It's something that's been in the financial climate ever since the global recession began to entrench itself back in November 2007. A rollercoaster 2008, which saw unstable commodity and oil prices, coupled with devaluing currency and rising inflation, has done little to move away company decision makers and strategists from looking towards layoffs as a means of stabilising their company's future.
Global Belt Tightening
A look at a few statistics indicates layoffs are on the rise: according to the US Department of Labor, in November 2008, the US unemployment rate was 6.7 per cent, a rise of two per cent points from 2007. The number of payroll employees in the US decreased by 0.5 million in November alone (and by 1.8 million in 2008). The manufacturing sector accounted for 39 per cent of these layoffs.
A cursory look across the international news proves that this phenomenon is not US-related, but a global event.
In November, Citibank announced that it was going to layoff approximately 53,000 employees in the coming quarter. This was in addition to the 22,000 jobs it had planned on cutting in October. Around the same time, HP announced 24,600 job cuts in the next three years following its acquisition of EDS.
In the same vein, retailer Marks & Spencer (M&S) recently announced the axing of up to 1,230 jobs and closing down 27 stores after a fall in Christmas sales. The dismal news continues on with car maker Mitsubishi Motors, in Japan, announcing that they will be cutting down 2000 temporary jobs by the end of March 2009. Lenovo announced that it will be reducing 2500 jobs worldwide, while Boeing announced 4500 job cuts starting next month.
The National Federation of Trade Unions of Unilever Chile accused Unilever in May 2008 of violating the rights of workers by failing to provide them with information about the closing down of its factories and preventing the workers to make the company's decisions public.
Even a company like Google has not remained lay-off free!
Pakistan has also been making news headlines. Giants within media, textile, FMCG, telecom and banking sectors have all been affected, with downsizing of existing staff and a freeze on the hiring of new resources. The list of the companies would read like a 'who's who' of Pakistan's top employers. Even the car and bike manufactures have suffered through the economic malaise. Chinese bike makers have cut jobs by 20-30 per cent in the last few months as 14 factories have been shut down since July. In another development, a Korean car assembling plant has reduced the workers' strength, while a leading Japanese car maker has already undertaken downsizing of workers and staffers.
The Final Throw of the Dice?
CEOs are forced to look towards layoffs, but layoffs are not the final throw of the dice; rather, they are a means of streamlining operations and 'rightsizing' rather than 'downsize'.
It is often wise to re-evaluate the objectives of the company and its departments, and the strategy that is being followed to achieve the said objectives. In such a re-analysis, it would often become clear that the company can be more efficient by trimming some fat, streamlining operations and resources. Often, a streamlining of resources results in less bureaucracy, and greater flexibility in the 'time to market' for a company. This also forces employees to take important decisions and rely on themselves and on smaller teams, rather than an assortment of assistants. For most global companies, this is often something that is looked towards in order to be increasingly competitive and profitable.
Steve Stanton, from the office of the CFO, Shuaa Capital in the United Arab Emirates articulates a consistent role of the CEO, "CEO's should always be looking to streamline business processes, automate routine tasks, and leverage technology to replace sweat." As the strategic decision maker behind the company's direction, it is indeed vital for the CEO to be exactly aware of the pros and cons of a particular headcount, and its resultant effect on productivity and profitability.
"Every CEO should always be looking to cut any staff that costs more than he/she earns in terms of revenue generation, cost savings, or risk mitigation," Stanton says.
CEO's Eye View
C-Level executives, supporting the CEO, particularly the CFO along with help from the HR, become vital in ensuring that the correct decision is made and the right direction embarked upon.
Howard Berkson, vice president sales and marketing at online arts dealers Art Exchange, in Dallas explains the situation, "It's not generally the CEO alone who makes the call to shrink or not-shrink if the layoff decision is being considered on the basis of a downturn in business." He goes on, "It's usually more like the CFO telling the CEO that the company will bleed money too quickly if spending isn't reduced and that turning the thermostat down and (just) going to single ply toilet paper won't be enough."
It is not a simple decision for one person to move the company into downsizing; rather it is a combined decision of the strategists of the company. In the case of global companies, it is often a direction that is handed down from the company headquarters. The direction can be in terms of cost reduction targets, or headcount reduction targets in unstable economic times. In such situations, there is little that a CEO can do to change the fate of employees that need to go. A bank, for instance, might get directions from the top about cutting down on employees. There is little then, that that the local country manager can do except to choose the best resources to keep.
Before the decision is made, either by the local or global management, it is vital for the C-level decision makers to know exactly why they have chosen a particular course of action. It is also paramount for the decision makers to realise that their decision needs to be thought through in terms of long term implications, rather than short term tactical solutions.
Laura Marchiori, owner of Chesapeake Bay Gift Baskets, explains, "The most important criteria for making layoff decisions needs to be the company's business goals." She adds, "There has to be clarity about the direction where the business is heading towards, not just in the immediate moment, but longer term, and then there has to be determination of what kind of knowledge, skill and ability is needed to reach the said goals."
The said direction, coupled with a re-evaluated portfolio of knowledge and skill workers needs to be translated into a possibly revised organisation structure and the jobs that will be needed to fulfill the company objectives. In such instances, new jobs might arise, or as is the case more often, old jobs might be made redundant.
Gary Smith, owner and managing partner at the Consultant Connection, brings to fore other concerns that a CEO would need to look at, "It is often more than simply trimming the fat and cutting costs." He adds, "At times, companies reach a situation where the business is slowing down and there is insufficient work, in the short-term, to keep people busy."
"There is often increased competition in terms of offshore pricing resulting in pressure that demands immediate cost reduction to maintain business and/or market share." Quite often, local CEO's are under pressure to deliver a target that is at par with the company's businesses elsewhere, and in such instances, there is not much choice except to cut costs.
Once the decision is reached that headcounts need to be decreased, the next question that arises relates to the employees who will be let go, and the employees who will be selected to stay. Stanton, tries to make the equation simple, "When business conditions change, a company may find itself with more people than it needs, or can afford. The CEO should assess what tasks are "mission critical", then determine the minimum number of people needed to accomplish those tasks. Then it's all about finding the best people for those tasks and laying off everyone else."
According to Stanton, the people who remain need to have the right technical skills, the right soft skills, the right attitude, and a willingness to work with their teammates to get the job done fast, right, and with a smile.
Berkson agrees, "From a leadership perspective, employees should be retained who will be most difficult to replace. It's important to keep in mind that tribal knowledge and experience is key to organisational success."
Kenan Ahmed Siddiqi, senior manager and human resources strategist at Pakistan's Habib Bank Limited (HBL), says, "In the banking sector a very simple strategy is usually employed when taking such decisions. The idea is to let go of the staff which you can generally do without, in other words people whose not being there wouldn't really hurt the business in any way."
Smith tries to pinpoint the characteristics that would help an employee to be retained, "I believe retention depends a lot on the personality, experience, and leadership abilities of the individual."
But for CEOs, the decision is seldom that simple: in companies where the HR is effective, employees too will have good skill sets and will be committed to the cause. In such situations, there could be many 'excellent' people for the one job and there could be many who snugly fit the culture of the company; so the decision could very well be about a particular mix of 'attitudes', 'thinking' and 'multiple skill-sets', rather than 'loyalty', 'experience' and 'commitment' when deciding on those who are to be let go.
Ahmed Siddiqi, elaborates, "The kind of people the company would want to retain are the ones who can multitask. For example one guy who is good in operations, and can also be used for relationship management would end up being the one that the bank tries to retain."
Smith looks towards the psyche of the decision maker in terms of analysing the potential candidates for being laid-off, "The CEO and the senior management's experiences, in conjunction with their personality, will have a huge impact on how they make business decisions, and who in turn they choose to be let go." Gary explains further, "A risk averse CEO, for instance, might try to survive a difficult situation by relying on the most experienced of his employees rather than a less experienced but more skilful employee."
Most companies look towards contractual employees as the first line of defence in a downsizing situation. These employees are not on the company payroll, and face the earliest possible exist in a situation where costs need to be cut down. Interestingly though, in other situations, companies can potentially also look to have more contractual staff and outsourced resources rather than in house specialist teams capable of performing the same job. For such companies, it is a question of better efficiency and more feasibility of outsourcing or contracting rather than having in-house permanent resources.
Berkson of Art Exchange raises an important point, "When the layoff is a response to a reduction in business, productivity must be taken into account and staff reduction must only be made in areas where the production is measurable and controllable according to actual business demands.
"In areas where production is unpredictable, then step downs and layoffs must be monitored and not so hasty." This would be particularly important for manufacturing companies where the demand for goods can go through seasonal patterns and may be unpredictable. This is something that can occur in evolving markets such as Pakistan. An FMCG company, for instance, would not want itself to be in a situation where it needs to hire more factory workers to meet a sudden hike in demand for a particular product, when they have just let factory workers go based on a decreased average demand for the very same product.
Looking through a magnifying lens
Smith advocates a more micro level approach when considering who to let go, "The CEO needs to see which business areas/departments need to downsize or cut costs; and which areas can be rightsized without affecting overall business performance too much." It might be prudent for a company to look towards less critical departments to start the down-sizing process with. Gary goes on, "It's also important for the CEO to understand where the value addition is occurring currently, and where it needs to occur in the future direction of the company. Keeping that in mind, particular departments and areas can be targeted for head count reduction."
When looking at departments and areas for potential right sizing, it is vital to take an open, honest and collaborative approach towards redesigning the job portfolios, and managing the resources that must be retained to perform the said tasks. The employees must know why the re-evaluation activity is taking place, how important it is and what its effect is going to be on the business. Laura Marchiori describes an effective turnaround process, "The most successful layoff scenario I was ever involved in was a turn-around situation for a department in trouble. They were simply not meeting the needs of the organization." Laura continues, "All involved were informed of what the goals and objective were for the department going forward, how the department would be structured and what jobs were needed to accomplish the goals."
According to Laura, all of the existing jobs were 'eliminated' and individuals were given the opportunity to apply for the new positions. Decisions were then very objective; matching individual's knowledge and skill to the new job standards that had been created.
It is vital for such a process to be transparent, in order to keep the employee morale high, and make ensure their commitment and belief in the culture and values of the company. Laura goes on, "Transparency is indeed vital; goals must be documented for all to see, specifically, the new job requirements for all to see." Laura advocates building a screening process that can be repeated and applied very consistently and objectively. The HR should be taken on board, and as much support and information as possible, must be provided to the employees. This is something that HR executives need to follow through, particularly in Pakistan, where most employees do not have faith in the information sharing or transparency of their HR professionals.
Another important consideration from the CEO's perspective is the mix of strategy and execution that needs to be maintained in the company. Does the company's new direction require more strategic minds, or does it need more tactical employees, who will perform and execute, rather than think and ask questions. The CEO needs to consider whether creativity should be rewarded, or simply getting the job done. Is a micromanagement approach the order of the day, or should there be more employees with a holistic macro level perspective. A number of people would believe that if the direction has been set by the powers that be, then there is little need for strategic thinkers and the order of the day has to be the 'doers'. Abid Siddiqi, Brand Strategist at Brand Apple, agrees, "It's a run-a-ball kind of situation when the company can't take risks to go out and hit sixes. At this point, captain would send in those players who can just take singles and follow the script strictly. So the 'big' players are provided with a letter." The onus could therefore be tactical, rather than long term, as strategic thinking resources would not be developed for the future. This could be an approach that might work for smaller companies where direction setting is done at the very top, and all the employee really does is execute orders.
Smith takes a different approach in the strategy, "It is indeed one of the most important considerations, choosing of the balance of strategic thinkers versus tactical executors.
"Depending on what the plans are for the short-term future of the company, there must be an appropriate blend of both skill sets to make sure that the business can meet its current obligations and that there will be a compelling future for the company." The key in this regards is to understand what level of mix is needed for optimal performance of the company in the direction that it is being steered towards.
HR and the layoff direction
As the custodians of the recruitment process and the talent development within a company, the HR must play a huge role in the layoff process. HR needs to help with the process and make it more collaborative, so as to ensure employees do not feel betrayed. HR executives must also play a vital role in both ensuring that the CEO and management make the right choices in terms of deciding to go for the layoff strategy and also in terms of choosing the mix of jobs, people and skill-sets to retain.
Don Herrmann, vice president HR for Pendum a cash machine services provider in Denver US, observes, "HR's role is to assist management in making decisions about the soon to be laid off population. This comes in the guise of determining criteria, ensuring an effective resolution to any compliance issues that are identified, such as: discrimination, risk, performance and productivity. Additionally HR should provide alternative solutions to the action intended. Layoff is not always the answer."
HR should indeed be the liaison in the process of re-evaluating company structure, but Herrmann believes that the task of communicating a layoff decision should not simply fall to the HR. "I don't believe HR should break the news about a layoff.
"Management decided to have a layoff and management should communicate that layoff. HR should not solely be the messenger of bad news and management should not solely be the messenger for good news," he adds.
According to Herrmann, the management has a responsibility to take ownership for its decisions, and a passing of unpopular actions off to HR is cowardly.
Another important concern that the HR needs to resolve is the question of gaps that may arise if downsizing occurs. Ideally, if the decision has been made for the right reasons, then a succession plan should be in place, and there will be no gaps. But quite often, unforeseen circumstances might result in a situation where a gap of skill, knowledge or experience may arise due to employees being let go. Herrmann points out that HR need to be in complete control of the change process in order to ensure that such a situation does not arise. "Filling potential gaps should be part of the decision process and not an afterthought once layoffs have been decided upon," he says.
"HR's knowledge of performance measurement, work flow, regulatory issues and the business in general should be a part of their input into the decision process," Herrmann says.
Layoffs and beyond
Planning the process is very important; especially to ensure that the very streamlining efficiency that the layoff process was designed to give actually does materialise. Hastily going through the process could result in terrible consequences for the future of the company.
Given that the road to recovery appears rather long and hard at present, the lay-off decision is something that the CEOs will find themselves struggling with more and more. Needless to say, the management must make the tough decisions if a process of re-evaluation deems it necessary to do so, and the said decision becomes doubly more important when dealing with an evolving market such as Pakistan.