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Sherin
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- What do you do now? What is your goal?
- I am a Freelance consultant / Journalist ..
My baisc goals are
1- To enhance my knowledge in business communications and Business reporting ..
2- To learn more about Human resources tasks
3- To meet new clients and business partners
- What is your interest in business?
- to Learn about the Best practices In large corporations when facing recession or down sizing
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http://www.allbusiness.com/downsizing/3102531-1.html
http://www.allbusiness.com/labor-employment/human-resources-personnel-management/11601902-1.html
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Cost Cutters: Trimming Payroll, Without Layoffs
Cost reductions, downsizing-related layoffs, and HR practices. By Gandolfi, FrancoPublication: SAM Advanced Management Journal Date: Sunday, June 22 2008
Introduction
Organizational decimation, or downsizing, has been a pervasive managerial practice for the past three decades. If a firm finds itself in difficulties, the widely accepted corporate panacea has been to cut personnel. While strong empirical evidence suggests that reduction-in-force
Today activities rarely return the anticipated economic and organizational gains (Cascio, Young, and Morris, 1997), there is increased understanding and awareness that downsized companies are forced to deal with the human and societal after-effects, also known as secondary effects, in a post-downsizing phase (Gandolfi, 2007). Research shows that the human consequences of layoffs are costly and devastating for individuals, their families, and entire communities (Macky, 2004). While workforce reductions cannot always be completely avoided, downsizing-related layoffs must be a managerial tool of absolute last rather than first resort (Gandolfi, 2006).
During an economic downturn, a company must carefully consider its options and assess the feasibility and applicability of cost-reduction alternatives prior to adopting RIF-related layoffs. While a large body of research presenting and discussing the alternatives to downsizing has emerged (Littler, 1998; Mirabal and DeYoung, 2005), there is still a lack of conceptual understanding of downsizing-related layoffs as part of an organization's cost-reduction stages (Gandolfi, 2008). It is vital for a firm to factor in the concept of cost-reduction and recognize the specific cost-reduction stage that characterizes the firms' current business position and environment. Ideally, a company should be in a position to determine the expected duration and severity of the business downturn as accurately as possible. To perform that task successfully, the executives need to know the cost-cutting phase that the firm is currently in (Vernon, 2003). A firm's cost-reduction stage refers to the timeframe the organization requires to be able to reduce operational expenditures (George, 2004). In reality, however, accurately forecasting a business downturn can be extremely difficult. Thus, firms have a natural tendency to react to rather than anticipate economic declines (Gandolfi, 2006).
The primary objective of this paper is to present a methodology enabling firms to minimize, defer, or avoid the adoption of RIF, layoffs, and downsizing-related activities. The research introduces and showcases a conceptual framework presenting the cost-reduction stages of a firm coupled with a brief introduction of contemporary (HR) practices that some firms have adopted. Fundamentally, the paper builds upon Vernon's (2003), George's (2004), and Gandolfi's (2008) work of three cost-reduction stages: short-range, mid-range, and long-range phases. Technically speaking, the article constitutes a review and extension of previously published work. The underlying conceptual framework of the cost-reduction stages is depicted in Figure 1.
Cost-reduction Stages
The conceptual framework shown in Figure 1 encompasses three timeframe-related phases commanding several internal cost adjustments that have produced a variety of stage-related HR practices. It is important to note that the HR practices are cumulative. In other words, the practices in each stage are not unique to the actual phase, but applicable in subsequent phases in a cumulative fashion.
First stage: Short-range cost adjustments
The first stage of the cost-reduction framework represents short-range cost adjustments in response to a short, temporary decline in business activities (Vernon, 2003). These business slowdowns are expected to last less than six months (Gandolfi, 2008). Most likely, the firm resorts to minor, moderate cost-reduction measures in this stage. These preliminary adjustments should enable the firm to shun RIF-related layoffs and involuntary cutbacks and return to normal business activity within four to six months (Gandolfi, 2008). Typically, this phase originates with an unexpected drop in sales or a decline in sales forecast. It is characterized by short-term expenditure adjustments to prevent a medium-range downturn or a more lasting, long-range decline. The immediate recognition of a temporary business slip and the resolute engagement in preliminary cost-reduction methods should allow the firm to focus its operations in a cost-sensitive mode for a quick recovery (Vernon, 2003).
The probability of success for the short-range cost adjustments hinges on a number of factors: First, senior management must be able to articulate the business necessity for the cost-adjustment measures effectively and stress the short timeframe of the strategy. A firm's ability to convey the message that preliminary cost-reduction measures at the present time will likely prevent RIF-related layoffs in the future is critical. Second, the HR's role is to communicate decisions made by the board of directors to the entire workforce promptly and to implement the cost-reduction methods swiftly. Third, the employees' flexibility in allowing the firm to modify cost structures increases the chance of success for the planned cost alterations. Therefore, a firm's capacity to overcome a business downturn in the first stage will depend to a large degree on its organization's ability to respond to the new environment by immediately and resolutely modifying expenditures (Vernon, 2003).
Suggested HR practices for short-range cost adjustments. A review of the literature and the popular press reveals several HR-related practices that firms have implemented for preliminary cost reductions. The following is a non-exhaustive overview and explanation of some of the approaches suggested by scholars and implemented by firms in the global corporate landscape.
* Hiring freeze
A hiring freeze is a mild form of downsizing that reduces labor costs in the short term (Littler, 1998). However, a hiring freeze does not imply that there is no hiring activity at all. Some firms hire new employees while cutting jobs at the same time (Vernon, 2003). While this practice may make sense in terms of supplying the firm with key personnel, it tends to send a confusing message to the workforce. As an example, in its latest attempt to fight rising jet fuel costs and a deteriorating U.S. economy, American Airlines imposed an immediate hiring freeze on all management and support staff (Maxon, 2008).
* Mandatory vacation
Mandatory vacation involves requiring employees to use their accrued vacation days or requiring them to take a number of unpaid vacation days during a certain time period. While employees might not want to be told when and how to use their entitlements, they will nonetheless appreciate the reaffirmed job security (Vernon, 2003). At the time of writing, Chrysler plans a corporate-wide shutdown of its U.S. operations during two weeks in July 2008 to improve the automaker's efficiency and boost productivity (Govreau, 2008).
* Reduced workweek
Firms sometimes resort to a reduced workweek. This may translate into a reduction from 40 to 35 or fewer hours, thereby reducing short-term payroll expenditures. While most employees appreciate being able to spend more time with their families, a reduced paycheck is not always welcomed. Also, employees may find that the same amount of work still needs to be performed while they spend less time on the job (Gandolfi, 2008). Nucor Steel Corporation in South Carolina has avoided layoffs for 35 years by resorting to two and three workdays for its employees during downturns (George, 2004). In a similar vein, in 2008, workers at a St. Thomas automotive parts plant in the U.K. voted a reduction in their workweek rather than see 200 employees leave permanently (De Bono, 2008).
* Cut in overtime pay
Minimizing or abolishing overtime pay for employees can be a powerful technique of reducing operational costs in the short term (Vernon, 2003). Firms may institute an across-the-board (i.e., all employees) abolition or confine the cut to selected categories, such as nonmanagerial, blue-collar, or salaried employees (Gandolfi, 2008). In 2004, GM and Ford and car-supplier Visteon Corporation slashed overtime pay for most employees indefinitely (Dybis and Garsten, 2004).
* Salary reduction
Salary reduction methods have been standard practice for firms experiencing unexpected financial pressure. Whereas salary reductions mitigate financial concerns in the short run, extended salary reductions can negatively affect employee morale and loyalty. Also, while companywide salary reductions prevent layoffs, there is a clear risk that top performers will be encouraged to leave for competitors that dangle superior (Gandolfi, 2008). In 2006, White Electronics Designs introduced salary reductions of 5% for salaried employees and 10% for management, while the hourly workers remained unaffected. In 2006, a collation of Intel managers agreed to take a temporary 100% pay cut to avoid permanent layoffs. Prior to that, Intel announced that it had planned to cut 10,000 employees, including 1,000 managers (Paul, 2006).
* Temporary facility shutdown
Temporary facility shutdowns occur when a work site closes for a designated period of time, while some administrative functions still perform (Vernon, 2003). A shutdown allows employees to have time off without using their vacation days. While overall company production decreases, the firm can achieve considerable costs savings, thereby avoiding layoffs. In early 2008, Aleris International shut down its rolling mill production in Virginia to align production with demand. As a consequence, production for customers was phased out and transferred to other facilities within the U.S. (Aleris, 2008).
* Soliciting cost-reduction ideas from employees
Employees appreciate the opportunity to make a positive impact on their workplace and environment. Firms frequently solicit cost-reduction ideas from employees, who are often creative in producing such solutions. This HR practice has proven to be most effective when employees are able to make suggestions in the early stages of cost cutting (Vernon, 2003). At Martin Heyman Associates, all professional construction consultants are encouraged to contribute cost-reduction ideas. Unfortunately, many executives still do not realize that employees are the best source of such ideas because workers on the job are in a prime position to identify and recognize waste (Yorke, 2005).
This overview has shown that there are numerous HR tools at an executive's disposal to reduce short-term expenditures. While some firms have come up with innovative ideas, others have used layoffs as a very first resort. Again, it must be understood that the techniques introduced in this stage are cumulative and applicable in other stages. Moreover, the utilization of each HR practice is unique in that each selected tool will have certain consequences that need to be carefully considered by management prior to adoption.
Second stage: Medium-range cost adjustments
The second stage of the cost-reduction framework comprises medium-term cost adjustments in response to a medium-range business downturn exceeding six months (Vernon, 2003) and up to 12 months (Gandolfi, 2008). These secondary cost-reduction adjustments are frequently signaled through extended company-wide or industry-wide forecasts of diminished sales activity. If properly recognized and executed, the firm may be able to transition to mid-range cost adjustments and thus prevent long-term, RIF-related layoffs and forced downsizing. In this phase constituencies need to recognize that deeper cost-reduction strategies may be required to avert downsizing-related layoffs. Senior management must be able to present the purpose and objectives of the expenditure adjustments convincingly to the entire workforce. This should ensure employee buy-in and commitment. Adopting HR practices in this stage could potentially alter employees' Therefore, the HR department will play an essential role in the conduct and transition of these practices (Gandolfi, 2008).
Suggested HR practices for medium-range cost adjustments. A review of the literature and the popular press reveals several HR-related practices that corporations have used trying to obtain secondary cost reductions. The following is a non-exhaustive summary of practices recommended by scholars and introduced in the corporate landscape.
* Extended salary reductions
Extending salary reductions can be a method of choice if an economic downturn exceeds six months (Vernon, 2003). While the extension of salary reductions can negatively affect employee commitment and morale, advocates stress that employees would prefer a smaller income temporarily than a permanent loss of their jobs. As with short-term salary reductions, there is a risk that high-performing individuals are encouraged to pursue external (Gandolfi, 2008). Firms have generally been innovative regarding altering variable pay options. Specifically, while some firms balance the reduced salaries by distributing once-a-year payments over 12 months, others substitute stock awards for variable cash payment. For example, U.S. firm 415 Production offered an overall 5% pay cut or a four-day work week reflecting the appropriate decrease in pay to its employees (Morss, 2008).
* Voluntary sabbaticals
Voluntary sabbaticals, also called furloughs, allow salaried employees to take voluntary leaves for a designated period of time. Companies may offer sabbaticals with considerably reduced or no pay. Most firms continue to provide benefits during sabbaticals. Sabbaticals enable firms to reduce their medium-term expenditure and can be effective in avoiding downsizing-related layoffs (Gandolfi, 2008). While employees may feel motivated and re-energized upon their return, HR professionals point out that medium-and long-term sabbaticals may cause employees to lose their leading edge and to return with outdated skills. Interestingly, evidence suggests that firms offer generous sabbaticals during times of economic growth but refrain from this HR practice during tough financial periods (Vernon, 2003). Practical examples abound. For example, in 2001, consulting firm Accenture announced that 800 employees qualified for a special voluntary sabbatical program, while 600 employees were going to be laid off permanently (Taub, 2001 ). In 2001, Information and Communication Mobile, a Siemens division, offered its employees a one-year time-out at reduced pay without losing their jobs permanently (Perera, 2001). Siemens was thus able to reduce costs without losing high-performing employees during difficult economic times.
* Employee lending
With this HR practice, the current lends an employee to another employer firm for a set period of time while continuing to pay salary and providing benefits (Vernon, 2003). The borrowing firm, which can be a competitor, in return, reimburses the lending company for part or all of the salary. While employee lending can dramatically decrease medium-range expenditure of the lending firm, some employees may not wish to work for a third party. There is also the risk that the borrowing firm decides to hire the employee permanently once the contracted period is lapsed. As a consequence, the lending firm would loose a critical knowledge base (Gandolfi, 2008). Texas Instruments engaged in lending HR staffers to vendors for up to eight months with the intention of bringing them back to their original jobs at the end of that period. The supplier reimbursed Texas Instruments for their staffers' salaries during the period and agreed not to offer them permanent jobs (Morss, 2008).
* Exit incentives
Exit incentive options give employees the option of leaving the firm and collecting severance pay or taking early retirement (Vernon, 2003). This strategy enables firms to target jobs while recognizing employees for their service and helps the firm retain the remaining employees (Gandolfi, 2008). Exit incentives can be costly and may create an entitlement mentality for the remaining workforce in the future (George, 2004). In 2007, technology-outsourcing firm EDS (Electronic Data Systems) offered extra retirement benefits to its 12,000 U.S. employees in an offer to accept early retirement (EDS, 2007).
Corporate leaders need to be innovative about reducing medium-term expenditures. As with the previous stage, some firms have demonstrated creativity and resourcefulness regarding the design and implementation of medium-range cost-reduction practices. Anecdotal evidence indicates a natural tendency for firms to resort to layoffs hastily by default without considering legitimate alternatives (Gandolfi, 2008).
Third stage: Long-range cost adjustments
The third stage of the cost-reduction framework represents long-term adjustments that are necessary if a firm experiences a prolonged business downturn exceeding 12 months. This stage may be recognized through an extended decline of current and projected customer demand or extremely volatile economic conditions (Vernon, 2003). The third stage generally requires extended expenditure adjustments by the firm (Gandolfi, 2008). In this timeframe RIF, layoffs, and downsizing-related activities are frequently inevitable. The third stage has two phases (see Figure 1). Phase 1 contains workforce reduction strategies that firms commonly adopt after a prolonged business downturn. While RIF and downsizing activities should always be seen as a last resort, firms should avoid mass layoffs at all costs (Macky 2004; Gandolfi, 2007). Companies who find themselves engaged in deep workforce cuts must adopt HR practices that instill loyalty and commitment in the remaining and exiting workforces (Vernon, 2003). In contrast, Phase 2 encompasses HR activities that aim to re-attract formerly laid off individuals and hire new employees in a post-downsizing period. This presupposes that the RIF have been implemented, that the business downturn has ended and reversed, and that the firm is able and willing to re-hire.
Suggested HR practices for long-range cost adjustments.
Suggested HR practices for long-range cost adjustments. Firms forced to embrace permanent RIF and layoffs have reported mixed results. While the execution of downsizing promises immediate financial relief, considerable empirical evidence demonstrates that downsizing-related strategies do not automatically translate into improved organizational performance (Littler, 1998; Macky, 2004). Such strategies have significant secondary consequences for the firm and its stakeholders (Gandolfi, 2006). While downsizing and RIF-related layoffs should always be a strategy of absolute last resort (Gandolfi, 2007), it is clear that layoffs are at times warranted, desirable, or unavoidable. Once the firm has conducted RIF-related activities, the firm will need to re-position itself to be able to re-attract those laid off or hire new employees. Again, this presumes that the economy has bounced back sufficiently and that the firm is in a position to hire again. Some firms re-hire formerly laid off employees, whereas others opt to return to the labor market and seek out new talent. How does the firm attract previous employees? The following constitutes a brief summary of three commonly-used practices.
* Rehiring bonuses
While some firms provide a monetary rehiring bonus for veterans to return within a specified period, others hire laid-off employees as external consultants. In some cases, firms realize that they cut too many or the wrong employees, while in other cases management decides to hire back after the economic downturn (Vernon, 2003). Evidence suggests that employees and consultants return to the downsized firm with improved monetary rewards (Gandolfi, 2006). For instance, in 2001 and after two rounds of deep layoffs, Charles Schwab Corp. offered a $7,500 hiring bonus for any previously downsized employee rehired by the firm within 18 months following the layoffs (Morss, 2008).
* Maintaining communication with laid-off employees
Firms frequently make a concerted effort to maintain friendly relations with laid-off employees (Vernon, 2003). Modern-day technology, including Internet forums, 24-7 hotlines, and e-mail, provides effective ways to foster and sustain positive employer-employee relationships (Lublin, 2007). This is particularly important if firms intend to rehire the former employees when the economic climate has improved.
* Internal job fairs
Firms should make every possible attempt to retain high-performing employees (Gandolfi, 2008). A powerful method is an internal job fair, where firms host events to help place and redeploy downsized employees within the company. For example, the Ford Motor Company is currently putting on internal job fairs in its U.S. plants to entice employees to find new careers beyond the assembly-line (Vlasic, 2008).
Concluding Comments
This paper has presented a methodology of cost-reduction stages enabling firms to minimize, delay, or circumvent reductions-in-force, layoffs, and downsizing-related activities. The depicted conceptual framework is an extension of Vernon's (2003), George's (2004), and Gandolfi's (2008) original work on cost-reduction stages, including an expansion of the third stage incorporating two distinct phases. The research has shown that the key to responsible cost reduction and the selection of appropriate cost reduction methods can be found in the alignment of a firm's cost reduction practices with its current cost-reduction stage. The paper has further established that it is difficult for a firm to accurately forecast the duration and magnitude of a business downturn. Consequently, firms have a natural tendency to respond reactively rather than to anticipate economic declines.
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Franco Gandolfi, Regent University
Dr. Gandolfi, currently director of the MBA/ EMBA programs at Regent University, specializes in human resource management and change management and regularly advises corporations in Australia and Switzerland. His published books include Corporate Downsizing Demystified: A Scholarly Analysis of a Business Phenomenon.