Preface: With 2015’s record-breaking $2 trillion in M&A deals,[1] many transformations have included the accompanying announcements of layoffs for “business optimization” reasons. However, should downsizings always be inevitable for transformations or are there other strategic levers that C-Suite executives should consider? Importantly, how might these levers be used to ensure long-term success beyond the next quarter or two of earnings’ reports?
This Q&A is part of a series inspired by Fortune’s Most Admired Company rankings.[2] The process includes interviewing executives and professors for their insights on the specific attributes that are measured to derive these rankings and their potential role in company transformation. As global companies strive to effectively compete, what strategies can help accelerate successful transformation? In this interview Professor Sucher explains how C-Suite executives should consider five hidden costs of layoffs that jeopardize their committed performance improvement goals.
Q. As I recall, a common theme for a number of HBS case studies revolved around leaders who could not make timely decisions on needed downsizings, so isn’t it good that today’s business leaders have taken decisive actions to help accelerate their transformations?
A. For those C-Suite leaders who strategically thought through the “why and how” of downsizings, many have been successful. For example, at Nokia, they took a holistic assessment of their restructuring and created a successful transition plan that addressed the needs of over 18,000 employees in 13 countries. Despite the high degree of complexity associated with engaging so many different stakeholders—not only the employees but also unions and government agencies, they were able to support many departing employees. For instance, some of the employees leveraged Nokia’s “Start Your Own Business Path” outplacement program, which resulted in over 1,000 new start-up businesses, of which 90% were still active in 2014. Moreover, approximately 60% of 18,000 worldwide employees knew their next step by their last day of employment. And employees and divisions that knew they were losing their jobs nonetheless created the same percent of sales from new products—one third—that Nokia had achieved under happier circumstances. So successful outcomes for both employees and the company are definitely possible.[3]
Still, too many executives have not critically thought through the “why and how” of downsizings. And so it is not surprising to see a systematic analysis of studies, between 1984 to 2008, reveals how there is no clear academic consensus that conducting layoffs improves a firm’s long-term financial health.[4] Moreover, my research has pointed to five hidden costs of layoffs, which are:
- Customer service and sales: Customer defection rates
- Innovation: IP loss and fewer new products
- Quality: Accidents, scrap rates, and rework/recall
- Reputation: Brand value, government relations, and lawsuits
- Talent: Sick/disability, turnover, and hiring/training
These hidden costs are often not included in downsizing plans and so C-Suite leaders should factor them in their strategic planning deliberations. For example, if some sales managers are hastily marked for downsizing, what happens to the coverage ratio for your key CPG accounts? Or for research-intensive industries like pharmaceuticals, what happens if your lead R&D folks are let go and they were managing the most promising clinical trials?
The good news is that when C-Suite executives strategically factor in these variables; there is an opportunity to deploy pragmatic tactics that truly match the projected future business conditions for the entity. Specifically, rather than just look at the time period during the imminent challenging times, what do the business conditions look like for the hopefully turnaround time period? In December 2008, research by HBS professors and a doctoral student at Northwestern University evaluated the performance of 4,700 companies listed in a S&P Compustat database during the recessions of 1981-82, 1990-91 and 2001 and compared their performance before, during, and three years after. As to what predicted which companies came out ahead of their peer group in the recovery, the authors discovered that “…companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession …these companies reduce costs selectively by focusing more on operational efficiency than their rivals do even as they invest relatively comprehensively in the future by spending on marketing, R&D and new assets.”[5]
Q. Per your reference to peer group comparisons, some Fortune 500 companies have been bench-marking their efforts against non-industry, but well-respected firms. When they take this approach, what have you seen with their transformation efforts?
A. Well, if you’re striving to elevate your marketing and sales efforts, perhaps you should not only be comparing customer metrics with your industry peers but also emulating certain practices of say Amazon, Nike, and Starbucks. Similarly for transformation efforts, I saw how Honeywell’s CEO developed a Honeywell Operating System, which was based on Toyota’s lean manufacturing system, in his view, the world standard for manufacturing process excellence. What was compelling though was the implementation of next steps. For instance, when a CEO’s staff returns from a best practice sharing study, they’re often eager to quickly leverage as many analogues as possible. After all, wouldn’t any CEO be happy that his or her staff followed up so quickly? But what Honeywell’s CEO did was also challenge his staff to consider the longer-term timeline associated with adapting Toyota’s ideas to Honeywell. At his insistence, they tested and piloted the system in 10 plants. After nine months they found it only worked in five of the plants. They introduced the most successful practices in five different plants, and then in two others, and finally in 20 others before they were satisfied that they had a system that would work at and for Honeywell. Per this CEO’s quote in my HBS case study, “…… That’s why I say it’s necessary to go slow to go fast. We could have gone really fast on implementation and we’d have had a mess. Instead, we’re creating a 20-year sustainable advantage because we’re bringing the culture along at the same time.”[6]
Q. Building upon your research and case studies, what are the top three suggestions for CEOs striving to accelerate their transformation efforts?
A. First and foremost, if you are considering layoffs as part of your transformation effort; strategically consider if they are truly necessary. Is there a valid permanent change in the entity’s business model (like a technological change or exiting a business) or is it actually a temporary challenge (like demand fluctuations, contract cancellations, earnings targets and/or recessions)?
If the latter, then my second recommendation is to consider the following action plans that Honeywell deployed for their transformation efforts. [7]
Reduce Expenses for Today
- Manage Materials and Supplier Costs
- Manage Overtime
- Hiring Freeze
- Annual Salary Increase Freeze
- Reduce 401k Match (Retirement)
- Furloughs (Reduced Work Hours – Savings Equivalent of a 19% Layoff / 20,000 Employees)
Invest for the Future:
- Maintain Employee Base for Future (No Layoffs)
- Create Bonus Pool with Restricted Stock for Employees
- Continue R&D Pipeline and Planned Asset Investments
- Advance Commitments to Suppliers for the Recovery
Interestingly, Honeywell has taken a contrarian view of the current trend to split up conglomerates to focus on only the most promising lines of business, by continuing to build the firm’s “great positions in good industries.” Still, the investor community has apparently agreed with their unorthodox approach since there has been a 194% growth in shareowner value since 2002, more than twice the increase of the S&P 500 over that same period.[8]
Third, it’s critical that C-Suite officers are directly involved in transformation efforts. One CEO told me that most C-Suite officers delegate transformation efforts too soon to consultants or lower-level managers. “You need to feel the pain as a leader,” he said. “You need to stand up for what you want to achieve…that’s where authenticity comes in—and speed—because you want to close this out quickly” to help all of the people involved. Moreover, from a moral compass perspective, C-Suite officers need to remember that shareholder wealth is one facet of their balanced scorecard; employees are important too. In a long-term study, Columbia University researchers followed employees who had been laid off.[9] Twenty years after their layoff, employees were still earning 20% less than employees who had not been laid off. So hopefully today’s leaders can carefully consider the effects of their transformation actions on their often mentioned “most valuable assets.” C-Suite executives have two audiences to support during a layoff: departing and remaining colleagues. For those remaining, are there tools and technologies that can help streamline operations so that remaining staff can support more customers with the smaller headcount? These are exciting days with the Internet of Things and other evolving developments but make sure that you are focusing on how they can be pragmatically deployed in your existing operations. After all, current and future prospective employees will be looking at how your organization is transforming in terms of respect for the individual and the ecosystem in which it operates. Regardless of age (Baby Boomer to Millennial); people have seen which companies transform poorly versus well; and such impressions are long-lasting.
Image may be NSFW.
Clik here to view.
Sandra J. Sucher is Professor of Management Practice, Joseph L. Rice, III Faculty Fellow at Harvard Business School (HBS). Professor Sucher joined the faculty of Harvard Business School after 25 years in industry and nonprofit management and is a member of the General Management Unit. Professor Sucher’s executive experiences have shaped her interests, teaching, and research, which have centered on the ethically ‘gray’ areas of business, moral leadership, managing differences, and most recently, layoffs and their alternatives. She is the author of two books on “The Moral Leader” course: The Moral Leader: Challenges, Insights and Tools, (Routledge 2008) and Teaching The Moral Leader: A Literature-based Leadership Course, A Guide For Instructors (Routledge 2007). From 1986 until 1998, she worked at Fidelity Investments as Vice President of Corporate Quality and Vice President of Retail Service Quality. Prior to Fidelity, Professor Sucher spent 10 years in fashion retailing at Filene’s, a Boston-based department store chain. She wrote the proposal, approved by Federated Department Stores, to expand Filene’s Basement from a single store to a national chain. Professor Sucher has served on two corporate boards and as Chair of the Better Business Bureau of Boston. Professor Sucher received her MBA from Harvard Business School with first- and second-year honors; she also earned a Masters of Arts in Teaching from the Harvard Graduate School of Education and a BA from the University of Michigan, High Distinction, Phi Beta Kappa.
[1] Joshua M. Brown, “Will a Stock Bust Follow the M&A Boom? …total value of deals involving U.S. acquirers topped $2 trillion…global total neared $4.7 trillion.” Fortune, January 1, 2016. 39-40.
[2] Key attribute measurements for Fortune’s Most Admired Company rankings include: innovation, people management, use of corporate assets, social responsibility, quality of management, financial soundness, long-term investment value, quality of products and services, as well as global competitiveness. Per the most 2015 findings, Apple had been the top ranked Fortune Most Admired Company for an unprecedented eight consecutive years.
[3] Sandra J. Sucher and Susan J. Winterberg, Nokia’s Bridge Program: Outcome and Results (B), N2-315-003, May 5, 2015
[4] Datta, Deepak K., James P. Guthrie, Dynah Basuil, and Alankrita Pandey. “Causes and Effects of Employee
Downsizing: A Review and Synthesis.” Journal of Management 36.1 (2010): 322-337.
[5] Sandra J. Sucher and Susan J. Winterberg, Leadership Lessons of the Great Recession: Options for Economic Downturns, HBS Working Knowledge, September 2015
[6] J.P. Donlon, “What Transformational Leaders Do,” Chief Executive, July/August 2013
[7] Sandra J. Sucher and Susan J. Winterberg, Nokia’s Bridge Program: Outcome and Results (B), N2-315-003, May 5, 2015
[8] Wall Street Journal, Sept 2015, http://www.honeywellnow.com/2015/09/02/wall-street-journal-highlights-honeywell-successful-growth-strategy-for-mergers-acquisitions/
[9] van Wachter, et al. Long-Term Earnings Losses Due to Job Separation During the 1982 Recession: An Analysis Using Longitudinal Administrative Data from 1974 to 2004.” Columbia University, 2008.
Image may be NSFW.Clik here to view.