Are Staff Reduction Recession Solutions?

Cost Cutters’ Advice: Act Sooner, Don’t Flinch


Job cutbacks are proliferating, as a deteriorating economy alarms many top executives. But if bosses think sizable layoffs will be regarded as a sign of courage, they may be in for a surprise.

Two of the best-known champions of efficient, cost-minded management — Larry Bossidy, the former chief executive of Honeywell and James Kilts, the former CEO of Gillette — both say that smart head-count management requires constant attention, in good times and bad. Sudden moves to shrink payrolls aren’t what their playbooks are all about.

“It can take several business cycles before you really learn how and when to do layoffs properly,” Mr. Bossidy said in an interview. “At first, people always do them too late.”

In recent months, capital markets have been in turmoil, and the nation’s economic output has softened. But employment rates stayed relatively strong — until last month. The Labor Department reported this past Friday that the U.S. economy shed 80,000 jobs in March, the biggest drop in five years. The overall unemployment rate leapt to 5.1% from 4.8%.

Now, more job cuts are piling up. Advanced Micro Devices announced Monday that it is cutting 1,600 jobs, or 10% of its work force, in the face of weakening demand for its semiconductors.

Last week, Dell and Motorola said they planned to expand existing layoff programs.

Such companies might not have much choice at this stage. But Messrs. Bossidy and Kilts, who are both now involved in making private-equity investments, take the long view: They are more inclined to focus on what could have been done differently earlier in the cycle. Dell, for example, has been having trouble reworking its direct-to-consumer business model so that it also can be a major presence in retail outlets, Mr. Bossidy observes.

In general, both Messrs. Bossidy and Kilts said, CEOs can get trapped in an overly rosy view when conditions start to deteriorate. They may be so eager to be liked that they shy away from tough decisions until they have no choice. Or CEOs may be relying too much on upbeat advice from sales and marketing lieutenants, who tend to predict rapid recoveries.

Managers also can dawdle too long over shedding underperforming assets, waiting until a recession forces their hand, Mr. Bossidy said. “I like to sell when things are going well,” he said. “You get a better price.”

Mr. Bossidy’s remedy: focus mostly on financial data. If sales and order trends are disappointing, quickly come to grips with the reasons and formulate a response.

At Gillette, Mr. Kilts was famous for “zero overhead growth,” keeping head count down in headquarters jobs even as his overall business was growing. “The best time to pay attention to this is all the time,” he quipped in an interview.

“I’ve got quite a reputation as a cost cutter,” Mr. Kilts added. “But if there’s any mistake I’ve made in this area, it’s usually been along the lines of: ‘I should have gone further.'”

When companies do announce big job cuts, executives often hope investors will applaud. That’s because the company is trying to become leaner and more cost-competitive, even if the move means taking severance charges and enduring short-term reputational damage from mass dismissals.

But the notion of a layoff-inspired leap in a company’s stock price is usually a mirage, according to a yet-to-be published study by Gunther Capelle-Blancard, a professor at the University of Paris, Pantheon-Sorbonne, and Nicolas Couderc, a researcher at the same university.

On average, the two academics say, share prices of companies announcing layoffs do about 1.2% worse than market benchmarks in the three trading sessions after news of the job cuts is disseminated. Companies fare even worse — a 2.2% drop — if the job cuts are defensive and simply reflect a business downturn. They fare a bit better — but still lose ground — if the layoffs are part of a broader retooling of the business without obvious economic pressures.

Their study is a “meta-analysis” that combines the results of 40 published studies looking at stock performance in specific countries during periods from 1990 to 2006. Mr. Capelle-Blancard says he was surprised that the data show investors almost universally view layoffs as bad news, regardless of whether the focus was on the U.S., Europe or other markets.

A myth has grown up, perhaps inspired by the example of International Business Machines in the mid-1990s, that big job cuts can jolt a slow-moving older company into a renaissance of growth. That did work for IBM, under its charismatic CEO at the time, Louis V. Gerstner Jr.

But IBM’s turnaround increasingly looks like a rare, once-in-a-generation comeback that defied the odds. Companies slashing payrolls these days can consider themselves fortunate if they merely stop the erosion in their prospects..