Jeff Pfeffer on Lay Off the Layoffs in Newsweek

Tuesday, February 16th, 2010

Back in the mid-90s I wrote about the problems with downsizing and tried to advise my clients to avoid it. I was bolstered by a report Wayne Cascio wrote for US Department of Labor where he identified nine alternatives to downsizing. I added four more alternatives to his list and wrote an article that was met with resounding indifference.

One of my clients told me that people needed to wake up. The old cradle-to-grave employment contract was over, so get used to it. It took awhile, but I started to believe what he said. I still didn’t like the human impact of downsizing, but I started to think that maybe serial monogamy was just the way things were these days. Perhaps it was new world.

My friend Wendy Mack made sure I saw the article in the recent issue of Newsweek titled Lay Off the Layoffs by Jeffrey Pfeffer (one of my favorite business writers.)

Here are some quotes from Pfeffer’s article:

“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.”

He acknowledges that some organizations need to downsize just to survive (although he believes this may only postpone the inevitable in many cases). He goes on to say, “But the majority of the layoffs that have taken place during this recession – at financial-services firms, retailers, technology companies, and many others – aren’t the result of a broken business model.”

Pfeffer again:

“Layoffs don’t even reliably cut costs. That’s because when a layoff is announced, several things happen. First, people head for the door – and it is often the best people (who haven’t been laid off) who are the most capable of finding alternative work. Second, companies often lose people they didn’t want to lose. I had a friend who worked in senior management for a large insurance company.”

“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.”

Cascio is the same Wayne Cascio who wrote the US DOL report. Pfeffer provides a link to Cascio’s book, Responsible Restructuring (2002). I suspect this book is as sound as the long out-of-print paper he wrote back in the mid-90s.

I urge you to read Jeff Pfeffer’s article and, if you are thinking of downsizing, get your hands on Cascio’s book right away.