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Human Element: When times get tough—cut people last
By Sid Scott, Scott Consultants

We have been through several years of poor economic conditions and this has put lots of pressure on businesses to wisely manage costs, inventories and staffing.  Sadly, because of lack of customers and revenue, positions have been cut in order to keep organizations viable. As we have learned, cutting people when bad times arrive can have dire consequences when times get better. Maybe there is a better way.

Why do we think about cutting staff so quickly?

I think there are two pretty obvious reasons. First, payroll and benefits are typically the largest category of controllable expenses within any organization. Second, because these expenses are perceived as being controllable, they are an easy target. In fact, thanks to Jack Welch, former CEO of General Electric, many business leaders began taking his approach (it earned him the nickname “Neutron Jack”) of cutting the bottom 10 percent of staff that were not performing.

While Welch argued managers need to be honest with performance appraisals, especially in good times, continually cutting staff is self-defeating, demoralizing and a short-term fix with long-term consequences. Certainly, an organization could be overstaffed and this approach might work the first time, but long-term it is naive to think the culture will not suffer in many unexpected ways.

A third reason we seem to want to look at staff cuts may be due to the publicity this approach receives from the media. Since private business activities are not easily accessible by newspapers, television, radio, magazines and the Internet, the tendency is to report the activities of the publicly traded, very visible companies that sell their stock in the various markets. While the vast majority of businesses in the U.S. are privately held, the larger, public companies are the ones most often featured and therefore emulated by others.

In 2001, Carol Hymowitz wrote in her “In The Lead” column for the Wall Street Journal “companies that capriciously cut key employees often lose the talent they need to compete effectively…end up paying hefty severance packages and…spend more to find replacements once the recovery occurs.”  She goes on to describe other fallout for those who are left inside the company. The “survivors” tend to hunker down and refuse to take necessary risks or venture new ideas for fear of getting axed themselves.

A final thought about cuts is we seldom read about highly compensated senior executives at public companies sharing in the economic misery by taking pay cuts or refusing bonuses and incentives. This sends a clear message to those at lower levels that we are not in this together.

When people are cut, the good go looking

Just like products, people are marketable commodities. Various management gurus have picked up the phrase, “Human Capital,” coined by Gary Becker in his book by the same name to describe this phenomenon. And, going back to comments Jack Welch often made about rewarding your best people, retaining them during downsizings, restructuring and the like becomes a challenge.

The talented, marketable employees, like those less gifted, have the same needs for a good place to work.  In other columns, I have shared the list of characteristics that Frederick Herzberg identified as contributing to a “good” job:

  •  Direct, timely, non-evaluative feedback
  •  Direct contact with customers
  •  Opportunity for new learning
  •  Ability to schedule own work
  •  Opportunities to utilize ones skills
  •  Control over resources—money, materials, etc.
  •  Ability to communicate with anyone at any level
  •  Personal accountability and recognition

If the good folks perceive that these characteristics are not present or are deteriorating during bad times, they will seek fortunes elsewhere, plain and simple.

Customers come first, but employees serve customers

We’ve all heard the expression, “the customer comes first.”  This is also sometimes expressed as, “The customer is always right. Even when the customer is wrong, the customer is right.”  Generally, most businesses that practice good customer service believe and practice those values.  Without customers, businesses would not exist.

But, without good, satisfied people, there would be no one to produce the products and/or services and to take care of the customer’s needs. This says to me great customer service starts first with keeping the employees well trained, well-compensated and well-satisfied so they will be able to make the focus of their efforts great customer service.  It’s a little nuance on customer service, but I feel an important distinction that separates the great companies from the good ones.  If employees are fearful of losing their jobs when the economic downturn occurs (and it has and will) they lose trust and are less likely to concentrate on customers first.

Maybe the problem isn’t people costs but people allocation

In over four decades of working in businesses, I’ve seen many perceived staffing problems (excess staffing) are really problems of company structure and allocation of people resources. A way to get at these difficult situations is to first define the problem by making certain we understand the causes behind the effects, before we start generating alternatives. When I see companies cutting jobs to meet short-term profits, it makes me think they probably don’t have a good handle on how best to structure the work for the best efficiency of operations and the most effectiveness of serving customers. It’s always less painful to generate more sales than to cut expenses.

I also believe that getting people involved throughout the organization in the problem solving can accomplish several positive things. First, we get input from everyone by allowing broad participation. Second, we communicate that the organization needs to be efficient and effective and we get all minds focused on these common goals. Finally, we get buy-in so that even if jobs must be eliminated, people will understand and accept the reasons why.

A final thought – the best time to analyze workflow is not when you have a crisis, but when times are going well.  When can you start?

Sid Scott is president of Scott Consultants in Dubuque, Iowa. You may contact him by e-mailing