Cutting Staff: Save Now, Pay Later

Last Updated Apr 21, 2009 9:29 AM EDT

Some businesses have failed to learn the limitations of short-termist approach, even after the shock of the worst downturn since the Great Depression.

I had lunch last week with a senior executive at a extremely large public company -- a financial services business, in fact. (That narrows it down, but I'm not going to get any more specific to protect her anonymity.) When she told me about major job cuts in her function of the business, I wasn't surprised. After all, financial services firms not only need to save money, they also need to be seen to save money right now.

But two further facts did shock me. First, it was a wholesale clear-out. The company had made redundant pretty much an entire cadre of senior functional specialists, all of whom had put in solid time with the business (30 years in one case).

That stuck me as questionable: not only would that denude the business of most of its skills base in a key area, it also meant they were throwing away decades-worth of accumulated knowledge about the company, its operations, its strategy and -- crucially -- its past. These people must have seen almost every shade of wrong over the years, and they know how to avoid those same mistakes in the future. It's a suicidal brain drain.

Second, the manner of this clear-out was pretty drastic. Classic "managing out" techniques had been used -- over-aggressive supervision, public humiliation, unrealistic goal-setting -- all the usual soulless stuff. If that didn't work, big cheques had been written. Now, given that these were mostly experienced guys, nearly all of them knew how to wait it out and collect their pay-off. So the aggressive management was never likely to work... but they did it anyway.

(Would it surprise you to learn that the CEO of this august enterprise is pulling down more than £5m in remuneration? Kind of goes with the territory...)

This seems to me the very antithesis of modern management. Even in the teeth of a recession, we're seeing businesses from all parts of the spectrum adopt creative and thoughtful approaches to restructuring. Workers are playing their part too. One provincial solicitors' firm needed to cut the payroll by ten per cent, and both partners and workers were happy to shift to a nine-day fortnight, protecting everyone's job. Similar creative has been shown by big firms such as Honda.

But it's not just about livelihoods. These businesses are protecting themselves. Most obviously, they're retaining valuable skilled workers at a time when our economy has little use for blunt, unskilled labour. In the Great Depression, there were lots of "shovelling" jobs, so you could lay off one set of drones and hire back a different set when you needed to. Now? No chance. Just think of the training costs for bringing fresh hands onto a high-tech production line.

Two other benefits:

  1. Skills are key, but knowledge is also important. People who know how your company operates, who its customers are, what they like, how to get the best out of suppliers, what quality looks like, what can go wrong... they add a surprisingly large slug of value.
  2. The more people you lay off, the longer the recovery is going to take. If everyone remains in work in 90 per cent of their salary, fewer homes are repossessed, more people need to travel to work, more lunches are consumed, more cinema tickets bought than if 90 per cent of people stay in work and ten per cent see their livelihoods collapse.
Call it enlightened self-interest. To discover one of today's financial service companies lacks it... well, it comes as no surprise, really.

(Photo: Hazel Motes cc2.0)