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October 7, 2009 | Andrew Winston | Jump to: Comments (0) | Post A Comment

Get Lean on Stuff, Not People

This may be hard for anyone below 40 to fathom, but companies didn’t always fire people to save money. IBM was famous for “full-time employment,” but then its first layoffs in the early 90s changed the game forever. Over the last 20 years it has become (supposedly) good management practice to slash people costs — remember the famous cutters like “Chainsaw” Al Dunlop? A company’s stock price rose whenever it announced cuts.

But as we face a carbon-constrained future with volatile, rising energy and commodity prices, companies will soon realize that they’re often “fatter” in energy and resource waste than in human capital.

I wish things were different today than in Dunlop’s time, but when this downturn began, companies raced to cut people ahead of the coming decline in sales and profits. It didn’t seem to occur to anyone that layoffs would accelerate the recession as fired employees — also known as consumers — had no money to spend. As we enter what seems to be a jobless recovery, it’s past time for us to realize that layoffs are not always the right answer.

I can’t say with a straight face that saving energy will eliminate the need for all layoffs. If your sales drop by 50 percent, which has happened to some automakers, you can’t afford to keep everyone on the payroll. But layoffs can also cost fundamentally sound companies more than they save. On the heels of the early 2000s recession, Bain & Company conducted a study on the true costs of firing people. Their conclusion: if you refill a job within six to eighteen months, you lose money on the deal. The drag on savings, they said, includes “severance packages, temporary declines in productivity or quality, and rehiring and retraining costs that more than offset the short-term wage savings.”

More recently, Fortune reporter Geoff Colvin laid out all the costs of layoffs, which, he points out, companies mistakenly equate with only severance costs. Colvin included brand equity costs, leadership costs, Wall Street costs, rehiring costs, and my personal favorite, morale costs.

To stay strong in tight times, to find opportunities to cut costs in smart ways, and to innovate your way to the future, you’ll need everyone on board. So undermining morale may not be a great idea right now. You’ll also need people with deep knowledge of the business — and mass layoffs ensure that you lose critical perspectives and information. In many cases, there’s another way (or two). Some companies, for example, have been paying everyone a bit less rather than resorting to layoffs.

Others are turning to the task of getting lean and getting creative.

[See Andrew’s full post at Harvard Business Online here]


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