I know, my math teacher, Mr Bertch would make me stay after class again, ’cause I can’t get the math right.
If you start with a high cost number, reduce it, reduce it again, and reduce it again how do you come up with [tag]decreased profits[/tag]? Every finance class will tell you that Revenue minus Costs = Profits (with a whole bunch of stuff in between). So if I’m reducing costs why aren’t my profits increasing? Sorry, no trick question about my revenues falling (although I guarantee they will in this situation!).
More Downsizing
I was talking with a colleague in one of my prior companies today. They are in the midst of some major changes – as most companies are with our new economy. He told me the group he is working in recently reduced 5% of their workforce (give or take). That’s Reduction #1. The logic is that by laying off these people, the company will have less of a cost burden to carry.
Information reported in the Society for Human Resource Management has determined that [tag]attrition[/tag] is 2.6% greater within a company having a [tag]downsizing[/tag] action of at least 0.5%. So this company can expect to see their turnover be higher than others in their industry who don’t downsize. That’s Reduction #2.
The third reduction is related to Reduction #2, but a little more concerning. The same report states that more than five times more workers than were laid off can be expected to leave the organization and many of these will be considered among the most valued employees. Whether these are part of 2.6% is not completely clear, but it is clear they are leaving and creating Reduction #3. Even in today’s new economy, talented people will still find new positions.
So why does this create decreased profits?
Production Capability vs Production
To understand that, we must remember something Stephen R. Covey taught regarding [tag]production capability[/tag]. To be effective, one must find the proper balance between actually producing and improving one’s capability to produce – like the goose and the golden egg. While downsizing may decrease costs, it also decreases production capability.
It can be argued that the need for [tag]production[/tag] has lessened thus driving the action. This creates a need to understand the difference between “decreased production demand” and “decreased production capability demand.” While a true decrease in ‘production demand’ may require ‘decreased production’ it doesn’t necessarily require a decrease in production capability.
To continue the analogy Covey uses of the goose and the golden egg, you can’t kill the goose to get the egg, because this destroys production capability in an attempt to get production. In the same way, you can mistakenly kill the goose because you need fewer eggs. The challenge becomes how to manage production while maintaining production capability.
Also, when people leave an organization (remember that ‘five times as many as were downsized’ number) they take their current production with them. Presumably it is the “lower” performers that are being let go in the downsizing, but it is not always the low performers who actually leave the organization – perhaps more so with Reduction #1 (the downsizing), but less so with Reduction #2 (the survivors), and clearly not the case with Reduction #3 (the movers).
What, then, is lost?
In fact, as revealed by McKinsey’s “War for Talent” study a number of years back, as well as other studies, [tag]top performers[/tag] deliver 50% or more greater results than [tag]average performers[/tag].
When five times more people walk out the door than a company downsizes, and many of them are considered the most valued employees, that is your top production capability – and production – walking out the door.
So, sorry Mr. Bertch, my math is good.
What can you do?
There are alternatives to downsizing.
A colleague, Joel DiGirolamo, the leader of Turbocharged Leadership, has given a presentation on Downsizing: Alternatives and Results.
Some of the alternatives:
- Reduce or Eliminate Bonuses
- Delay Pay Increases
- Delay New Hire Start Dates or Revoke Job Offers
- Unpaid Vacations
- Redeployment
- Retraining
Today’s leaders and managers can quickly deal with economic challenges while still maintaining a strong employer-employee relationship. Knowing the right actions to take is the first step.
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