"Conventional Wisdom"? It's One or the Other, Bro

The Feb.15th issue of Newsweek featured a cover story I had to read immediately: "Layoffs Are Bad for Business." We don't have a personal stake in this miserable topic unless Blue Cross loses a major client (possible these days), but business and economics are fascinating because they, along with natural disasters or health problems, either always or possibly loom large in our lives. A couple of my loyal readers are thinking, "Oh, yes, indeed" right now.

The essay opens with a recent and clear example: after 9/11, all airlines except Southwest immediately laid off employees in anticipation of (temporarily) declining business. In 40 years, Southwest has never had an involuntary layoff and believes that if people are your most important asset, why would you get rid of them in the face of a short-term problem? Why would you pay executives so much if they can't work through such situations? The flying experience has deteriorated to a level of unpleasantness comparable only to a root canal. Companies now "routinely cut workers even when profits are rising." Locally, Hershey started this a few years ago and has lost a lot of talent (while retaining unstable perfumed princes with advanced degrees). The loss of institutional memory is one of the greatest costs of the layoff mentality; I think it is the crack in the dam which eventually leads to the collapse of the dam. One of the first things that happens when downsizing is announced is the flight of the best people for the door. (Then, realizing but not admitting their mistaken thinking, management pays them to come back as consultants after handing them huge severance packages. Okay, that didn't happen for you guys). If the drop in demand, and revenues, is temporary, that is a much different scenario than being in an industry facing inevitable decline, like carriage makers in 1910. You have to credit the foresight of the tobacco companies, who have used their accumulated wealth to move into foods, beverages, packaging and other steady enterprises.

The Wall Street Journal reports stock price upticks for companies after downsizing, believing in and perpetuating the myth that the two are always causally connected. "A study of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects." Another canard, repeated constantly, is that layoffs increase individual productivity (I see this reported every day). But, data shows that increases in productivity were just as likely to have followed the addition of workers as the elimination of them. With "labor costs per employee decreasing under downsizing, sales per employee fall, too." A perfect example is the way Circuit City commited hari-kiri by ridding itself of its 3400 highest paid sales associates. I experienced this personally when encountering two teenage employees there after that bloodbath, who knew exactly nothing about what they were selling. Like thousands of others, I walked out.

And one final myth to bust, about laying off to boost profits: "a study of firms in the S&P 500 found that companies that downsized remained less profitable than those that did not."

We don't have to wonder what this fashionable but misguided business principle does to individuals, families and the community: suicide, violence, despair, unquantifiable lost potential...and Wal-Marts full of Asian-made junk brought home by people with less to spend.

So managerial behavior across the corporate landscape resembles a killer virus more than shared wisdom.