Nike designs and sells
sport shoes without stitching a threat itself. Cirrus Logic, a semiconductor
firm, has all its manufacturing done by sub-contractors such as
Taiwan’s semi-conductor Manufacturing Corporation.
This explains one of the paradoxes at the heart
of the downsizing debate: that the total number of jobs in the economy
is growing at a time when big companies are laying off people off
in record number. Big companies have not so much been destroying
jobs as handling them over to other people, often with a contract
attached. The past decade has seen strong growth in two sorts of
companies small consultancies that provides specialist services
to larger companies (of which they may previously have been a part)
and large companies operating on a wider front, such at Electronic
Data Systems, which manages information and Pitney Bowes, which
runs mailrooms. America’s biggest employer is now Manpower,
a temporary-help agency that hires out 767,000 substitute workers
Another consequence of calculated downsizing
is a widespread re-examination of the idea of contracts between
companies and employees. Some companies that once prided themselves
on rewarding diligence with a job for life have started “pruning”,
lopping off a few workers every year. But others have begun to reformulate
the traditional job contract in terms that may be useful to workers
as well as employers. If the workers promise not to make too much
fuss when they are asked to leave, the employers promise to give
them the opportunities they need to keep their skills up to date.
For lifetime employment, read-one-hope-life-time employability.
Economists have tried to throw cold water on
this loosening of the relationship between companies and their employees,
pointing to official figures which suggest that the average length
of job tenure is about the same today as it was in the 1970s. But
the official statistics fail to take into account either new companies
or privately held ones, the two categories where labour mobility
is particularly pronounced. A better guide than the official labour
statistics is surveys of student opinions. Young people now seems
to take for granted that they will have lots of different employers,
and perhaps even lots of different careers, during their working
The gleam ahead
So, is the worst over? Are more companies now so efficient that
they can start growing again? Or will downsizing gather pace? Concerning
America, opinion is divided.
Michael Jensen, of the Harvard Business School,
thinks the worst is still to come. He sees the world in the middle
of “a modern industrial revolution” it will take decades
to adjust to. Lower trade barriers and the collapse of communism
has brought more than a billion cheap workers into the global labour
market. New technology has made it easier to send jobs abroad or
to replace humans with machines at home. New management practices
such as “total quality management” have made companies
much more efficient. The result is a huge over-capacity in the rich
world. Mr. Jensen predicts that millions of jobs will disappear,
as western companies slim their operations or move into higher-value-added
activities. Wages for manual work, he thinks, may fall by half or
more. There could be Luddite-like insurrections of the poor and
Other takes a less dramatic view. Nitan Nohria,
a colleague at the Harvard Business School who has studied downsizing
in Fortune-100 companies, argues that many firms shrank themselves
in order to concentrate on their core business; now they have done
this, they can start expanding again. And this time the growth is
likely to be more enduring, partly because they will be increasingly
free to invade the territories of more ramshackle companies in Europe
David Lewin, at the Anderson School of Management
at the University of California, Los Angeles (UCLA) presents an
even wider-ranging case of optimism. As newly efficient companies
outperform their rivals, the demand for their products rises, and
they have to hire new workers to keep up. Downsizing, properly done,
is thus a self-eliminating process.
And downsizing, Mr. Lewin points out, has its
downside, as companies are starting to discover. Having fired 12,000
people in recent years, Delta Airlines has found itself short of
baggage handlers, maintenance workers and customer-service agents;
none of which helps it to attract travellers. Downsizing can have
a devastating impact on innovation, as skills and contacts that
have been developed over the years are destroyed at a stroke.
Even the cult of contracting out, Mr. Lewin
argues, can be carried too far. It is harder to draw the line between
peripheral and essential than people once thought. Handing your
computing system over to another company, for example, reduces your
control over your information technology. Even if contracting out
helps companies to control their costs when times are hard, it can
put a break on growth when times are good. You have to take your
turn in the queue along with all the contractor’s other clients.
And tight markets then lead to higher prices. This has been particularly
worrisome for airlines, which have not always been able to get essential
maintenance done in time to meet their flight schedules.
Companies, Mr. Lewin concludes, have begun
to discover the virtues of stability. They can maintain their special
efficiencies only if they can give their workers a unique set of
skills and a feeling that they belong together. Teams work best
if the team members get to know and trust each other and if each
team member masters a broad range of skills to be able to double
up for absent colleagues. Profit sharing makes sense only if the
employees are around at the end of the year to enjoy the rewards.
For Mr. Lewin, profit sharing is an anti-downsizing concept. In
the past, companies resorted to downsizing because workers refused
to take pay cut. Now, for many firms, pay son the way to becoming
a variable rather than fixed cost.
lessons for the laggards
It sounds like crossed fingers for America. About continental Europe
and Japan, on the other hand, the management theorists are unanimous:
downsizing is bound to get worse. These parts of the world still
have hundreds of huge companies protected by the state against competition.
Deregulation, when it inevitably comes, will make them shed jobs
as savagely as AT&T and all those American companies already
have done. Moreover, many European companies (think of Lagaréde
in France and Siemens in Germany) are still unfocused in comparison
with their American competitors. Growing global competition will
force these companies to choose between excelling in one business-cutting
large numbers of jobs in the process becoming also ran in dozen
However, continental Europe and Japan have
one big advantage: they have America’s example to learn from.
The Americans have made almost all the mistakes it is possible to
make in downsizing. Europeans and Japanese can learn three lessons
from America’s experience.
The first is that there is a big difference
between blind and thought-out downsizing. Most of America’s
early attempts where flops. A 1990 survey of downsizing by the American
Management Association found that fewer than half the firms that
cut jobs actually improved their performance. A 1991 study of the
stock-market reactions to downsizing found that, although companies
at first increased their stock prices when they announced job cuts,
they were performing below the market average three years later.
But recent, better planned downsizing have prospered. AT&T now
looks better positioned to defend its market. Procter & Gamble
is outperforming Kao in East Asia and Unilever in Europe. Goldman
Sachs is arguably the world’s most successful investment bank.
The second lesson is that there is an art maybe
a science in deciding whom to sack. Many of the early downsizers
let the victims select themselves, by offering early-retirement
packages and generous severance pay. The result was that anybody
who was capable of getting another job went off and got it, while
the duds stayed behind. The point was taken, and companies started
to do the choosing themselves. Unfortunately, the criteria they
used were often much too crude: lastin-first-out (which meant that
they lost all their bright young people); or the removal of everybody
below a certain level in the hierarchy (which meant that they top-heavy
firms became even top-heavier); or the weeding out of all middle
managers (which meant that they lost a wealth of experience and
Karen Stephenson, an anthropologist- turned-
management- theorist at UCLA’s Anderson school, claims that
it is possible to be cleverer than this. The key is to look beneath
the corporate hierarchy and to find the informal networks that shape
the day-to-day life of a company. Ms. Stephenson says she has developed
a technique for identifying the key figures in these networks, the
people who shape the conversations in the corridors and know where
the bodies are hidden. Companies can make downsizing more acceptable
by using these people to spread the bad news and more efficient
by ensuring they hold on to these key players. The technique has
been used by a lot of organisations, including IBM and TRW, an aerospace
The third thing the American experience has
taught is that there are good ways of getting rid of people and
bad ones. Apple, a computer company, regularly announces that a
certain number of people will be laid off in a few weeks’
time, leaving its workers to wonder whose neck is for the axe. Some
companies tell the victims by sending anonymous messages via e-mail
or voice-mail. Others deliver the news by simply by putting rubbish
bags on the desk of those doomed to leave. This is not only brutal,
but also foolish. Workers waste their time worrying about the future.
The survivors of each downsizing may spend less time working and
more time in building their family life. Few have the energy or
the commitment to engage in creative thinking.
Getting rid of people will never be nice, but
some firms are doing it as unnastily as they can. They make it clear
from the start that their employees need to keep their skills up
to date and their options open: in short, that they cannot count
on a permanent job. They use their own kindly people, or bring in
professional “outplacement” companies, to give advice
to employees who are being told to go. They try to keep work teams
intact, so as to minimise disruption demoralisation. And they try
to ease the pain. Navcon, a Californian defence contractor, asks
those who survive a downsizing to make a point of helping those
who leave. They also seek to tackle “survivors guilt”.
Michigan National Bank encourages the survivors to get involved
with local charities.
The language of downsizing is a nasty
mix of pseudo-science and euphemism. These days you can be “rightsized”,
“displaces”, even “put into the mobility pool”.
The reality is wrenching, even for those who have the luck to jump
to another well-paid job. And some of the consultants who make a
living from the business have all the moral dignity of ambulance
chasing lawyers. But European and Japanese managers will have to
learn to live with downsizing over the next decade or so. Studying
the American experience, however distasteful much of it sounds,
makes better sense than flying by the seat of your pants.