Chapter 2
Start with the Work

Muscle or fat?
Human costs
Faulty assumptions
Wrong starting point


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Chapter 2

Start with the Work

Excerpt from Rethinking the Corporation

By Robert M. Tomasko


Many - possibly most - downsizings fail.

That is the message conveyed by studies of the aftermath of the wave of global corporate cutbacks that began in the late 1970s. More than half the 135 major U.S. companies that attempted massive restructurings failed to achieve significant increases in their value relative to their competition, reports The Economist.

A group of University of Michigan professors spent four years studying the effects of downsizing in 30 automobile-industry companies. Among their main observations: white collar productivity has made little significant improvement. Administrative costs in many American firms were still far above those of their strongest global competitors.

Unmet objectives
A broader ranging study by a leading actuarial firm found an even bleaker picture. It asked over 1000 companies what they had hoped to achieve from their downsizing or cutback efforts. Then they were asked if their expectations were met.

Their objectives covered a broad range:

- Almost 90% wanted to reduce expenses (but less than half actually did!)

- About three quarters hoped for productivity improvements (only 22% achieved them)

- Over half wanted to improve cash flow or increase shareholder's return on investment (but less than 25% were able to)

- More than half expected to reduce bureaucracy or speed
decision making (and only 15% did).

Many of these downsizers sought improvements in customer satisfaction and product quality from their reorganizations. Others expected to become more innovative or better able to utilize new technologies. But fewer than 10% felt they had met their goals in these key areas.

Corporations commonly streamline operations to improve their competitive position. But only 191 of these 1000 businesses reported increases in competitive advantage resulting from their downsizings. David Heenan, senior executive of the Hong Kong-based multinational Jardine Matheson, warns that companies shouldn't "... expect an organization with anemic headquarters to forge breakthrough strategies."

Muscle or fat?
Exxon - rival with Royal Dutch Shell for the accolade of "world's largest oil company" - has had more than its fair share of criticism for the ways it downsized. But its experience has some important lessons for other companies, and is worth considering. Some critics have charged that Exxon's shift from a "cradle-to-grave" to a "lean and mean" company came at the price of cutting muscle as well as fat. R&D expenditures were cut by 20% during a period when Shell increased its research spending by almost a third. Nor have Exxon's oil exploration efforts been as aggressive as those of some of its global rivals.

But probably most stinging have been the criticisms Exxon received in the wake of the 1989 Alaskan coast oil spill. The New York Times charged that Exxon had responded to that incident in "slow motion," and questioned the extent Exxon had been blindsided by the reductions in its headquarters staffing from 1362 to 320.

Several former Exxon executives claimed this massive cost cutting made the company more "accident-prone." They attributed this in part to overworked survivors of the downsizing, and in part to the elimination of a group of oil-spill-response experts who were the repository of much of the company's know-how on this subject. Exxon's top environmental staffer also was moved out of corporate headquarters during the pre-Valdez restructuring, a move a now retired company official felt signaled a weakening of commitment to environmental concerns.

Restructuring's failures also have taken other forms. Some have more a human face.

Human costs
Harry Levinson, a pioneer in the application of psychological insights to management, has seen many companies "blundering" through the change processes involved in reorganization, merger and acquisition. He observes: "Early retirements have left many ... bereft of organization memory. There is much reinventing of the wheel." Levinson also fears that some companies "will never regain the enthusiastic commitment of once loyal employees."

A survey of Industry Week's readers supports Levinson's concerns. Sixty percent of the middle managers polled said they feel less loyalty to their employers than they did five years ago. Many managers who survived large scale cutbacks have ridden emotional see-saws ever since. First feeling relief and sometimes even elation that they were spared job-loss, many soon found this sense of well-being replaced by a combination of guilt and despair. One Georgia-Pacific headquarters manager felt: I'm obsolete. I'm at a dead end. There's no way up. No way down. And no way out."

A Los Angeles branch manager of a division spun-off by Raytheon echoed this concern: "There's very little upward mobility around this company anymore, and I'm out of here as soon as I can land something decent."

Peter Drucker's view of the human aftermath of restructuring is equally as blunt. "The cynicism out there is frightening. Middle managers have become insecure, and they feel unbelievably hurt. They feel like slaves on a auction block."

A manager in a major New York bank became very cynical about the results of the bank's continual reductions of staff. He observed that, while too many good employees were "thrown out on the street," the same top management team that got the bank into all its problems with foreign loans and over reliance on interest spread income was still in place. He felt that the post-downsizing atmosphere was one in which "instead of trying to get work done, people are constantly covering their ass." His biggest complaint was about how to deal with the concerns of his subordinates, in the face of the bank's uncertainties. "When someone asks you, 'What's my career path?' and you don't have one yourself, what do you say?"

When this manager's comments were reported in a national business magazine, the bank's personnel director quickly wrote a damage control letter to the editor. The director cited evidence from quarterly polls of employee attitudes to show that most middle managers took a favorable view of the restructuring, and that since its occurrence they found their jobs more fulfilling.

Charges. Countercharges. At times it is difficult to sort reality from perception. One fact is beyond dispute, though. Three years after this exchange, the bank's top management found their competitive position had declined to the point that the bank's best hope for the future was to be acquired by a stronger institution. Now its identity and organization has disappeared - at the cost of several thousand additional lost jobs.

The impact of these human costs has not been lost on the competitors of companies going through retrenchment. Kevin Walsh, an executive vice president of a bank competing with Chicago-based Continental Bank Corporation observes: "It's tough for them to keep their morale up when they're going through that kind of restructuring. We try to take full advantage of any signs of weakness like that. We go for the throat."

Continuous downsizing
Some of these adverse human reactions were results of a boomarang-like effect: just when you feel you gotten rid of the problem it comes back at you, with a vengeance. Too often downsizing only begets more downsizing.

Successive rounds of cutbacks seem to be the fate of many companies in industries such as computers, financial services, and telecommunications. One consultant who studied the aftermath of corporate restructuring in over 800 companies discovered almost all of these found it necessary to replace people they had dismissed. A quarter of these businesses replaced 10% or more.

Chrysler corporation, a great turnaround success story of the 1980s, illustrates this unfortunate pattern. After reducing its workforce by a third in the early 1980s, it allowed staffing levels to balloon by mid-decade to the point where they surpassed the pre-turnaround headcount. By the early 1990s a Chrysler executive was forced to admit "We allowed ourselves to get fat," as he announced the first of a new series of programs to re-reduce white collar jobs - efforts that eventually led to the sale of the company to Daimler Benz.

Some companies tire of repeatedly announcing the "last cutback," and declare themselves in a state of continual downsizing. The message to employees is that their jobs will be, for the foreseeable future, continually at risk. While this might be interpreted as a sign of realism and candor, it is too often a lame excuse for poor planning, suitable only for a business in terminal decline. What company would make similar public projections about its expectations for ongoing market share losses, margin shrinkages, or earnings reductions?

John Whitney, a Columbia business school professor and leading academic authority on turnaround management, likes to tell his students there are three stages to the successful revival of a business. First comes the crisis actions that stop the company's hemorrhaging, then the business must be returned to profitability, and finally a way needs to be found to grow the company again. The first two of these usually involve deep headcount reduction and tight cost control. But these emergency tactics, if kept in place too long, can make it impossible to make the intelligent investments needed to reach stage three. For this a different mentality, and possibly a different management, is needed. Otherwise the once-troubled business might find it is good at only one thing: cutting back.

Faulty assumptions
Behind these statistics and stories are several assumptions about strategy and organization that guide, at least implicitly, many companies' reorganizations. They reinforce the dangerous impact of the conventional wisdom discussed in the Introduction. They are of questionable soundness, and have led many businesses into a number of difficulties. Here are the most frequently troublesome.

Growth can't be all that bad. Many companies are addicted to growth, sometimes at the cost of their survival. This is what causes the fat to return. We have overlearned the lesson of economies of scale, and have under appreciated how size creates inertia. The most popular basic economics text in use when most American executives studied business told them "large size breeds success, and success further success."

The incentives behind bigness are unmistakable. Psychologically, how many executives of mid-sized businesses haven't dreamed of being listed among the Fortune 500? Which Fortune 500 company would prefer not to make the Fortune 50 list? Financially, for chief executives, generally the larger your company, the larger your pay. For middle managers, the larger your department, the larger your paycheck.

Drucker sums up the consequences of these tendencies by maintaining: "A penalty of size is that you try to do everything, and no one can do everything well."

The best way to deal with unnecessary overhead is by frontal assault. When times turn hard for a business, as they always do at some point, head-on overhead cost reduction is a common first priority. Unfortunately overhead frequently behaves like the hydra - you can cut off one portion, only to find it quickly grows back. Lasting changes in a company's administrative cost structure require rethinking the basic structure, not just whittling away at its edges.

Too often a great deal of effort is devoted to putting an artificial "value" on each component of overhead, when what is really needed is a bottom-up examination of the work processes in place that are generating the need for the overhead in the first place. Overhead activities are symptoms, not the disease.

Clever, quick-fixes will solve most problems. Overhead reduction campaigns are the most commonly attempted quick fix. Early retirement programs are another. One postmortium of downsizing companies who offered these seemingly attractive early-outs found that 80% of the firms offering them ended up losing good performers, people they wanted or needed to keep.

Another "creative" approach to payroll reduction is the institution of a two-tier pay system. Newcomers are paid at a significantly lower rate for doing the same work as those previously hired. Tightening labor supplies and workforce resentments have limited this tactic's usefulness. This resentment factor should not be underestimated. Some employers have noticed productivity drops on the part of the lower paid second tier workers - drops that often wipe out the cost advantage of the dual system (and bring their effective pay per unit they produce back up to the first tier worker's pay rate)

The built-in inequity of this quick-fix has caused problems far back in history. The Roman Emperor Macrinus, in 217 A.D., tried something like this when he reduced salt rations and pay for new recruits, but kept compensation at the old levels for those already on board. This was an early attempt to solve Rome's budget problems through cuts in military spending. His move caused such dissension among both new hires and veterans that a mutiny ensued, and the soldiers killed Macrinus.

Pay concessions, which have their place as a tactic to cope with temporary emergencies, can also backfire when they are used to cope with a long term decline in competitiveness. One American company attempted to obtain a 40% wage cut from its factory workers. The goal: to bring costs closer to those of its Asian competition. As happened in Rome, the workers revolted and the company suffered a long strike to achieve what ended up as a 10% pay reduction.

The strategic significance of the lower payroll was, however, much less. In this company, as in many manufacturers, direct labor accounted 15% of the total value added. So the the company's net cost saving: only 1.5%, achieved at the expense of significantly deteriorated relations with the employees upon which the company's future competitiveness depended.

The place to start is headcount elimination. Almost everybody does. Downsizing, rightsizing, streamlining and restructuring are all euphemisms for reducing the size of the workforce. It is an agonizing, painful process, an emotional "hot potato" that most companies try to get behind them as quickly as possible. And judging from the studies and examples cited previously, one that is not producing - even at very high cost - the benefits it promised.

It is a problem not limited to the private sector. When the chiefs of the U.S. Army, Air Force, Navy and Marines sent their spending goals to Richard Cheney, then Secretary of Defense, each military service showed it anticipated significant staffing reductions. But the assumptions behind their plans showed they were still oriented around the mission of the Cold War, rather than around the changing challenges of the period they were in.

On a more micro level, this is a trap that many Japanese companies have avoided. They avoid confusing cost cutting with headcount reduction. Consider how they manage the development of a new product. The Japanese predetermine the product's cost - based on the price they feel customers will accept, not on their thick library of manuals of historical costs - before even thinking about how they will make it. Then they use this target cost as the reference point to influence the efforts of their product developers, manufacturing engineers and suppliers. In short, they take what many Western companies assume is an effect, and make it a cause.

This ensures that products are designed to be as least costly as possible, and that the processes used to make them are as economical as possible.

Contrast this with the typical European and American approach to price setting that starts with microscopic measurement of the anticipated labor hours a new product will require (already focusing attention on headcount). Added to this is a formula-determined amount for overhead and administrative charges. This number is finally massaged with a profit margin computation based on the stock market's current expectation of the company's return on investment. All these convolutions and financial abstractions make it very difficult for a manager proposing a new product get a feel for what concretely is making the product cost what the numbers say it will (Is the manufacturing process the right one? Do we have too many steps in the logistics pipeline? Do we need so many progress reports so frequently?). And without this feel, it is very difficult to accurately figure out what to do to reduce its costs - other than to go after staffing levels.

Headcounts are vulnerable because they are very visible in the accounting systems many Western businesses use. But not all non-Japanese companies have fallen in this trap. James Bryant, a vice president at medical equipment maker Baxter International, focuses his efforts on costs, not headcount. He philosophy is: "If I can make costs go away by adding a person, I am going to add someone." This logic is acknowledged by many managers, but practiced by too few.

Minnesota Mining and Manufacturing has also avoided these missteps. It had managed to avoid layoffs among its almost 90, 000 worldwide employees while, over a five year period, reducing labor and manufacturing costs by 35%. How did 3M accomplish this difficult balancing act? With clear, consistent leadership from its chief executive and the willingness to spend money to save money on such items as new plant layouts, automation and just-in-time inventory methods. This cost reductions have also help 3M protect it future. 3M's research budgets, from which its new product introductions flow, are twice U.S. industry averages, a generosity made possible in recessionary times by close watch on costs more peripheral to the core of the company.

The wrong starting point
What went wrong?

Why have positive gains from organization restructuring been so hard to realize? Primarily because too much attention was focused on eliminating unnecessary jobs, and too little on cutting unnecessary work. The importance of outplacing people has been learned, but not the techniques of outplacing work. One downsizing survivor lamented: "We cut the workforce, but left all the work and the old ways of doing things in place."

A recent review of several hundred companies that downsized found that less than half of them took steps to identify and rid themselves of low value work. This puts these companies under tremendous pressure to restaff once their immediate economic pressure lets up. And in the interim, it puts the employees who survived the cutbacks under tremendous pressure to cope with the unchanged workload. This also helps explain the missed objectives of the 1000 companies mentioned at the start of this chapter. Only half actually achieved lasting cost savings, and only a third noticed productivity improvements.

Perhaps this is a good point to bring in the perspective of the architect, our role model for the organizational planner of the future.

Many modern architects have adopted Louis Sullivan's famous dictum: "Form follows function." Their analysis might suggest that a bloated form is really just a symptom of excess functionality. And excess functionality is a result of doing, or attempting to do, too much.

In the Prologue the importance of restructuring companies by changing their architecture was stressed. Building bridges and lowering walls are some of the keys to this new architecture. The architect of these structures might say, if these changes are among the most necessary, does it not first make the most economic sense to consider the possibilities of:

- reducing the area that needs to be enclosed, and

- minimizing the distances that need to be bridged?

Too often companies - and their management consultants - develop elaborate organizational solutions when they might have been better advised to reconsider the nature of the problem: what is the work that really needs to happen? And how? And where? And by whom?

Then comes the hard part, the resizing. Picasso is attributed with saying: "Every act of creation is first of all an act of destruction." The famed economist, Joseph Schumpeter, espoused a view of the successful enterprise as one which "incessantly revolutionizes the economic structure from within., incessantly destroying the old one, incessantly creating the new one." The trick here to plan the movement from old to new in a way that does not lead to mindless destruction and chaos. Which means starting out with a clear idea of where to end up.

What stays, what goes?
How do you know high value work when you see it? This is one of those questions that is easy to pose, and often extremely difficult to answer. A good place to start, though, is by viewing your company from more than one vantage point as you consider resizing its turf.

At times during the design process architects will stand back from their detailed drawings and look at the structure they are planning as a whole, as might a bystander walking by. They focus on it in relation to its site, how well does it fit, should more earth be moved to make way for the building, or should the building's design be modified to accommodate some unique feature of the terrain?

They will, at other points in their planning, try to understand what they are doing from the inside out. How will the space be perceived by those using it? Will the floor plan of the new office building help or hinder the work done by those who will occupy it?

Without the benefit of this shift in perspective, the architect might design a functionless beauty, or an efficient eyesore.

Similarly, dual perspectives are essential when planning the restructuring of a corporation; many reorganization efforts flounder because they take a too simple-minded view of the enterprise's work.

One useful perspective is the "big picture," the view from the top of the corporate hierarchy looking down. Analysis of this macro view can help sort out which parts of the business are central to competitive success, which tangential, and which out-and-out hindrances.

This big picture - after some degree of editing - then needs to be complimented by a bottom-of-the-hierarchy-up examination of what is being done where and how. This, more micro-perspective, will also provide the organization planner with a number of targets for resizing.

The two chapters that follow consider each. They start with the macro view; there is no point fine-tuning something that really should be discarded.

© Robert M. Tomasko 2002

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