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Why Employees Are Like Napkins ...

... and other observations from finance-savvy HR experts about the difficult job of downsizing.

January 2009
by David McCann/CFO Magazine

With layoffs continuing to pulsate through Corporate America, CFO.com sat down with three veteran business management experts to talk about the thought process behind head-count reductions, alternatives to that drastic step, and how to move forward if you take it. The panelists — they were interviewed separately, but their comments have been woven together in a panel-discussion format — include:

  • Jeff Higgins, executive vice president of client services, North America, for Infohrm, a workforce analytics company. He is a former CFO of Klune Industries, a midsize aerospace and defense manufacturer, and a former divisional controller and finance vice president at Johnson & Johnson.
  • Jason Zickerman, CEO of The Alternative Board, a 19-year-old firm that provides peer-to-peer advisory meetings and executive coaching for small and midsize private companies. Earlier in his career Zickerman was an accountant with Ernst & Young.
  • Dean Meyer, a business transformation consultant, researcher, and writer. He founded his company, NDMA, in 1982.

What's your opinion of all the layoffs? Facts and circumstances obviously differ from company to company, but in general, do you think corporations are cutting the right number of people? Too many? Too few?

Higgins: As a former CFO, I certainly understand, because I used to be the person who had to either recommend, enforce, or administer work force cuts. But my experience was always that job cuts are one of the most unscientific decisions companies make. They typically use some back-of-the-envelope technique. Today, many companies may be overcutting, if their long-term strategic plan is growth.

In financial statements, corporations often refer to employees as being among their most valuable assets. That's a complete contradiction. Employees are usually seen as period expenses. They're the same as a napkin. They're less than a chair, because if you bought a bunch of chairs, they are capital equipment. Computers rate far higher than people in accounting systems.

Zickerman: It has been demonstrated time and time again through the years when recessions have hit that during the good times organizations had gotten fat. I've been around companies that got rid of 20 to 25 percent of their workforce and didn't skip a beat.

But one of the big things many companies are overlooking is what it costs to rehire and retrain. An analysis of that, at a minimum, allows you to re-look at who you're letting go versus just picking the ones with the least seniority or the highest paid. Forget those rules of thumb — they're very shortsighted.

Meyer: It's kind of the wrong question to start with. What I advocate is, don't cut "inputs" — head count, training, travel. Cut "outputs" — the things you produce. If you cut out a strategy to go heavily into South America, you cut all the costs associated with that. Then you can fully fund the fewer things you decide to do so you can do them well.

Everyone has heard the garbage phrase, "Do more with less." How could that happen? Were there people sitting around and wasting time? Not likely. Companies have already cut to the bone over the past two decades. The truth is, an enterprise is going to do less with less. But it can decide consciously and deliberately what the "less" is going to be.

I guess that means you're not a fan of across-the-board head count cuts.

Meyer: That leaves it to individual managers to decide what the "less" is. Then what you get is a patchwork quilt of failures, and the entire enterprise becomes ineffective at doing anything at all.

Higgins: I call it cutting peanut-butter style — 7 percent across the top, spread evenly. It seems fair, but when I had to implement it I knew for a fact that some areas had more fat and in other areas I'd be cutting muscle. That's something CFOs should try to influence.

What else can companies do to avoid layoffs?

Higgins: Say you want to move 150 engineering jobs to India to save money — a typical scenario being looked at. Comparing wage rates, benefits, and other costs of employment, it looks like an easy decision, because the cost of maintaining those engineers in North America is maybe 2.5 to 3 times higher. But you also should factor in the cost per hire, which includes cost of turnover and continual replacement. If in North America your turnover rate for engineers is 10 percent but in India it's 50 percent, you could come up with a scenario analysis that says if wages in India were to rise another 20 percent, which is likely, you would be at a break-even level.

Zickerman: One alternative that a number of our members are looking at is moving some or all staff from a five-day work week to four days. Everyone stays employed, but you reduce payroll expenses by 20 percent.

If you communicate that properly, telling employees that you're doing everything in your power to ensure the least-possible amount of layoffs, that you're fighting for them and protecting them, you can get a morale boost, whereas a lot of companies are getting flattened on morale.

Or, instead of two or three weeks vacation, give five weeks, but two of them unpaid. The interesting is that the younger generations who don't have mortgages or tuition almost look at that as a perk. It's not as big a deal to that segment of the work force as a lot of people think.

Won't going to a four-day week reduce your productivity by 20 percent?

Zickerman: That's absolutely not true. The fact is, people fill their week with the work. They will be more efficient and effective, spend less time at the water cooler, stay an hour later, and get the work done.

We've talked to a number of experts who advise that to do layoffs effectively, companies must identify their most valuable performers. Is that really so hard to do?

Higgins: Companies can avoid getting rid of their top salespeople and other performers. It's their future talent that they often don't recognize and throw away. And those people are very hard to get back. With workforce planning, you can be aware of who your feeder pools are and the profiles of those who tend to be successful in your critical jobs. Just like with professional sports, it always costs less to fill from within than to hire on the free-agent market.

What lessons will companies have learned from this period of intense pressure to cut costs?

Meyer: If the company has decided what it will not do, what not to buy, now it can set aside an appropriate amount for innovation, product experimentation, process improvement, and customer relationship development. And professional development — the company should invest in its employees as part of its pricing algorithm. Most companies set the billable time ratio way too high, like around 70 percent. That leaves too little time for those other things.

Zickerman: If employees are going to be more in the weeds because of less hands on deck, you should stop to celebrate the small successes. If your organization was one that celebrated only when the big deal closed, don't do that. Celebrate at milestones so people feel progress, which builds a winning attitude.

Companies also should help employees understand that because of what's happened, we're doing things differently. No one wants to feel that people were let go but nothing has changed.

Aside from head count considerations, any advice for getting through the financial crisis?

Zickerman: More than ever, it's critically important for businesses to have a cash flow projection for at least 90 to 180 days. You'd be amazed how many companies don't.

We're also telling people not to duck their bankers. Now is the time to really have a relationship. When you suddenly need to speak to them and you surprise them, things can go really bad. Let them know what's happening so they don't pull credit lines unnecessarily.

We're advising people to watch their purchases and negotiate terms on their accounts payable. If you are in a strong cash position, leverage that. Tell your vendor that if you pay cash and right away, you want a substantial discount. On the other hand, if cash is tight, tell them you need 45 days, not 30 days. You've got to be really aggressive in managing your cash flow.

But on the other end, manage your accounts receivable very closely; don't let any customers over-extend themselves and make their problem your problem. Get very aggressive on your collections. You need to work both sides of the fence.

David McCann is a reporter at CFO.

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