Layoffs should come last

Layoffs should come last d

In keqing a company afloat, it ti usually best to consider shorter work weeks and retraining before letting people go

t is 10:30 Monday morn- ing and the weekly managers’ meeting begins like all too many others lately, with sales below forecast, expenses too high, and unanticipated delays in new-product develop-

ment. Then comes the dreaded announce- ment: to reduce expenses, top management has decided to lay off E percent of the company’s employees. Department heads have 24 hours to decide which members of their staffs should get the axe.

All over the world, businesses are bowing before a tidal wave of change and funda- mental restructuring that menace the economic security of working people. In Japan, where lifetime employment used to be the rule for large companies, major automobile manufacturers have announced far-reaching plans for cutting costs and headcount. In Europe, where employees negotiate with employers on programs that impact jobs, labor unions and work councils are meeting with managers to plan how best to reduce staff and expenses.

In the United States, companies are more routinely using across-the-board and selec- tive layoffs as a way to cut costs. In less than a decade, the procedure has undergone an image reversal, from corporate embarrass- ment to (in some cases) a reason for the price of a company’s stock to rise.

For lean, well-managed companies, a layoff means a loss to the organization of some of the very talent it needs to recover its profitability. For companies that are flaccid and overstaffed, trimming staff may be a wake- up call to manage more thoughtfully in the future. But regardless of whether staff cut- backs resemble loneoverdue pruning or the amputation of healthy limbs, good people (and their families) will be thrown into personal and financial turmoil. And, when the surgery is finished, the survivors will have to make the best of a dispiriting situation.

How should engineering managers handle ~~ ~

Helen Gracon and Maureen Clark

such situations? The best course of action is :o take the initiative and implement sound 3ptions before the situation becomes dire and management is forced into the equiva- lent of performing delicate surgery with a dunt instrument. Even if it’s too late for that, there is still no need to panic. Alternatives to layoffs exist, and engineering managers should bring them to the attention of top management. The key is to “think out of the box”-to consider choices beyond those with which they are already familiar. First though, they must be really clear about the objectives and assumptions behind the decision to lay off staff. 6ET THE FACTS STRAIGHT. Most managers have seen layoffs used as a solution to a variety of problems-from a sly way to get rid of troublesome employees to a last-ditch effort to stimulate a failing corporate pulse. So job No. 1 is to determine what the layoff is sup posed to accomplish [see table]. Once that is clear, it will become much easier to determine whether a layoff is the right-r first, or only-cost-reduction tool to use. The table shows six common company goals along with layoff alternatives that are responsive to those goals.

Layoff discussions have at least two dimensions that virtually define the choices available. The first is time-how quickly must savings be realized, and over what period must they be sustained? The second dimension is size-how large a saving must be realized? It is against these measures that the impact of a layoff should be measured- on the workforce that will remain; on the company’s competitive position; on its future ability to attract highly skilled workers; and on customers, vendors, distributors, and the financial community. CHOICES. There is, of course, more to management than looking up solutions in a table. Not every option is appropriate-r even possiblefor every situation. In Europe, for example, it is not easy to take any action that affects wages, hours, or employment conditions without negotiating directly with the employees (in work councils or through trade unions). Also, European laws may require lengthy notice periods.

In Japan, where many companies still struggle to maintain at least the appearance of lifetime employment, payroll costs may be managed through attrition, hiring freezes, or the transfer of employees to subsidiaries or positions of less responsibfity. The culture of the company and the country will dictate the options that are realistic to use.

0018-9235/94/$4.0001994 IEEE

The expense-cutting choices in the box see ”Layoff alternatives,” p. 541 are clustered n terms of the immediacy of the savings they xoduce and the severity of their impact on 2mployees. They may be used individually, in combination, or in stages as managers xcome more skilled at anticipating staff cut- 3acks. It should be noted that the choices assume that expenses have been trimmed as much as possible in all other cost categories and that poor performers are being handled through the company’s normal performance- management process.

Whichever strategies are selected, it is essential to be honest with staff about the actions to be taken and the reasons for choosing them. Management should never imply that any set of cost-saving strategies is a guaranteed solution to the crisis facing the company. Because so much depends on fac- tors outside the company’s control, no one can be certain that the chosen measures will do the job.

Management should treat staff as adults, with respect. The time and effort invested in frank communication with staff, acknowl- edging the ambivalence everyone may feel, and helping them stay focused and produc- tive despite uncertainty, are time and effort well spent. Finally, before implementing any- thing, the company’s human resources department andor legal staff should review the whole plan to make sure it complies with nondiscrimination and plant-closing laws. HELP IS AVAILABLE. Before staff is laid off or hours are reduced at any location, management should check to see whether unemployment insurance programs offer offset- ting compensation. In the United States, such programs are called Work Sharing Unem- ployment Programs (WSUPs). Because WSWs pay unemployment insurance benefits to persons whose wages and hours are cut even a little, they can soften the financial blow of whatever cost-reduction options have been chosen. WSUPs are considered temporary, practical alternatives to layoffs, but hindsight may also show a WSUP to have been the first of a series of increasingly stem measures.

The following example illustrates how a WSUP works. A California employer of 100 employees finds a 20 percent reduction in weekly payroll necessary. Instead of laying off 20 employees, the company enrolls in the state’s Work Sharing Unemployment Insur- ance Program, under which it keeps all 100 on the payroll but reduces the workweek from five days to four. The desired payroll

52 IEEE SPECTRUM MAY 1994

LAY OFF 1 ELIMINATE RUDGEI- CLir U ST SAME WORK ! OF 10% LESS SrAFF

DWGE

PAY INCREASES ELIM~NATE ,-. -.-k OVERTIME

reduction is achieved, and the employees tvxome eligible for state unemployment benefits for the fifth (nonworking) day. The employer retains skilled. motivated staff and. when business improves, employees resume their regular five-day work schedule.

Who may participate in a IVSUP? Gener- ally, any employer forced by a reduction in

HP managers can pick and choose among workforce management options, dependmg on how long they expect a business downturn to last. Short-term disruptions might see them actuating the Fortnight Program, in which employees are asked to take off one day every two weeks without pay, or in effect, a 10 percent pay reduction.

production, services, or other conditions to The Fortnight Program operates in con- seek an alternative to layoffs. California’s i junction with a WSUP and, when it was program also requires that at least 10 per- ~ imposed companywide several years ago, cent of the regular workforce or workforce actually enhanced HP’s public image as a unit (at least h V ( J employees) mill have wages good employer. Other short-term strategies and hours reduced by at least 10 percent. In include placing employees in temporary California, this program is administered by intemal assignments, and having them take t i c State of California Employment Devel- i off extra time with or without pay. opment Department (EDI)) Work Sharing Long-term strategies for balancing the lInemp1oy”nt Insurance Unit. workforce include managed attrition, WEAVING AN OPTIONS NET. Employers large selected relocations, and the excess pro- and small are discovering that an array of gram. This last was used when HP moved a thoughtfully conceived, progressive options plant from one state to another. Employees can be a reasonable and cost-effective alter- , were given up to two years’ notice of the native to layoffs. In Silicon Valley, for exam- move, and in a series of classes, were helped ple, corporate values have led employers to to prepare job search tools and update their design options-laden programs to handle ’ skills. Those who were declared excess were short- and long-term profitability issues. ~ entitled to priority for internal openings. HP

Hewlett-Packard Co., a .55-year-old em- actively matched excess employees with ployer with 1993 sales of US $20.3 billion and available openings, and employees were 96 200 employees worldmide, has always had encouraged to identify their own opportuni- a policy of “eniplo!ment security based on ties. Coupled with HP’s Voluntary Severance pc~rformance.” (hier the years this has led to , Program and occasional early retirement periodc ‘horkforce balancing” and, in recent ~ incentives, the company continues to provide years, this balancing has become a continuous an entire tool box to help managers “do the management-driven process. right thing.”

According to Kelly Murphy, manager of I PLANNING IS KEY. Intel Corp., 25 years old worldwide employment programs, HP’s with 1993 sales of $8.78 billion and approd- workforce goals have always had the sim- ~ mately 30 000 employees, is quietly carving plicity of the golden rule, uncomplicated by out its own niche when it comes to “right- a lot of written instructions and management i sizing” its workforce. According to Pat regulations. “In the end, managers are O’Coffey, Santa Clara internal staffing nian- expected to constantly think about what is ager, Intel’s objective is to redeploy its p e e good for the business, and to treat people i ple from areas of low productivity to areas of with respect, dignity, and sensitivity,” said i high productivity. Because of this commit- Murphy. “We. give managers the resources ’ ment to employment, the company tries hard and tools to really manage. All options are to anticipate technological and workforce available to them to deal with the ebbs and changes and to plan for the staff displace- flows of the business. Hewlett-Packard , ments that will result. expects managus to ‘do the right thing,’ and Foresight was not always a strong com- they do.” ’ ponent of Intel’s staff planning. ]<on

Marenco, corporate internal staffing manager, characterized the company’s former staffing program as “reactive.” “For example.” he said, “in 1984 Intel hired 4000 employees; between 1985 and 1986, it laid off over 4000. In 1986, after the new corpo- ~

rate value of making Intel ‘a great place to work’ was articulated, [the] human resources [department1 shifted its strategy from meet- ings to identify layoff candidates to a proac- tive stance of anticipating the skills needed to staff the planned business model. , Although 1991 and 1992 marked the end of ~

their jobs for 2100-2600 employees, only 11 percent have actually left Intel; 86 percent of affected employees remained successfully emplo!,ed, even while Intel ‘raised the bar’ for skills and performance.”

One of Intel‘s strategies has been to retrain workers to upgrade sk~lls and develop ~

new ones for emerging jobs. Working with community colleges and other resources, the company has developed intensive training programs. For example, in Mask Operations Intel designed an eight-week program to teach technical skills. The first class of 11 ~

employees included mask operators, techni- cians, a documentation clerk. and a few exempt employees, some realizing their jobs were going away and others simply seeking change. At the end of the program, five newly minted mask designers were placed immediately within Intel. The other six needed hands-on experience to back up their 1 classrooni skills. so Intel placed them in ~

internal internshps. Four months later, eight of the original 11 retrained as mask designers had been placed.

While not all situations require designing new training programs from scratch, Intel ~

is committed to retraining as a workforce ~

strategy and as an alternative to layoffs. ~

Besides being good policy for employees and the community, it makes good economic sense, too. Pat O’Coffey, speaking of the mask designer project, observed, “You have to remember that this is such a unique skill ~

that if we had to hire these people as consultants. we’d pay $50-$60 an hour. It’s very ~

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easy math to figure out what the company has just saved. This was one retraining situ- ition that just made sense.” M E EUROPEAN CONNECTION. Mike Evans, Zuropean human resources director for Ray- :hem Corp., comments that while European aws mandating employee notice periods .tied to length of service) are stricter than :hose in the United States, good European :ompanies go well beyond the minimum requirements in designing policies and prac- ices that affect job security. Raychem, a nultinational company headquartered in Menlo Park, Calif., is 37 years old with sales i f $1.4 billion and about 11 000 employees worldwide. With almost 1300 employees in

tion policies very clearly in its UK employee handbook.

resort. The company’s Country Council, which represents the diverse business units operating in the UK, works hard on one or more alternatives to layoffs: placing employees in other positions on a risk-free trial basis and retraining them for other jobs. If a layoff becomes inevitable, Raychem gives employees “substantial” advance notice and compensatory pay packages, and makes out- placement services available to the individual or group.

In Britain, unemployment benefits are available for employees who become “redun- dant.” But there are no work-sharing benefits comparable to the US. program.

According to Evans, Belgium has a work

Belgian employment is also heavily regulated, with most job holders unionized and

Cutting pay or benefits without cutting headcount Lengthen the number of months to all employees’ next salary increases. Eliminate all pay increases for a specified time. Reduce executive salaries for a specific period or permanently. Reduce pay temporarily for all employees by a specific amount or percentage Freeze all vacation accrual for a specific period. Increase all employees’ contributions toward the cost of benefits. Lengthen the amount of time required to earn paid sabbaticals. Suspend paid sabbaticals for a specific time.

Cutting headcount through voluntary measures Create voluntary, early retirement incentives. Allow employees to voluntarily reduce daily or weekly hours. Solicit volunteers to change status from employee to temporary or contractor status. Design job-sharing opportunities. Grant unpaid leaves of absence.

Cutting headcount, pay, or benefits through involuntary measures Require staff furloughs, creating temporary shutdowns or “rolling” furloughs that are less visible

Mandate companywide reduced work weeks; encourage use of accrued vacation. Shut down the company for a few days or a week at a time; encourage the use of accrued

Set up a time-off-without-pay program. Implement a redeployment program (with real possibilities for employment elsewhere in the

Outsource functions or activities, arranging for the new vendors to make job offers to current

Carry out layoff or reduction-in-force program (with few or no options for retraining or internal

“Grass roots” options that may emerge from employees’ suggestions Reduce expenses by carrying out cost-saving ideas and improving process controls Accelerate performance counseling to weed out poor performers. Delay pay increases. Freeze all pay increases and benefits enhancements. Eliminate overtime. Impose companywide shutdowns, allowing employees to use accrued vacation. Implement an across-the-board reduced workweek, allowing the use of accrued vacation.

to customers; encourage use of accrued vacation.

vacation.

company and serious attempts to retrain and connect redeployees with available jobs).

employees.

placement).

pany can tamper with an individual’s job security. Evans has found French and Ger- man employment also heavily regulated when it comes to trimming the workforce. Trade unions or work councils are partners in negotiating staff reductions. Statutory pay- ments for employees can be quite high, and the long periods of notice require planning far in advance. A PLAN FOR EVERYONE. Hewlett-Packard, Ray- chem, and Intel are huge corporations. But it would be a mistake to assume that only big :ompanies can afford to weave a fabric of :ost-reducing alternatives to layoffs. Con- sider CXR Telcom Corp., a manufacturer of :ustom products for use by the telecommu- lications industry.

CXR, a $30 million company founded in 1984, has a headcount of just under 200 worldwide, half of them in Silicon Valley. Fol- lowing a merger and general economic belt- tightening, the company has been riding herd on costs for the past two years. Tim Franey, director of manufacturing at CXR, spearheaded a comprehensive effort to ensure the manufacturing functions were sized right for the business. Shortly after the merger, he reduced manufacturing’s headcount from 92 to 75 by selectively encour- aging attrition as well as by managing performance issues.

Productivity rose by about 40 percent. But in 1991, with the recession in full swing, still deeper cuts were needed. Franey’s twin goals were to preserve his solid workforce and to keep faith with his employees. CXR was not overstaffed, but it did have to cope with a depressed economy.

To deal with those conditions, Franey designed a variety of tactics to skirt outright layoffs. He instituted a four-day work week, but kept the facility open Monday-Friday by rotating four-day schedules. He tied into Cal- ifornia’s WSW to help compensate for the employees’ 20 percent pay cut. Pay increases were frozen, and he encouraged employees to use accrued vacation time and unpaid leaves of absence. He intensified cross-training of everyone on the production staff and concentrated on identifying oper- ational efficiencies.

These tactics sufficed until the breadth and depth of the downturn required more dras- tic measures in early 1993. Then, he did in fact reduce his workforce by about 10 percent. He did so by eliminating jobs that had been made unnecessary because the past year’s intensive cross-training had positioned CXR manufacturing to function with fewer, more versatile employees. Franey also implemented a fixed fourday week (Monday-Thursday), staffing for peak periods through overtime and the use of temporary help.

Franey notes that during all these cost- reduction measures, CXR lost no production staff to competitors. The little voluntary attrition that did occur was for complete career changes.

Companywide, everyone at CXR partici- pated in a one-week shutdown over the July

IEEE SPECTRUM MAY 199

3 holiday, during which employees took How to keep ship unused vacation. A sliding-scale salary freeze

crew afloat went into effect for all employees; staff making over $50 000 a year took a 10 percent cut while executives took a 25 percent pay cut. The lost wages were tracked under a deferred salary plan, and the company expects to replace them when it becomes more profitable.

In July 1993, at the beginning of a new fis- cal year, CXR finally decided on a companywide layoff. Franey, allowed to develop and act on his own stratem, made careful cuts at all levels. He and his supervisors worked diligently (but "unofficially") to assist laid-off employees who asked for help and, to the best of his knowledge, most landed new jobs. In fact, the cross-training CXR did during slow times added to former employees'mar- ketable skills. decreasing the time they needed to find new work.

CXR is an example of a company that used an array of softer options before resorting to letting people go. Perhaps because employees could see the many efforts taken to preserve their jobs, and certainly because Franey and CXR management made con- stant, concerted efforts to communicate openly and honestly. morale has remained high. Franey has monitored his quality and on-time indices, noting that employees have never let either slip. Company-sponsored events such as picnics or Christmas parties have been successfully replaced by informal potluck lunches, organized by the employees themselves.

Because CXR maintained its commitment to employee benefits (for example, company contributions to the 401(k) program), employees remain committed to CXR's suc- cess. And by using tuition reimbursement, employees have been able to maintain or improve their slulls. Like Intel, CXR is dedi- cated to keeping people at work. And CXR's manufacturing staff has been voting with their feet to stay and weather tough times in partnership with their company, perhaps not despite, but because of, the cost-control measures. WORTH THE EFFORT? The prospect of laying off members of their staff can throw even thoughtful managers-including human resources professionals and top corporate executives-into a blind panic, reducing them to mouthing rote responses to the crisis. Anticipating the loss of valued employees is stressful and depressing. Under those conditions, neither the executive staff nor the human resources people are likely to wel- come questions on either the premises underlying a layoff decision or the processes selected for accomplishing the task.

Understandably, they would prefer that engineering managers simply draw up a list of the unlucky, take a double dose of antacid, listen to legal counsel, and begin the process of restructuring the work for fewer people. After all, layoffs are an inevitable fact of life in high-tech corporations. Rght?

Absolutely not! Managers cannot afford to

Cut costs by X percent

Correct a perceived companywide overstaffing problem

Correct overstaffing in engineering

Shift the company's technological direction

Reorganize, consolidate, or streamline functions

Eliminate all contractors, consultants, and temps

Recover X percent from your total budget, not just from the salary and benefits lines.

Freeze hiring, consolidate functions, provide realistic companywide feedback on future career growth, accelerate the exit of problem nonper- formers, cut nonrevenue-producing functions first

Listen and learn. Why does management think engineering is overstaffed? Are there particular employees whom others believe to be extraneous? Why? (Keep your mind open for this discussion. You want to gather information right now, not launch into an unretractable defense of your staff. Listen and reflect on the observations of others. Respond later, within the context of your overall plan.)

Truly understand where the company wants to go technologically. Why? What engineering projects does management want to stop? What devel- opment efforts does it want to scrap? What current products and tech- nologies will they allow to die with little or no more technical support? (Again, listen and reflect on this information. Respond with data, laying out the advantages and disadvantages of this thinking.)

Identify related functions that can be merged, or at least streamline related functions for purposes of evaluating and retaining key staff. For example, a technical sales and customer support group may be staffed by engineers even though it is really part of the sales organization. In this case, engineering and sales should collaborate on decisions about employees whose skills cross functional lines.

Alert management to the possibility that you will need to maintain one or more key contractors although regular staff may be let go. Technical contractors often have critical skills that employees lack. Since you probably cannot cancel contracts without notice, at the least you should let management know that your cost reduction plan will likely use contractors during their notification periods.

become numb to the effects of laying off staff. It is up to them to combine ingenuity, integrity, care, and energy to ensure that human flotsam does not float in the corpo- ration's wake. When laying off employees becomes a quick and easy fix to myriad business and management problems, the entire business environment is degraded and everyone-laid-off and remaining, management and staff-becomes a casualty.

A recent nationwide survey showed that 'hearly half of the nation's largest employers predict that they will have to lay off workers by this time next year," while "84 percent said they had not considered putting workers on a four-day work week." Responses also supported trends toward hiring more temporary workers, while more than 60 percent of respondents said it was fairly difficult to find qualified workers.

Layoffs should be hard work. They tear at our social fabric and create displacements that can extend far beyond a particular position, place, and time. If you find yourself in the meeting described at the beginning of this article, have the courage and self-disci- pline to think through all the options. Take a page from the Europeans and involve your staff in identifying cost-savings. Look first at ways to maintain personal pride, employment, and benefits. Take advantage of programs in your state that can help you and

vour employees weather the storm. TO PROBE FURTHER. I,essons Lecinicd: Dis- pelling the Mjtks qf Dozcwsiziizg (Right Asso- ciates, Philadelphia, 1992) discusses the actual experiences of 1203 people from 23 industry groups in 18 of the United States. 1992 ilTutionul Cost Per Hire Surwy

Kepot? (Employment Management .kiockd- tion, Raleigh, K.C.; 1993) provides data on recruitment and staffing activity in the United States.

In the United States so far, 16 states have Work Sharing Unemployment Programs: Arizona, Arkansas, Connecticut. Hot-ida, Illi- nois, Iowa. Louisiana, Maryland, hlassachu- setts, New York. Oregon, I'ennsylvania, Rhode Island, Texas. Vermont. and Wash- ington. Details on the programs, which are not identical, are available from the respon- sible agencies in the indibidual states. + ABOUT THE AUTHORS Helen Gracon I S a nalion- al/y cenihec career rou:iseliii wno has worked

wit17 iechnical professionals iii career tiansi?i'on Maoreeii Clark is a humaii resouice man- agemeni consiilian? with parlicdar expeitise in corporate career mailageme,nt piograms Bolh have masters' degrees in counseling They would very mocl: /ike to heai abcui readers' experieiices wit0 /ayoff aitematves Commenfs should be sent to :hem ai 747 Holly Oak Dr Palo Alio CA 9.2303 or by e - m i . 7332 1 1570@"ngi!serve coni

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Layoffs should come last