AMERICAN WORKPLACE VOLUME 3 ISSUE 4 JULY 1995 ALTERNATIVES TO LAYOFFS WHEN TIMES GET TOUGH Company downsizings--cutting large numbers of employees over short period of time--often fail to achieve the increased productivity and profitability once thought possible, according to a new report issued by the Office of the American Workplace (OAW). Some companies, including those cited in Guide to Responsible Restructuring, have fashioned creative approaches. They have "responsibly restructured" to protect their work force investment. The guide is the culmination of a year-long effort to examine the impact of downsizing on company performance. In addition to citing a body of evidence on the effects of downsizing on the economy, American firms, and American workers, the publication includes research about the downsides of downsizing, guidelines for restructuring, a resource section, and case studies of companies that have approached the subject differently. "The good news is that there is an alternative path--one that actually saves jobs and produces better business results," said Secretary of Labor Robert B. Reich. "More and more companies are finding they can achieve stronger financial performance if they treat the workers not as costs to be cut, but as assets to be developed " What does "responsible structuring" look like? The efforts at successful companies speak for themselves: Rhino Foods, a 60-person specialty dessert manufacturer in Burlington, VT, chose to adopt an employee exchange program when it was faced with efficiency improvements and a drop in orders. Rather than lay off workers, Ted Castle, the company's president, pursued an exchange with two neighboring companies in need of workers. It included placing employees with one of Rhino's biggest customers, Ben and Jerry's Ice Cream. The 12 hourly employees who worked at Ben and Jerry's learned new skills, gained an understanding of their customer's needs, earned the same or higher pay, and kept their Rhino benefits and seniority. They returned to the company when business improved, with more knowledge, experience, and a new respect for their employer. Intel, the company that invented the computer microchip and whose average product life cycle is just 2.5 years, has avoided major layoffs through a strong in-house redeployment program. To sustain the program, the company maintains five employee development centers that offer self-assessment tools, career counseling, educational opportunities, and job listings within the company. In addition, job skills have been redefined to encourage employees to find new positions inside Intel. Temporary assignments and up to $8,000 worth of training also are provided to prepare workers for new jobs. The result of these efforts is that, as the company grows into new areas or builds on existing products, employees can grow too. Today the ranks of Intel are filled with those who have made successful transitions from shop floor to sales and public relations positions, or from obsolete technology divisions to high-margin technology centers. If none of the job placement strategies work, the company pays for outplacement assistance. The benefits to Intel employees and the company are impressive: Between 1989 and 1991, Intel closed plants employing 2,000 people; it redeployed approximately 80 percent of the affected workers. From 1991 to 1994, when redeployment affected 3,409 employees, the company placed 90 percent of them internally. NYNEX Corporation, the regional telephone company serving New York and New England, and its union, the Communications Workers of America (CWA) jointly faced the issue of downsizing. Rather than take the quick, "lean and mean" route to downsizing, NYNEX and the CWA negotiated an agreement that responds to the company's need to eliminate overall some 16,500 jobs. It commits the company to an eight-step process that includes transfers, offers of early retirement, job sharing, and bringing contracted work back to the company. The agreement has the added bonus of providing training, toward a degree if workers so desire and meet certain criteria, for those employees who remain with NYNEX. CWA members with at least 5 years at NYNEX have additional options, including an unpaid educational leave of absence. They retain all benefits and seniority and will have a guaranteed job when they return. The hazards of quick, "lean and mean" downsizing are numerous. It exacts a measurable toll on morale and productivity. It can interrupt customer service or product development. And the cost of recruiting, selecting, and training new workers when business picks up are high. Guide to Responsible Restructuring offers a window to alternatives that make better business sense and support human resources as the nation's sustained source of competitive advantage. To receive a copy of Guide to Responsible Restructuring, contact: Superintendent of Documents U.S. Government Printing Office Phone: (202) 512-1800 Stock No: 029-000-00454-4 Price. $3.25 The companion video, Responsible Restructuring/Responsible Downsizing, is available for sale through the PBS Adult Learning Satellite Service. To order, phone: 1-800-257-2578. The hour-long video, hosted by Secretary of Labor Reich, features five companies that have chosen to approach downsizing in innovative ways. P O I N T O F V I E W REENGINEERING: CAN THE COMPANY AND THE EMPLOYEES WIN? Cecil Ursprung, CEO Reflexite Corporation It is easy to say "people are our most important asset," especially in good times. After all, slogan; are inexpensive, and they don't appear on the income statement or the balance sheet. But when business sailing gets a little rough, traditional companies often order their "most important assets" to 'walk the plank" under the euphemisms of downsizing, right sizing, reengineering, or other phrases which, to the people in the organization, mean mass firings. Reflexite followed this strategy in late 1982 when business slowed and 20 percent of our production people were laid off--an event well remembered by our senior people more than 10 years later. In 1985, Reflexite began to change from traditional company to an employee-owned company. Things went well for the company, and our ESOP strategy worked. From 1985 to 1991, business expanded about 30 percent per year. But in the spring of 1991, our backlog began to fall rapidly. By late May, it had dropped 50 percent, and the end was not in sight. During the third week of June, I called our top 11 managers together to develop an action plan for dealing with the situation. Tension and anxiety were high in the workplace. After all, since we were an ESOP, everyone already had access to the order backlog, monthly financial statements, and other financial data. One manager suggested that a traditional company would go by the numbers and lay off 25 to 30 percent of the production work force. But we decided on a different approach. We decided to eliminate layoffs as an option but keep the goal of reducing our wage and salary costs by 25 percent for the balance of the fiscal year. One hour later, the managers had a plan that included paycuts for everyone--10 percent for employees earning over $70,000, 7 percent for those in the $35,000 to $70,000 range, and 5 percent for those making less than $35,000. We also devised a voluntary leave program under which employees could take leave without pay but collect unemployment and keep their benefits. And teams of employee-owners studied ways to cut waste and overhead. During the 10 months of the program, wages and salaries were reduced 26 percent --without a single layoff. Even more significantly, however, Reflexite came out of the slump a much stronger company. Everyone had worked together to achieve a very important goal--that of saving the company. The real payoff came later on, however, in an unexpected way. As we began an aggressive move to switch from a functional manufacturing approach to a cellular approach, we were surprised at the way people demonstrated their commitment to the company. No doubt, as we began these strategic changes, there was some anxiety. But the people involved had enough confidence in their job security to be able to give their best and to make change work for us. The return so far? Two years of 40 percent in factory through-put with 6 percent fewer people (through attrition) and a small level of capital investment. We expect more of the same this year as our intelligent, committed, "most important assets" actively look for ways to increase productivity, with the knowledge that productivity increases, good job performance, and attention to customer service are proactive ways to secure everyone's job. To Reflexite employee-owners, the long-term costs of layoffs cannot be justified by the small, short-term benefits derived. we are committed to job security and long-term financial health. We get the added benefits of commitment to each other and to the values of the company, qualities not easily measured in the productivity and profit increases that we have experienced since acting on the words, 'people are our most important asset." Editor's note. Reflexite Corporation develops, manufactures, and markets reflective products that enhance visibility and safety The company is headquartered in Avon, CT, and its 300 employees serve customers in 26 countries. MYTHS VS. FACTS ABOUT DOWNSIZING WHEN CONFRONTED WITH THE NEED TO REDUCE COSTS, MANY OF THE SAME EXECUTIVES WHO TOUT PEOPLE AS "OUR GREATEST ASSETS" SEE THOSE ASSETS AS RIPE OPPORTUNITIES FOR CUTTING COSTS. MYTH Downsizing boosts profits. FACT Profitability does not necessarily follow downsizing. Between 1989 and 1994, operating profits increased in only 51 percent of companies reporting work force reductions; 20 percent said operating profits declined (The Wyatt Company, 1993). MYTH Downsizing boosts productivity. FACT Productivity results after downsizing are mixed. A study of over 250,000 manufacturing plants by the National Bureau of Economic Research found that the productivity-enhancing role of downsizing has been exaggerated. While some plants did downsize and post healthy gains in productivity, even more (including many of the largest facilities) managed to raise output per worker while expanding employment, and they contributed about as much to overall productivity increases during the 1980s as did the successful downsizers (Business Week, July 1994). MYTH Downsizing is a last resort. FACT Data indicate that for many companies, downsizing is a first resort. Right Associates reported that before downsizing, 6 percent of companies tried to reduce costs by cutting pay, 9 percent tried unpaid holidays, 9 percent tried reduced workweeks, and 14 percent tried job sharing (Right Associates, 1992). MYTH Now that the recession is behind us, we can expect less downsizing of workers. FACT In 1993, corporate America announced 615,186 layoffs--a new record. Through the first half of 1994, announced layoffs totaled nearly 300,000, which is 17 percent higher than the total over the same time period in 1993 (The Wall Street Journal, August 1994). Companies are not downsizing because they are losing money. Fully 80 percent of companies that downsize in a given year were profitable in that year (American Management Association, 1994). MYTH Jobs are secure at companies that are doing well financially. FACT Financially sound companies, some with record profits, are downsizing. General Electric, Campbell Soup, Compaq Computer, and American Express Travel-Related Services are examples. In fact, when asked why American Express was launching another cost-cutting drive that may lead to the loss of an additional 6,000 jobs, the CEO replied: "Because we're doing so well." (Knecht, 1994.) MYTH Downsizing is a one-time event for most companies. FACT The best predictor of whether a company will downsize in a given year is whether it has downsized the previous year. One of the clearest trends is that downsizing begets more downsizing, as ongoing staff reductions are etched into corporate culture (Cascio, 1993; Touby, 1993). On average, two-thirds of firms that cut jobs in a given calendar year do so again the following year American Management Association, 1994). Among companies that laid off workers since 1991, 57 percent had to replace some of them subsequently (The Wyatt Company, 1993). MYTH Blue-collar workers are much more likely to lose their jobs than are white-collar workers. FACT Middle managers continue to lose jobs out of proportion to their presence in the workplace. While making up 5 to 8 percent of the American work force, middle managers have lost 18.6 percent of jobs eliminated since 1988 (Cascio, 1993). More recently, supervisory, technical, and professional jobs have increased as a percentage of all positions lost Touby, 1993). MYTH Since companies are just "cutting fat,, by downsizing, there are no adverse effects on work load, morale, or commitment to a company. FACT For the majority of companies, downsizing has had adverse effects on work load, morale, and commitment. Among 531 companies surveyed, 6 out of 10 reported increased workloads among survivors, and more than half reported decreased morale and commitment (The Wyatt Company, 1993). MYTH Victims of downsizing do not suffer any long-term income loss as a result of structural shifts in the economy. FACT Downward mobility is the rule rasher than the exception. (Business Week, November 1994.) Of roughly 2,000 workers let go by RJR Nabisco, 72 percent found jobs subsequently, but at wages that averaged only 47 percent of their previous pay (Time, 1993). And in a recent study of 311 workers (285 males, 26 females) whose average age and salary were 57 and $75,000, respectively, it took them an average of 5.6 months to land jobs that paid an average of $61,500 (Drake, Beam, Morin, Inc., 1994). Excerpted from Guide to Responsible Restructuring RESPONSIVE GOVERNMENT LINK TO OVERSEAS BUSINESS Business America, the U.S. Commerce Department's magazine of international trade, is designed to help American exporters penetrate overseas markets. The monthly magazine provides small- and medium-sized businesses with information on opportunities for trade and methods of doing business in foreign countries. A typical issue includes an analytical piece on current U.S. trade policy, a "how to" article for novice exporters, a brief picture of the nation's economic health, news of congressional and government actions affecting trade, and economic and market reports gathered by the Commerce Department's Foreign Commercial Service. Subscription rate: $43/year, $4/copy (6 back issues available). To order, contact: New Orders Superintendent of Documents P.O. Box 371954 Pittsburgh, PA 15250-7954 Fax. (202)512-2233 Telephone. (202)512-1800 OAW CLEARINGHOUSE GOES ONLINE The Best Practices Clearinghouse, OAW's guide to information on high-performance work practices, is now available via electronic bulletin hoard. The Clearinghouse contains database files on high-performance companies, publications, and other resources. They can speed the learning curve for businesses executives, union leaders, and managers seeking information on workplace training, worker-management partnerships, teamwork and employee involvement, innovative compensation systems, and six other high-performance practices. (For a full description of the Clearinghouse, see the May 1995 issue of American Workplace [download from the TQM BBS, filename: AWPMAY95.ZIP].) To contact the Clearinghouse via computer and modem, dial (202) 219-7088. 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