Downsizing: a Fad That Spins Wheels

"Better, perhaps, to call it "dumbsizing."

Recent research by management experts finds that major job cuts by companies - the downsizing trend so dominant in the 1990s - bears little relation to intelligent cost-saving.

"There is no good evidence of positive financial benefits," says William McKinley, a professor at the College of Business and Administration at Southern Illinois University, Carbondale.

Still, the cuts keep coming, 170,475 announced through May, according to Challenger, Gray & Christmas, a Chicago outplacement firm.

That's slower than last year's pace, and no match for 1993, with its record 615,186 announced cuts.

Yet the same companies announcing job cuts are often out in the marketplace hiring. Some 63 percent of firms eliminating jobs last year were also hiring in other parts of the company, according to a 1996 survey of 1,441 companies by the American Management Association in New York.

In those companies reporting job cuts, 7.1 percent of the work force was hit. But the net job loss added up to a mere 0.7 percent.

Less than half the companies surveyed said operating profits rose after downsizing; only a third claimed greater productivity; and three quarters reported a drop in morale among surviving employees.

Other research also indicates a questionable payoff from downsizing. Professor McKinley and three other academics, examining 210 major layoffs, found a one-year boost in financial performance, then a decline.

"Layoffs do not seem to generate continuous, long-term improvement in corporate financial performance," they concluded.

Even troubled companies are unlikely to find a quick fix with job cuts, finds co-author Vincent Barker III, a business professor at the University of Wisconsin in Milwaukee.

So why continue?

"Companies today are being driven by the shareholders," says John Challenger, of Challenger, Gray & Christmas. "And the shareholders or the stock market don't believe it [the academic research]."

Mr. McKinley has a different view. "Downsizing and restructuring have become institutionalized in corporate America. For [top executives], the consequences don't matter much. Evidence of positive outcomes no longer becomes relevant. You are demonstrating your legitimacy. Restructuring has come to be seen as a way to go in management."

Roger Schmenner, of Indiana University's School of Business in Bloomington, calls downsizing "easy and dramatic. If companies feel pressed, they feel they have to take action."

A more-selective approach, redesigning work and ferreting out waste, "is a tougher, longer slog," he says.

Yet many executives consider downsizing an investment in the future.

So Mr. Schmenner and colleague Vincent Mabert examined seven companies that had downsized: Allison Engine, Amoco, Cummins Engine, Cyprus AMAX, Eli Lilly, General Electric, Inland Steel, and Towers Perrin.

Schmenner's conclusion: "There is a significant probability that you are not going to get the profitability gains from downsizing that one originally touts."

Because so many factors affect success, researchers can't always gauge the impact of downsizing. But Schmenner and Mabert, in an unpublished paper, offer these tips for effective downsizing:

1. Minimize re-hire creep. Companies often cut too deeply, then hire new employees or consultants for the necessary work. So remove the non-value-added tasks before the layoffs.

2. Keep severance costs low. Mr. Challenger says many companies now pay a week's severance per year of service, rather than two or three weeks.

3. Keep post-downsizing productivity positive. Good communications, compassion to those cut, and more than three months notice remove some of the sting.

4. Watch for hidden costs, such as poor quality from surviving workers, more overtime, lost business because of manpower shortages, and expensive wage concessions to survivors.

A VETERAN'S VIEW

Downsizing gets a whack from Harold Geneen, the noted chief executive of ITT.

Now chairman emeritus, he writes in "The Synergy Myth": "Has top management lost sight of the fact the victims are real people, with real children and real mortgages to pay? ... that they have made real contributions to the company?

"What 'downsizing' really means is: 'We just discovered layers of fat that we never knew were there.' That's incompetence, all right - top management's. It is a public admission: We have no vision.

"In a just world, people who insist on cutting so many jobs should at least think of cutting their own pay and perks."