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Job cuts may be counterproductive

Corporate morality * A consultant and author of a recent book on productivity settled on 10 businesses that had never made a lay-off. * Each of them has a written or well-understood covenant with the workers that the corporate checkbook, or management missteps and misdeeds, are never going to be balanced on the backs of the workers.

Even as the economy shows some signs of emerging from the doldrums, several leading companies -- like Goodyear, Humana and Verizon -- are cutting thousands more jobs.

They plainly believe that lowering labor rolls now will help them perform better in the long term. But experts on corporate strategy and human resources are not so sure.

Some argue that lay-offs, combined with a careful revamping, can set the stage for growth. Others, however, contend that companies that avoid downsizing reap huge benefits in loyalty and productivity.

In a quest for the most productive companies in the world, Jason W. Jennings, a consultant and author of a recent book on the subject, settled on 10 businesses that had never made a lay-off.

"Not only have they never had a lay-off," Jennings said, "but each of them has a written or well-understood covenant with the workers that the corporate checkbook, or management missteps and misdeeds, are never going to be balanced on the backs of the workers."

Jennings, who chose the companies using a combination of elementary financial criteria and on-site research, conceded he could not prove that a no-lay-offs policy led to profits and growth for the group. But he did see something valuable in the strategy of the 10 companies, which included innovators like Nucor Steel, the mini-mill operator, and Ryanair, the low-cost European airline.

"They know that if they use lay-offs, they're going to end up with a work force that's going to be more concerned about themselves than about increasing productivity," he said.

But the picture is not so simple, according to Peter Cappelli, a Wharton School professor who runs the Center for Human Resources at the University of Pennsylvania.

"If you look just broadly at whether companies that lay off do better, the answer appears to be no," Cappelli said. But, he added, "the ones that lay off the most are already the ones that are in the most trouble."

In the past, manufacturers responded to cyclical downturns in sales by making temporary lay-offs, usually concentrated among blue-collar workers. Often unionized, the workers were usually rehired for the same jobs when business turned up again.

Many other companies, except those about to collapse, often chose to retain their workers on the theory that lay-offs and rehirings were both costly. Absorbing the expense of wages and benefits allowed the companies to remain ready to take advantage of orders for new business.

But increased competition and investor demands have made companies more aggressive about cutting costs. At the same time, structural changes in the economy -- among them, declines in unionization and the rise of information technology -- have made the labor market more fluid, a trend Cappelli expects to continue. Starting more than a decade ago, with waves of lay-offs that also aimed for white-collar workers, many companies began to reconsider the traditional thinking.

The trade-off is a serious matter at Goldman Sachs Group, whose financial businesses are people-intensive. "You want to cut enough excess capacity in down markets to be cost-effective, but you don't want to cut so deeply that you can't respond when markets turn up," a Goldman official said. "Management has certainly been aware of how fine a balance it is."

The company has interspersed at least seven rounds of cuts with several spurts of job growth in the last 15 years. Early this year, the company anticipated trimming about 5 percent of its work force. When business conditions continued to sour, Goldman decided to reduce its headcount by 13 percent, including lay-offs and voluntary terminations -- its biggest cuts ever.

Though Jennings' group of productive companies may not make use of lay-offs, those that have done so recently appear to perform no worse than the market. According to news reports, 38 publicly traded companies based in the US all made more than 1,000 lay-offs in the fourth quarter of 2001. Between January of this year and last week, their share prices dropped by 22 percent on average -- exactly the same loss suffered by the Standard & Poor's 500 index.

In some industries, making job cuts is not a choice. More airlines and telecommunications companies, faced with a steep drop in demand, might have failed if not for hundreds of thousands of lay-offs in the past two years. And for many companies outside those hard-hit industries, cutting jobs has always been an important component of strategic change.
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