If you're trying to get physically fit, don’t try to lose weight by going on a diet.
If you’re trying to get organizationally fit, don’t try to cut costs through layoffs.
In my new book, Building the Fit Organization, I argue that real fitness isn’t defined by overall weight, or by body fat percentage. Sure, if you’re 5’6” and weigh as much as a double-door Sub-Zero refrigerator, you should probably put down the box of Twinkies. But if you’re a 5’10” fashion runway model tipping the scales at 102 pounds soaking wet, you’re probably not very fit either. Skinny, yes. But not especially fit. Real fitness isn’t just about body mass index. It includes cardiovascular capacity, muscular strength, and flexibility. You can’t develop those by dieting.
There’s an organizational parallel here: a company can’t get fit simply by cutting costs, especially through layoffs. To be sure, it can improve its income statement in the short term by laying off workers, closing offices, banning color copies, and getting rid of the coffee machine. That’s not going to make the organization fit, however, because organizational fitness isn’t just about low expenses. It includes the ability to react quickly to market shifts, to create and deliver new products and services, and to continually improve process efficiency and effectiveness—all in the service of delivering greater value to customers. Cutting expenses as a way to organizational fitness is like cutting calories as a way to personal fitness. At its logical extreme, it results in corporate anorexia nervosa—a feeble organization filled with dispirited employees unable to compete in the marketplace and serve customers.
Organizations that simply cut expenses tend not to maintain their new weight either. More often than not, there’s no concomitant reduction in work—it simply gets shifted around after layoffs. Employees take on the additional responsibilities of a colleague or a boss. They work longer and harder, but because the underlying processes aren’t functioning any better, and because these companies haven’t focused on improving how they operate, work doesn’t get done faster, better, or more easily. Eventually, after the financial crisis passes, the organization brings back the coffee machine, permits color copies, and caters meetings again. Travel restrictions are lifted. Gradually, the company hires people to refill the roles that were eliminated earlier. The weight comes back on, and the organization is just a market downturn away from another round of layoffs and cost cutting.
A new article from Knowledge@Wharton provides further support for my argument. The authors point out that there's precious little evidence that layoffs are good for operational performance or for long-term profitability:
Contrary to popular belief, there’s not much evidence that layoffs are a cure for weak profits, or, to use the current euphemism, that they reposition a firm for growth going forward. . . . There is no evidence that cutting to improve profitability helps beyond the immediate, short-term accounting bump. . . . Employers also often underestimate the cost of layoffs in immediate financial terms, as well as in the lingering burden it places on remaining resources — both financially and emotionally. There is definitely a huge problem in HR generally that the stuff that is easy to put on a spreadsheet outweighs the stuff that isn’t.
And then, of course, there's the downstream consequence of those layoffs:
But what does that [the short term cost reduction] mean two or three years from now when the firm is growing and now has to ramp back up by hiring a bunch of people? Now the firm must incur all these costs to hire and train workers. In addition to the laid-off employees. other workers may now leave voluntarily, all of which is disruptive for the firm and lowers productivity. Layoffs may look good on paper because they have an immediate effect on costs. Yet in reality there are a lot of costs that layoffs impose on firms that might not show up on an income statement quite as clearly.
What's the alternative? Just as a person striving for true physical fitness has to increase strength, cardiovascular capacity, and flexibility, so too must an organization focus on increasing value delivered to customers. Wayne Cascio, a professor at the University of Colorado at Denver points out that companies that that have avoided layoffs in times of financial difficulty position themselves for greater growth when the good times return:
[They] come out the other side with positive results. "He points to Southwest Airlines, which, like the rest of its industry peers, suffered during the Great Recession. People were not flying as much, so they took their job recruiters — who are typically great with people interaction skills — and instead of laying them off, redeployed them into frontline customer service jobs, which made flying on Southwest a better experience for its customers. And as the economy recovered they transitioned back to their original jobs.”
Another approach was taken by Steve Jobs, Cascio says, who took advantage of downturns to focus on innovation. “When the dot.com bubble burst, he said, ‘We are going to invest our way through the downturn.’ Look back at when the introduction of the iPod was and the iPad. It turns out shortly after the 2001 recession ended was when the iTunes Store opened. Then after the Great Recession, they bring out the iPad in 2009 and 2010. So while the economy was bad and people were being laid off, Apple was actually investing in R&D.
And of course, we can't ignore the human element, which is nearly impossible to capture in a spreadsheet. Loyalty, morale, commitment to one's job and one's company don't appear in a company's cash flow statement. Yet according to Wharton management professor John Kimberly,
if a company can manage through a rough patch with creative strategies without laying off, employees will emerge with a greater sense of loyalty, and that loyalty will pay off for the company. “I believe at the heart of the issue, that is going to motivate outstanding performance, in any company, no matter what business they are in.”
If you're going for fitness -- personal or organizational -- you've got to do more than cut your food intake or cut your employees. Long-term, sustainable fitness requires that you learn to increase value to your customers. Any other approach will give you a short term thrill, but leave you too weak to compete in the future.