Bold Exec

Au Contraire Newsweek Part I

 The cover page headline onthe Feb 15 edition of Newsweek was "LAYOFFS ARE BAD FOR BUSINESS"; the downside of downsizing. I'm sure, as in all things in life, some (layoffs) are bad, some are necessary, some are good; it depends. However this article, authored by someone who should know better, a professor of organizational behavior at Stanford University's Graduate School of Business, is an amateurish and wrong-headed treatise and draws erroneous and just plain silly conclusions. The author makes the point that all layoffs are bad for the company, for the economy (as laid off people don't spend as much--quite a revelation), and for the individual (another startling finding). Hard to dispute these latter two but I don't believe they meet the test of the ink and paper used. Regarding the first conclucion, there's much to dispute just using common sense: in my dispute process I'll also insert some experience and reality based study, and over the next four weeks pick off their most absurd conclusions.

The Final Ingredient

Even after what most people thought were the ingredients of potential success in the GM bankruptcy scrubbing, I wasn't ready to "buy in" (of course there's nothing at this point to buy in literally, as there are no publicly traded shares). Why wouldn't all these decisions give GM a significant chance of success--namely the large reductions in:

• pension funding
• corporate debt
• dealers
• brands
• labor costs
• AND a brand new, from the outside, Chairman, CEO, and board     ?????

Hire and Fire, Cut and Fill: Simultaneously

The smart companies still hire even when they're firing; still fire even when they're hiring. Boeing cut 3000 jobs in the first four months of 2009 but added over 100 employees in its defense unit, and at the same time had more than 1500 current and anticipated job openings.

When the economy, your markets, the acceptance of your products, and your overall strategy change, the size and make-up of your work-force also has to change.

The cartoon show cutting and filling. It's not easy for a CEO to add positions and hire new people while layoffs are being enacted. It's also not easy to do pruning even when the company is doing well and growing. But the American economy has always shown robust growth basically because this type of practice is embraced, even if too-infrequently practiced. It is in your company's best interests, and in the long term also in your employees' best interests to cut and fill

Lingo is Important

Would you buy a used car from this person?

There are many companies in difficulty, requiring expenses to be reduced. One key expense, of course, is personnel wages and salaries. So one obvious requirement then is laying off or firing employees--sad and tragic for those affected but, if done wisely, hopefully saving the remaining jobs and providing for the possibility of employment growth in the future. There are many ways to reduce employee costs, and usually the easier but typically wrong methodology is utilized (see category F. Progressive Downsizing in the right hand column).

But regardless, the message sent by the CEO is all telling. An honest, straightforward, you-can-bet-on-him CEO will say it like it is, along the lines of "we have to terminate x employees in order to have the opportunity for our company to stay alive". But when a CEO uses one of these spin lines of obfuscation, if i have an equity position i sell it--fast like a scared bunny:

     *downsized
     *rightsized
     *synergy related headcount adjustment
     *actions to simplify the organization
     *offboarding
     *rationalizing
     *surplusing
     *de-verticalization

If you have to take tough decisions, first do them right but at the very least have the guts to say it like it is.        

So----if a CEO uses one of these or any other obfuscating spin description for a program to terminate employees, find another place for your equity investment.

Cut and Fill

A CEO who attacks an organization’s problems with the Cut and Fill approach is choosing the most difficult but also the most rewarding approach. This balancing act requires high levels of skill and wisdom. Once you’ve begun implementing this method, expect to take a lot of heat. But the objective is not to make the CEO happy today; it’s to make the CEO and the board and the shareholders happy a year from now. If reasonably good decisions are made, sustainable results will be enormous.

Just as with targeted workforce reductions, the CEO makes personal and often unpopular judgments about how much or how little to cut from each department, the Cut part of the process. At the same time any business needs new initiatives, and certain departments or functions need to be enhanced or increased in size and capability, the Fill part of the process. But there's much more to it!

The actual implementation utilizes a war-room approach, using a locked off conference room, and following these three steps. First we had each manager (only those that I had decided were probably keepers) draw their departments’ organizational structure on white boards. Each manager then walked us through that structure and justified how it operated. In every case it quickly became obvious that most had little idea of how the total organization truly functioned. Many managers were surprised by the lack of clarity within their own and others’ departments, and how many cross-functional band-aids had been put in place!

Next we “hypothetically” fired every person in the company and simultaneouly did the same with the existing organizational chart. Starting fresh, we then laid out the company’s principal organizational requirements on the clean white boards on the remaining walls. We consolidated duplicate functions and threw out nonworking history. Some managers lost responsibilities, others gained; but this was not a popularity contest. Because everything was in the open, the typical destructive behavior of threatened individuals was somewhat quelled.

The last step was to “rehire” employees from the original boards. Each manager had his pick to fill out his new function; and they were told that they had no responsibility for previous hiring decisions or employees in their departments that they had supported. "History if history". Think of this as a drafting process but with all existing players on every team also thrown into the pool. It is quite amazing to see the difference between the view that each manager took on given employees before this process, and during it. Many previously supported employees didn’t get drafted. In other occasions individuals who had been thwarted were highly sought. The cream of the crop rose to the top; the non-performers didn’t make the cut.

Believe me, this is excruciatingly hard work. It’s intense. It requires amazing attention to detail by the CEO and a Solomon like approach. However the hard work is over in a couple days, and in every company in which we did this exercise the organization was both smaller and significantly more effective, in a matter of weeks.

It’s easy for a CEO to shirk from making tough Cut and Fill decisions. Just blame the company’s financial problems on a lack of meaningful management information or on ineffective marketing initiatives. But the CEO is responsible for fixing the root of the problem. At the risk of creating additional dissention during a forced downsizing, the CEO must muster the courage to undertake strategic hiring programs. The result is a streamlined company better prepared for long-term success.

Targeted Reductions

As the difficulty and courage in implementing a downsizing goes up, so do the results (assuming good judgment and intelligence is applied of course)! As with across-the-board reductions, targeted workforce reductions occur in every department. A targeted reduction plan, however, now forces the CEO to make some tough decisions, to really earn his or her pay.

No organization on the earth is perfectly balanced, and very few are even close approximations. So you must take the opportunity presented in a downsizing to also do a re-balancing. Make lemonade out of lemons, as they say. This approach finally (as we come up from the bottom of the scale of bonus-induced voluntary terminations) meets my bare minimum of acceptable performance during a downsizing.

One department may be reduced by a whopping 20% while another only 3 percent. Individuals with longevity may not be retained. Entire organization chart layers may be eliminated. The decisions becomes personal, often painfully so.

Middle managers likely won’t be helpful: probably their departmental personnel are over-evaluated due to misplaced loyalties or for salary increase purposes, they may need to feed self-esteem by overstating their department’s tasks, and they’ll display resistance to retreat from a previously done and inappropriate departmental expansion.

There will be the inevitable chaos during the process; the CEO may even face a palace revolt. But that’s why CEOs make the big bucks. The best defense is to go on the offense. Bravely claim personal ownership of the overall plan and the individual decisions. Communicating in a straightforward way and confirming individual responsibility is powerful.

After undertaking the first targeted downsizing plan at Paradyne, my position was both simple and unapologetic: “I know the plan is far from perfect. It represents my best shot at getting our expenses in line and creating an effective organization going forward. With regard to all the decisions, the buck stops here!” Approaching the downsizing process with blatant honesty was a critical element in achieving a major turnaround in morale, profitability, and shareholder wealth. Next week, the whole banana.

Across The Board Destruction

We’re still on the subject of Progressive Downsizing; how to gain momentum and capability while going through the difficulties inherent in downsizing (see the chart at the left). Last week we dissed the tactics of attrition and bonus induced voluntary terminations. Next up the ordinate is across the board destruction. When an across-the-board reduction is ordered, we’re finally getting to some degree of difficulty for the CEO; some difficulty but with his verbal protection shield “everyone’s feeling the same pain”. Assuming it is accompanied with strict controls on new hiring, at least there will be actual expense reduction. But there are large negative factors, and what an opportunity-for-greater-benefits wasted!

The principal fallacy of this method is that one can manage by arithmetic. Life isn’t that simple. By definition, cutting a predetermined percentage from all departments rewards the bloated departments and penalizes the leaner, more efficient groups. Unless the inevitable rehiring program is based on each department’s strategic requirements going forward, this shotgun approach will exacerbate existing imbalances. Inside an across-the-board approach one could carefully look for opportunities to be more surgical, removing layers and taking out high level non-performers but, alas, frequently the more timid CEO’s will push the reductions down to the lower end of the org chart and pay scale. The further away the cuts are from the CEO and the less he’s involved other than mandating x%, the less painful. There are serious hidden costs. The CEO’s not fooling anyone; the employees know this is a chicken approach and a chunk has been whacked out of his leadership aura. Further, department managers, knowing their CEO won’t make tough decisions, realize it is in their best interests to get their departments fat for the next round, which will surely come.

If the municipal symphony orchestra needs to be smaller, the conductor can tell each section head “cut one instrument from every category”. But if there are simply too many horns for the stringed instruments to be heard, Schubert’s always going to sound like a marching band. A great example of across the board destruction is Paradyne; read further for a real life example.

Bonus-Induced Voluntary Termination, and Attrition

This week two subjects for the price of one! These two are combined because they both are different forms of the same management poison.

If you own shares in a company that announces it needs to reduce force, and anywhere in that announcement are any of these words-- “Voluntary Termination, Bonus-induced” or “Attrition”, sell your shares at once. You are invested in a company in trouble whose management has neither the guts, nor the intelligence, nor the willingness to do the hard work necessary to deal with it’s problems in a progressive way.

Bonus-induced voluntary termination is perhaps the most painless, and arguably the most counterproductive, method for a CEO. In this plan, any worker who self-selects to be terminated is offered a bonus. You don’t need Management 101 to figure out the high performers and the most valuable employees are the ones most likely to opt out.

Nevertheless, the CEO can proudly declare victory, “The workforce has shrunk by X%; the downsizing program was successful.” Wall Street analysts and unhappy shareholders are temporarily appeased. But a footnote should read: We lost our most aggressive and talented employees. We are now left with an inordinate number of lower level performers who are thrilled to be working for you, or anyone, for that matter. I’ve even seen an occasional media accolade for the forward thinking-ness. Ugh.

Not all CEOs who employ this lazy-man’s practice are totally naive. In fact, some might actually anticipate the corporate talent-exodus or at least sense the impending critique from common-sense owners or directors. This more clever subset of CEOs will often then state that executive approval is required to qualify any employee for the bonus package.

While this ploy allows CEOs to temporarily convince the Board and Wall Street that they are not completely inept, it will cause even further serious detrimental effects for the organization. While most employees will go on with business as usual, the most talented and aggressive will explore alternatives as soon as the program is announced. They can smell blood in the corporate water and will swim away before their own blood is shed.

These high-performers don’t let the executive approval clause stop them. Instead they hit the CEO with an ultimatum. “Give me the bonus now and I’m history. Deny the severance package and I’ll find an even better position with the competition and leave on my own timing!” Either way, the company loses.

Bonus-induced voluntary termination programs are a cinch to implement; no employee is upset or complains. However, to camouflage the resulting organizational weaknesses, the CEO then will usually pursue an ill-fated merger or acquisition. Management weakness plus camouflage plus a big, stupid merger is an unfortunately oft-repeated story.

Attrition stated as part of a downsizing program is both destructive and misleading, for two basic reasons.

First, does the boss say “and anyone who leaves on their own for their own reasons (the usually definition for attrition) will not be replaced”? Never. They’ll count those who leave and not debit for their replacements. Because who in the world would say “even if my cfo voluntarily leaves I won’t replace him/her?” So then what it the purpose? It’s just pure b.s.

Second, the randomness of attrition mandates that there will be no organizational progress. What if the entire quality control department leaves? How will layers be removed if the departures are randomly scattered throughout? Who’s in charge?

Remember, if you hear any of these words, Voluntary Termination or Attrition, occur, sell out; fast like a bunny. This management needs to be abandoned for their lack of capability, unwillingness to do hard work, and lack of guts. Next week we'll begin discussing more progressive approaches to downsizing.

Beat the Bloat

Profitable revenue growth is seductive. Bloated departments, marginal workers and outmoded priorities are often ignored. Extra layers are added. Then revenues shrink, major customers walk, profit margins decline, and operating losses rear their ugly heads. Suddenly everyone—investors, creditors, directors—are demanding change yesterday. Occasionally even the CEO can see that stressful days lie ahead….

A visionary management team will prune as it grows, but by far that is not the norm. If you have done that skip the rest of this chapter. For the rest of you, there comes a time in the life of most every organization when crisis forces an employment reduction. Most organizations deal with crisis when, and only when, it occurs.

Whether you call it forced reduction, downsizing, shrinking, or “right-sizing” (a wonderfully frustrating example of corporate non-speak), the process will never be pleasant. But by making tough decisions and refusing to take the easy way out, a CEO can make an astronomical difference for the corporation’s sustainable future success, and successfully beat the bloat.

The five workforce reduction techniques typically utilized are: bonus-induced voluntary termination; attrition; across-the-board reduction; targeted workforce reduction; and (my nomenclature) cut and fill.

Although I don’t have the data, I totally believe in the direct correlation expressed in the graph between the degree of difficulty of each approach and its long-term benefits. It reflects my experience and observation, it fits the idiom “you get out what you put in”, and it makes common sense. Too bad, many CEO’s choose to hang out on the left side of this graph, not being willing to do the hard work and make the tough decisions; instead hoping to short-term impress distant observers with short-term memories (like share holders). In the next weeks I’ll explore each of these methods.

 

Progressive Downsizing Summary

Everyone faces the necessity of downsizing an organization in their career.  Most do it poorly, losing organizational respect, losing effectiveness, gaining irritability.  There are many ways to go about it; but the Cut and Fill method assures gaining effectiveness and organizational espirit de corps and reduced costs simultaneously.  Topics: Beat the Bloat; Voluntary Termination; Across the Board Destruction; Targeted Reductions; Cut and Fill; The CEO’s Guide to Progressive Downsizing. To be published 3Q07.