Nowadays, more than ever, we see a widespread use of a very short-term business practice - workforce reductions. This practice is quite in vogue. Business pundits have even coined extraordinary words to describe this practice. Words such as rightsizing, restructuring, downsizing, de-layering are now making this practice sort of legitimate. De-layering is a wrong word. Because are we talking about delays or layers? And the dictionary does not have a word called delayer. The widespread global use of these practices has climbed steadily over the last two decades. This has resulted in a wider acceptance of these practices as a common management practice. But when is common practice used along with common sense?
The purpose of this essay is to suggest that such a practice is "evil" from the human side of the enterprise. The widespread use of reductions in force has emotional, psychological, economic and social consequences that are far reaching. Use of this management practice destroys people and communities.
In addition to the devastating human consequences, I contend that this practice does not fulfill its intended purpose and that is to save money. Sure it saves expenses in the short-term. It makes income statements look good now. But I am not sure about the impact on the balance sheet. Of course, accountants in their narrow-minded thinking are yet to look at human capital investments as assets and not expenses.
Thus the use of this practice can make business leaders look competent in the eyes of shareholders in the short-run. But if you invest capital for the long haul this practice does not save money. On the other hand, it lands up increasing long-term costs. Yet it seems that this business practice has become a reality in business modernity, especially in bigger organizations.
I contend there are long-term consequences and costs directly associated with this practice. Very few organizations have creatively explored alternatives to save expenses before letting the axe fall on employee livelihoods.
It becomes "evil" and cruel more so when we see instances of business leaders who have massacred their organizations through repeated downsizing exercises and at the same time earned enormous sums of compensation and also fame and glory. Examples of such so-called business leaders are Jack Welch and Carly Fiorina. Ms. Carly according to HP insiders has the dubious reputation of a CEO who destroyed HP's culture of no lay offs. She strode into the HP culture as an outsider and reduced large numbers of excellent long-term HP employees. In the process she destroyed a legendary company and then when she was fired, she walked off with a $60 million severance package. What makes her worth that much? This is a question we will ponder in this blog later.
My contention and arguments are based on my long years as a HR specialist. Of course, I participated in the devastation of human lives by laying off hundreds as well. But also as an analytical person I have found that long-term cost savings accruing out massive lay-offs is not a reality.
I will lay the ground for this argument in this blog.
Thirty-nine years ago fresh out of university with a MBA in hand I started working as a Research Analyst in the Corporate Personnel Research department of a very large computer company. By the way, this great company has been buried in the cemetery of failed companies forever. One can argue through repeated workforce reductions this company facilitated its own demise.
My first assignment as a twenty-three old new MBA was to do the analysis for the planning of a workforce reduction exercise. I was the number cruncher preparing reports for management as to how much will be saved in the short-term if the company laid-off x, y or z numbers of people. I must have crunched well because within fifteen days of my starting a career, the company laid off four thousand employees. This included all the members of my department. But I was spared, I guess I was the cruncher. What a way to start your work life?
But that very first experience has left me scared forever. The scaring is evidenced through a deep concern with job security and self-preservation. But also at that time I used my freshly acquired knowledge of a concept called "human resource accounting" to develop a financial model which can prove that over an extended period of time RIFs do not save any money at all, as a matter of fact they cost more. I used the present value concept to develop this model.
In this blog I present the conceptual framework for this model:
Principle vs Reality – conventional wisdom (may not be true) vs a research based conclusion – An Exercise in Freakonomics!
—Savings from lay-offs (immediate short-term impact):
> Direct Labor Expenses (-)
> Associated Benefits Costs (-)
—Additions to Consider:
> Separation payments (+)
> Replacement hiring costs (+)
> In/Out additional Compensation Costs (+)
> Replacement hire training costs (+)
> Replacement productivity ramp-up costs (+)
> Loss from unused office and other facilities (+)
> Key employee additional retention costs (+)
> Remaining employee demoralization cost (+)
> And there are others also (+)
Now do a PV analysis:
yr 1 yr2 yr3 yr4 yr5
Savings
Costs
Net Savings:
PV Net Savings or Costs @ an appropriate discount rate
I contend here if one calculates the impact of workforce reduction exercises using this model, one may see a different reality.
Readers who are further interested in the model can contact me on my email address hrvalu@gmail.com
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