Economists tell us that businesses are starting to expand, but you wouldn’t know that from mass layoff statistics. In April, for example, the number of mass layoffs — companies cutting at least 50 people — numbered 1,856 as employers shed over 200,000 jobs, according to the Dept. of Labor. Almost 450 of these employers were manufacturing companies.
It looks as though mass layoffs will be a fact of life for some time to come. So it is fair to ask whether companies that adopt this strategy are being short-sighted or pragmatic. Wayne Cascio, a professor at the University of Colorado, Denver, has researched this point for much of the last two decades. Working with colleagues, he looked at companies that were part of the Standard & Poors 500 from 1982 to 2003, sorting them into categories each year based on whether or not they cut employees and shed assets.
He then looked at what happened one year before a downsizing until two years after to see whether company financial performance was better or worse than competitors in the same industry. The results were noteworthy. Companies that purely downsized — cutting employees and nothing else — never outperformed their competitors. The only companies that did well financially were those that grew their businesses by adding both assets and employees.
“We were looking at downsizing from the standpoint of a management decision. If you are a manager, you want to know the best strategies for profitability over time,” says Cascio. “We found that investors who bet on downsizers wouldn’t have done well.”
Cascio has also looked at companies that have restructured or reorganized themselves to see if there are similar trends. “We found companies sorted themselves into two camps. One had the management philosophy of running the place with the least number of people possible. Another smaller camp adopted a different approach by figuring out ways of better using the people they had.”
The classic example of a company in the latter camp is Lincoln Electric Co. which, in the early 1980s, came up with the Leopard program to avoid laying off employees during a downturn. In it, factory and clerical workers volunteered to be trained as assistant salespeople. “One of the opportunities they identified was a market for home-welding equipment through big-box retailers,” says Cascio. “Lincoln had never thought about that area before. It turned into an $800 million a year business that didn’t exist until Leopard teams went out and found it.”
And though big layoffs make headlines, Cascio claims an increasing number of firms are taking a different approach. “Right after 9-11, we looked at Fortune Magazine’s list of the best 100 employers to work for. About 80% of those companies had no layoffs the previous year. That was also true for 2008 and 2009,” he says. “Companies know that people have long memories and that when the recession is over, they will need to hire again. So a lot of firms now use layoffs as a last resort rather than as a signal to the market that they run a tight ship.”
— Leland Teschler, Editor
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