Recently, the Wall Street Journal
had a startling headline: "Lean Companies Ready to Cut."
Its opening sentence: "Despite another quarter of robust corporate profits, an ominous impulse is stirring at many big companies — restructuring."
Spooked by prospects of sluggish revenue growth in 2012, some large companies, already quite lean, are making plans to slash jobs. This strikes us as a knee-jerk reaction and a bad idea. According to the article, analysts cite the danger that such moves, taken because the economy seems so fragile, could render the economy even more fragile — "adding to unemployment rolls just as signs of improvement have begun to emerge." We agree, but we also see two broad dangers for the companies themselves.
First, downsizing often leads to worse, not better, financial performance for firms. The years-long research program of Wayne Cascio
at the University of Colorado presents persuasive evidence that restructuring is far from the imagined panacea that boardrooms seek, executives expect, and Wall Street applauds. In his work on responsible restructuring,
Cascio discovered profitable alternatives to employee layoffs. Every corporate leader and every board member should study this work. Cascio's advice boils down to two dictums: Avoid downsizing, if at all possible. If reducing headcount is absolutely essential, it's a big mistake to stop there. Proceed thoughtfully.
Second, downsizing can dramatically — and negatively — alter the work environment in the organization, diminishing the motivation and performance of remaining employees. This is the micro-level process that can cause the macro-level effects observed by Cascio. Our research shows how this dynamic plays out on the front lines, for people tasked with doing the company's most innovative work. In a study we conducted several years ago
at a large high-tech firm's R&D units, we discovered that, during the downsizing period, aspects of the work environment most important for creativity took a significant nosedive — things like a sense of positive challenge in the work, clear goals coupled with autonomy in achieving the goals, information flow, and support from colleagues and managers. Actual creativity and
productivity also tanked. A few months after the downsizing ended, the work environment had recovered in most (but not all) aspects. Productivity had picked up to a level approaching the pre-downsizing period. But creativity was still significantly impaired.
Our more recent research
presents a blow-by-blow picture of how downsizing is actually experienced by the people going through it. The picture is an ugly one. All three aspects of inner work life
suffer: motivations, emotions, and perceptions — views of the organization, top managers, and even oneself. Here is what one programmer wrote in her diary the day that terminations began at her information services company. Keep in mind that she was a high performer who had survived previous layoffs in the company:
It is very hard to work and get anything done around here today. Thirty-nine people lost their jobs...and it seems like this is just the beginning. They will get rid of people from the project managers' level next and then they will move on to us; they even came out with a letter saying as much! I feel like an abused spouse that will not leave the abuser. I keep giving them another chance and they keep socking us in the face. I'm ashamed at my own inability to just get up and walk away with a little dignity. Instead, I sit here and wait for them to decide my fate.
It's hard to think of a worse psychological experience at work than feeling like an abused spouse. Although this programmer once again survived the layoff, her respect for and loyalty to the organization evaporated. She questioned why any employees, now, would maintain strong internal motivation to give the work their all: "What kills me is, after this, they will turn around and wonder why everyone doesn't just throw themselves in front of a train for the company. What dopes." Before long, she had left the company voluntarily, and so had many of her best colleagues. But really, they had left psychologically long before.
Many useful papers and books have been written on how companies can handle downsizing so as to minimize this sort of damage to the workforce. (See our downsizing paper
and Wayne Cascio's work, mentioned above; a classic book by David Noer called Healing the Wounds
; and the excellent work of Joel Brockner
of the Columbia Business School.) But make no mistake; damage will be done. The best course is to think twice, and then think twice again, before going down this pathway.
A couple days ago, a close friend called to say that her company was about to undertake a massive reduction in force. Employees will see the new org chart soon. About 30% of the names — from every department — will be missing from that chart. The CEO has told them that surviving employees will have two days to grieve before they are expected to pick themselves up and make the organization great again. What do you
think the chances are?