How many times have we heard about a company laying off masses of workers in the name of profitability?

“But what about the poor workers?” so many of us ask.

“We’re doing it for our stockholders,” they respond unflinchingly, looking us straight in the eye.

Oh really??? Well, the case is not so clear according to a wonderfully written article in the April 30, 2007 issue of The New Yorker. It seems James Surowiecki has a very different version of the story to tell. I highly recommend reading Surowiecki’s piece It’s the Workforce, Stupid!, but in a nutshell, here’s what he says:

  • The old “seven-percent rule” about a stock price jumping 7% when major layoffs are announced does not hold up in reality.
  • There may be a temporary spike in productivity, but gains are often short-lived as the impact on morale (along with other often unforeseen effects) takes its toll.
  • The few examples where downsizing did boost the stock price and help reshape the company were more about an extraordinary CEO like Jack Welch of GE; the layoffs there were only a tiny part of the organizational redevelopment that took place. Unfortunately, too many people assume they can replicate what Jack Welch did. They can’t.
  • We don’t hear about all the countless other places where downsizing failed to make a difference to the bottom line or even hurt it.
  • Valuable resources are sacrificed for a quick blip in the bottom line. In fact, sometimes because of their higher salaries, experienced employees are purposefully included in a layoff. The company thinks it’s being so clever, but what was thought to be a smart move turns out to be more costly as the company learns these employees were not as fungible as they thought.
  • R&D may be lost and this does not bode well for the company’s ability to be competitive in the long run. And, iff this trend continues here, it will also impact our country’s ability to compete internationally.
  • The stock market is now taking all these factors into account, so the 7% rule (which wasn’t true anyway) is basically dead

Surowiecki sums it up nicely:

“There’s nothing wrong with cost-cutting, and in any dynamic economy layoffs will be necessary. The problem is that too many companies today define workers solely in terms of how much they cost, rather than how much value they create. This is understandable: after downsizing, it’s easier to measure a lower wage bill than it is to see the business the company isn’t getting because it has too few salesmen, or the new products it isn’t inventing because its R. & D. staff is too small.

These lost opportunities may be hard to measure, but over time they can have a huge impact on corporate performance. Judging from its reaction to layoff announcements, the stock market understands this. It’s time executives did, too.”