Thursday, August 26, 2010

The Layoff Economy Cause Suffering and It's Bad Business

In reading this blogpost at The Baseline Scenario on management consultants (I'll have more on that later), I came across, via (ugh) The Huffington Post, this article critical of management consultants.  I'll have a word to say on that in a bit.  Of more importance, though is that the Huff Post post linked to this article in Newseeek on the true costs of layoffs.

... Much of the conventional wisdom about downsizing—like the fact that it automatically drives a company's stock price higher, or increases profitability—turns out to be wrong. There's substantial research into the physical and health effects of downsizing on employees—research that reinforces the seemingly hyperbolic notion that layoffs are literally killing people. There is also empirical evidence showing that labor-market flexibility isn't necessarily so good for countries, either. A recent study of 20 Organization for Economic Cooperation and Development economies over a 20-year period by two Dutch economists found that labor-productivity growth was higher in economies having more highly regulated industrial-relations systems—meaning they had more formal prohibitions against the letting go of workers...

There are a number of myths that have taken hold to justify managers' urge to downsize. Many of them aren't true. For instance, contrary to popular belief, companies that announce layoffs do not enjoy higher stock prices than peers—either immediately or over time. A study of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects. An examination of 1,445 downsizing announcements between 1990 and 1998 also reported that downsizing had a negative effect on stock-market returns, and the negative effects were larger the greater the extent of the downsizing. Yet another study comparing 300 layoff announcements in the United States and 73 in Japan found that in both countries, there were negative abnormal shareholder returns following the announcement.
Layoffs don't increase individual company productivity, either. A study of productivity changes between 1977 and 1987 in more than 140,000 U.S. companies using Census of Manufacturers data found that companies that enjoyed the greatest increases in productivity were just as likely to have added workers as they were to have downsized. The study concluded that the growth in productivity during the 1980s could not be attributed to firms becoming "lean and mean." Wharton professor Peter Cappelli found that labor costs per employee decreased under downsizing, but sales per employee fell, too.
Another myth: layoffs increase profits. Even after statistically controlling for prior profitability, a study of 122 companies found that downsizing reduced subsequent profitability and that the negative consequences of downsizing were particularly evident in R&D-intensive industries and in companies that experienced growth in sales. Cascio's study of firms in the S&P 500 found that companies that downsized remained less profitable than those that did not. An American Management Association survey that assessed companies' own perceptions of layoff effects found that only about half reported that downsizing increased operating profits, while just a third reported a positive effect on worker productivity.
Layoffs don't even reliably cut costs...
 Of course, despite what the author of The Baseline Scenario says, too often management consultants have recommended layoffs and job cutting.   So many companies have been gutted by this mentality.  Which brings me to my next business blogger asks, "If management consultants are so bad why are they still around?"

The answer is very simple: they tell management what they want to hear.  It's the same type of question as, "If hocus-pocus fortune-tellers are so bad, why are they still around?

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