Negotiating as emotion management Prof. dr. W.F.G. Mastenbroek More info...
Thought Leaders: Wayne Cascio on Responsible Restructuring An interview with Wayna Cascio Rich DiGeorgio
Dr. Wayne Cascio is a professor of management at The University of Colorado at Denver. He is the past chair of the Human Resource Division of the Academy of Management and was the past president of the Society for Industrial and Organizational Psychology. Professor Cascio is the author or co-author of 16 books and numerous articles on Human Resources. In 1999, he received the Career Achievement Award given by the Human Resource division of the Academy of Management. In addition to Responsible Restructuring, published in 2002, he recently published Managing Human Resources: Productivity, Quality of Work, Profits.
Dr. Cascio has been a visiting professor all over the world, working at prestigious universities in Australia, Switzerland, Singapore and Hong Kong to mention a few. He received his PhD in Industrial Organizational Psychology from the University of Rochester in 1973.
Topic: Responsible Restructuring
RD: This is a very timely topic given todayís business environment. Youíve done quite a bit of research on responsible restructuring going back a number of years. Tell us about that research and what got you so interested in the topic.
WC: I started doing work in this area in the early 1990ís. As a psychologist I was looking at the massive downsizing that was going on and felt that a lot of mistakes were being made that had serious consequences for people, their families and their communities.
In 1993, I published an article entitled, ďDownsizing: What do we know? What have we learned?Ē I tried to debunk some myths about the whole restructuring process. In 1995, I was fortunate enough to be approached by the Department of Labor who gave me a grant to travel around and find the good news about companies that were restructuring in a positive way. From that, I wound up publishing a brochure called, ďThe Guide to Responsible Restructuring.Ē From that experience, I went on to continue my research and provide advice to companies on how to restructure in a more positive way.
RD: In your book you debunk a lot of myths about the economics of downsizing. You asked if firms that downsized were more profitable than those that didnít. Tell us what you found regarding this key question.
WC: There have been a number of surveys done by the American Management Society and the Society for Human Resources Management in this area. What they have found, through self-reporting, is that after downsizing profits increase about a third of the time, stay the same a third of the time and go down a third of the time.
When looking at our research, which we conducted over 18 years using S&P 500 companies, we find that stable employers tend to outperform most companies that had undergone restructuring. When we refer to ďstable companiesĒ we are referring to those companies that have a less than 5% rate of staff fluctuation in any given year. The only companies that seemed to outperform stable companies were firms that were actually growing and upsizing. Companies engaging in employee downsizing were next to the bottom in terms of profitability. The real message is that you canít shrink your way into prosperity.
RD: Tell us about the Bridgestone-Firestone story. It is an excellent example of some of the indirect costs associated with downsizing.
WC: Many people are aware of the problems at Bridgestone-Firestone and the fatalities that resulted from faulty tires on the Ford Explorer. A couple of economists at Princeton University decided to look at a particular plant in Illinois, where a lot of the defective tires came from, to determine if poor labor relations had affected the quality of the product.
Before 1994, there was a master agreement in the rubber industry that was set amongst companies like Goodyear and Bridgestone-Firestone and the United Rubber Workers of America. In 1994, Bridgestone-Firestone decided to break with the master agreement to push for some pretty sharp changes in the arrangement. They went from eight-hour to 12-hour shifts, they rotated between day shifts and night shifts, and they cut pay for new hires by 30% and existing employees by another 30%. In response to these changes the United Rubber Workers of America went on strike. Despite the strike, the company was determined to continue operations. For a period of about three years the union was either on strike or working without a contract. During that time the company hired about 1,000 replacement workers.
The economists looked at the quality of the tires that were produced during the three- year period of the labor disagreement and after it. What they found was really surprising. At the plant in Illinois, prior to the strike, tires that were produced there were 14% less likely to produce a complaint to the National Highway and Traffic Safety Administration. After the strike, tires produced there were 376% more likely to prompt a complaint to that agency. When they compared that to two other Bridgestone-Firestone plants Ė one unionized and one non-unionized Ė they found dramatic differences in the quality of the tires. Ultimately, these tires led to 40 fatalities on the road and a lot of the problems likely had to do with the poor labor relations climate in the plant at the time.
RD: Downsizing is often a symptom of failure within an organization. What are some of the failures within an organization that can lead to downsizing?
WC: A lot of people like to pin it down to one side, either labor or management, but there is certainly enough blame to go around. Management sometimes fails to see trends that are coming and neglects to make the appropriate changes. Labor, on the other hand, might be inflexible and refuse to accept any changes in work rules. I think it is often a failure on both sides that causes firms to cut costs.
RD: To be fair, there are times when circumstances definitely require layoffs. What would you say are those circumstances?
WC: Clearly, if the company is overstaffed then something needs to be done. Weíve seen de-regulation happen in a lot of industries recently, which has led to layoffs due to overstaffing. When companies were regulated monopolies they didnít have any competition, so they could hire as many people as they wanted and pass the costs onto the consumer. Once you deregulate an industry and you start getting low cost competitors entering the marketplace, you often find that companies are overstaffed and have to let people go in order to stay in business.
The second case for layoffs is when youíve got unprofitable assets or lines of business that donít fit your business strategy. A good example of this is IBM. About 10 years ago they realized that they needed to get out of the printer business. What spun off from that decision was a company called Lexmark, which is now extremely profitable. In that case it was a good move to let the asset go.
RD: What are the mindset differences between those companies that downsize responsibly and those that donít?
WC: As I traveled around the country with the Department of Labor, I interviewed CEOís and top managers as well as lower-level managers and shop-level workers. What I found was that companies separated themselves pretty quickly into one of two camps. The larger of the two are what I call ďthe downsizers.Ē They try to find the smallest number of employees that they need in order to operate. I called the second group ďthe responsible re-structurers.Ē They saw their people as assets to be developed rather than costs to be cut. Their philosophy was to change the way they operated in order to make the best use of what they had. There was a dramatic difference in terms of how the groups saw people and how they managed their business.
RD: Letís talk about some examples that illustrate alternative strategies to restructuring. One of the examples in your book that struck me as very interesting was the story of Charles Schwab. Tell us that story.
WC: As many people know, Charles Schwab was the first online broker in the industry. The company was amazingly profitable but times changed and they started seeing a lot of competition. In 2001, we went into a recession and Charles Schwabís commission revenues dropped dramatically. Despite dropping stock prices, the company used downsizing as a last resort rather than first resort.
Charles Schwab followed five steps before they decided to lay anyone off. They began by doing the obvious things like cutting down on expenses and travel expenditures, but it became clear that it wasnít going to be enough. Charles Schwab and his co-presidents each took a 50% pay cut and really led by example. They had a sliding scale of pay cuts for different levels of employees. At the same time they encouraged employees to take advantage of unused vacation days, take unpaid leaves, etc. However, they eventually did have to lay off about a quarter of the workforce. When they did that they actually offered a $7,500 hire-back bonus to anyone who was willing to be re-hired within 18 months, if there was a job available. The company had spent a lot of time and money investing in these peopleís skills so it made sense for them to do this. It also helped to stop people from moving over to a competitor.
RD: Reflexite was another terrific example of a company that took an alternative approach to restructuring. Tell us about that.
WC: Reflexite is a Connecticut-based company that manufactures reflective products for fire departments, police services and other emergency services. In the early 1990ís we were in the midst of a recession and Reflexite orders were down. Although they were not losing customers, they were still losing orders. Because most of the organizations they serviced were municipal, they didnít have the money to place new orders.
The company took a really innovative approach and partnered with the State of Connecticut. Together they offered employees voluntary leave of absence benefits. Employees could, on a voluntary basis, take between two weeks and five months off. During that time they would receive unemployment benefits from the state, while still maintaining their employment status at Reflexite. During their absence employees would still retain their seniority and benefits.
Reflexite didnít have to lay anyone off and they saved about half a million dollars from their budget. They were able to bring everybody back and they havenít had a layoff since.
RD: Reflexite also created a business decline contingency plan, which you presented in your book. It seems like a lot of companies would do well to have something like this in place. Tell us a bit about that plan.
WC: Itís a fascinating concept. Reflexiteís management developed a system where they identified four stages of business decline. They assigned specific symptoms to each stage of that process. For example, during stage two the symptom might be that sales and profits have been below the plan for two months or more and that they are losing key customers. Management involved the workforce in the creation of the plan, asking them to identify actions that should be taken to eliminate each symptom. It is only at stage four, where there is a continued loss of customers and loss in shareholder confidence, that layoffs could be implemented. Employees have the security of knowing that there will be at least 50 to 60 actions taken before they get to the point where people are laid off.
RD: There are a lot of great examples in your book, but one that I found particularly interesting was the story of Axiom Inc. Tell us about that.
WC: Axiom is a database management firm headquartered in Little Rock, Arkansas. During a time of financial stress, the company made the decision to ask for voluntary pay cuts. Although they did impose a mandatory 5% pay cut for everyone, they offered people stock to cover that amount. If your pay was cut by $10,000, then you got $10,000 worth of Axiom stock. On top of that, the firm asked for voluntary pay cuts of an additional 5%. They expected maybe 10% to 20% of the workforce to agree to this, when in fact 36% of the workforce agreed to it. What the company then did was set-up a two-to-one pay cut match. For example, if you took a $15,000 pay cut then you received $30,000 in Axiom stock. In essence, if the company did well then those employees would be walking around with a lot of money. In fact, thatís exactly what happened. The company has a lot of millionaires walking around there today.
RD: You devote a chapter in your book to the virtues of stability. Letís talk about one of those examples. Lincoln Electric Holdings Inc. has not laid off a worker since 1948. How do they do that?
WC: This is a fascinating case study. Lincoln is based in Cleveland, Ohio and makes arc-welding equipment. They have about 3,500 non-unionized US employees and seven manufacturing plants around the world. The unusual thing about them is that after three years of employment they offer workers a guarantee of permanent, full-time employment.
People within the company are also encouraged to act like entrepreneurs. The company is very different in that employees work on a piece-work payment system. Promotions are almost exclusively from within, there is no mandatory overtime or break periods and there is only one supervisor for every 100 employees. There is a great deal of flexibility at Lincoln, but it is also a tough place to work.
After employees are hired, they spend three years on probation. They have a very rigorous performance management system in place where they judge each employee on quality, availability, output, dependability, ideas and cooperation. Based on these performance appraisals people can make bonuses of up to 100% of their salary. The company pays wages that are in-line with other manufacturers in the Cleveland area, but it is the bonus factor that distinguishes them from everyone else.
You have to have a very strong work ethic to work for them. There is no sick pay. If you are sick, you donít work and you donít get paid. Although they do have a catastrophic illness fund that everyone pitches into, they donít allow time off for the sniffles. Many people have asked if Lincoln is behind the times or ahead of the times. The answer to that one is still out there.
RD: In the last chapter of your book you talk about what to do and what not to do if you want to restructure responsibly. Two key considerations are justice and communications. Tell us why these are the keys to responsible restructuring.
WC: Every time there is a decision that affects you personally, in terms of your pay or benefits, everyone automatically asks himself or herself if they were treated fairly. In academics the term we use is ďprocedural justice.Ē Procedural justice refers to whether or not the employees were dealt with in a fair and just manner. There has never been a case of theft, sabotage or violence in a case where employees felt that they had been treated fairly.
Communication is also absolutely critical. It has often been said that you canít over communicate when you are restructuring or downsizing.
There was actually a unique study done with a company that was restructuring after a merger. There were two different plants affected by the merger and one acted as the control group and the other as the experimental group.
In the control plant there were communications on the day of the merger and also following the merger. On the day of the merger everyone got a letter from the CEO telling him or her about the merger agreement and the primary motivation for it. People were also told that there would be redundant facilities and that some jobs would have to be cut, but no other details were provided.
In the experimental plant there was a very systematic and sustained communication program that included a weekly newsletter, a telephone hotline and weekly meetings between supervisors and employees to keep them up-to-date.
Researchers did surveys two weeks and three months after the merger agreement and then compared results from the control plant and the experimental plant. Performance dropped 20% in the control plant and there was no change in the experimental plant.
When it comes to restructuring, I generally tell people to avoid the four noís. No secrets, no surprises, no hype and no empty promises. If you can stick to that people will generally get in step with the program.
RD: The last chapter of your book lists 11 suggestions for those implementing responsible restructuring. Letís go through them.
WC: I think you need to begin by examining the rationale behind downsizing. Is it part of the plan? Or is it the plan? Companies need to ask some tough questions around why they are restructuring. Are they doing it to make things better for the customer?
Secondly, consider the virtue of stability. In knowledge-intensive businesses people work best when they have worked within the same team for quite some time. There may be some virtue in not doing anything and keeping those teams intact.
Another recommendation, and it is often the hardest thing senior managers have to do, is to get input from employees. Let them know the issues and ask them for suggestions. Employees can be amazingly creative at finding ways to cut costs while keeping their own jobs.
Make downsizing a last resort and not a first resort. The myth is that it is a last resort, but the American Management Association has found that year after year 80% of the companies that downsized in a given year were profitable.
If layoffs do become necessary it is important to be fair and consistent across all levels. People need to feel that they have been treated fairly by the company.
I also recommend that people communicate regularly and in a variety of ways. We talked about that earlier and we have already seen the value that can come from that.
You also have to have a story that you can tell to survivors, the people who are going to take your company through the evolution and on to the next level. Give them a reason to stay and give new employees a reason to join.
I also suggest implementing training programs for managers and employees. Often you have new reporting relationships and new processes in place after restructuring. People need training on how to accommodate the changes. You just canít cut people and not do anything else.
Before you make any final decisions you need to look carefully at all of the HR systems. How are jobs going to change? Downsizing has a ripple effect on every aspect of how you manage. We need to think carefully about how restructuring is going to affect each aspect of the business.
Hopefully, companies will strive for the three Cís of success: care of customers, constant innovation and committed people. When was the last time a company increased the commitment of its workforce by downsizing? Itís a tough thing to do.
This interview was first published on www.hr.com and is reprinted with kind permission.
By:Rich DiGeorgio Date:02-01-2005 Number of words:3224 Number of pages:10 Section:Human Resources Type:Article
Lecturer-HRM Indeed, the interview thrown insight into the crux of the problem i.e. downsizing. Very few studies... K. Srinivasa RaoAttorney at law An excellent, well reasoned and balanced article.... A. Paul Ingrao