Don't Rush Downsizing Plan, Plan, Plan

November 1, 1993
Bill Ryan still recalls the exact moment he realized his company was on the verge of becoming a fossil. In the spring of 1989, the vice president of human resources for Sea-Land Service sat staring at a business plan that clearly wouldn't work without a major shift in corporate strategy. Sea-Land, a cargo-shipping company based in Liberty Corner, New Jersey, was bloated, inefficient and only marginally profitable. Like many companies, it had become complacent during the booming '80s.

To regain market share and become profitable in the fierce international arena of cargo transport, Ryan knew the company would have to embark on a huge downsizing—one that ultimately would affect upwards of 15% of the work force. After conducting a comprehensive, nine-month study that examined virtually every aspect of the company, Sea-Land created new job descriptions for every position. Then, using zero-based staffing that ultimately determined who would stay rather than who would go, it put all employees at risk of losing their jobs. Employees, from top-level executives to janitors, were rated against the job descriptions and matched with the new jobs. When a new work force emerged, it was one that had "a heavy emphasis on abilities and skills to support the demands of the new organization," says Ryan.

The result? Sea-Land managed to eliminate more than 800 positions and excise five layers of management. In the process, it also slashed approximately $300 million in operating expenses and boosted productivity beyond what it thought possible. Since 1989, the firm, a wholly owned subsidiary of CSX Corp., has seen revenues climb by 30%, to $3.3 billion, and profits have mushroomed by 35%, to $151 million. More remarkably, Sea-Land achieved the results in a global environment racked with recession and cutthroat overseas competition.

Even successful companies downsize.
Every day the word reverberates through the boardrooms and employee lounges of corporate America. Scan the business headlines or watch the nightly news and you're likely to see that IBM, Northrop, General Motors, McDonnell Douglas or Sears has just announced yet another round of layoffs. These days, companies large and small are scrambling to adapt to a radically changing set of conditions. This doesn't include just those companies in financial straits. Even successful, healthy companies are finding that they have to trim their work forces. "The upheaval and carnage throughout the land is overwhelming," says William P. MacKinnon, president of MacKinnon & Associates, a strategy-consulting firm that has offices in Detroit and Boston.

The reasons for the turmoil are numerous: a sputtering economy, increased global competition, the implementation of new technologies that displace jobs, the deregulation of certain industries, and the general consolidation of other industries, such as banking and health care. Moreover, "in some circles it's simply a fashionable thing to do," observes Mitchell Marks, director of Delta Consulting Group in New York City. "There are CEOs who see everyone else doing it and believe it's their ticket to squeeze out greater profits."

Yet the consequences are clear. Even the best-executed downsizing creates tremendous anxiety and loss of productivity. "It's a complete disruption to the work force. It turns a company upside down," says Marks. Statistics back him up. A survey conducted by the New York City-based American Management Association indicates that fewer than half the companies that downsized reported an increase in profits afterward. According to The Conference Board, also located in New York City, 64% of downsized firms that have more than 10,000 employees report lowered morale among those who survived. Thirty percent found that it increased overtime costs, and 22% found that they ultimately had eliminated the wrong people.

How can a company keep its head above water when it's forced to downsize? How can the HR department deal with the array of issues and problems that arise? And what, ultimately, differentiates the companies that are successful from those that fail? One fact is perfectly clear: It's an issue that virtually every company will have to grapple with at one time or another. And today, the architects of a downsizing must redesign jobs and even re-engineer a corporation if they're to make the downsizing truly efficient.

Says Ryan, who sat on the executive-management committee overseeing Sea-Land's downsizing, "U.S. industry finally is realizing that you don't have to be in crisis to begin making an organization more competitive, productive and profitable. People also are beginning to understand that a downsizing is just one tool in an overall strategy. Any company that finds itself downsizing and then hiring employees back, or cutting jobs but not reducing the amount of work, will soon find itself in trouble."

Downsizings should be planned with an eye to the future.
Bill Coffey, corporate director of HR for NYNEX Corp. in White Plains, New York, knows all about the pitfalls of trying to downsize a huge company. After its separation from AT&T in the '80s, NYNEX had to cut 9,000 positions from its managerial staff of 25,000. It instituted a voluntary program that included generous severance, pensions and other incentives. "We were successful in getting raw numbers of people to leave, but we were very unsuccessful in retaining some of the best minds," he says. "We wound up with too many people in certain divisions and not enough in others." Ultimately, the company wound up backfilling 4,000 positions and spending millions of dollars to get back on track.

When the telephone company saw another downsizing looming in 1991, Coffey vowed not to let history repeat itself. "We knew we couldn't play that ball game again," he says. Today, NYNEX has a workplace-management plan that automatically kicks in when conditions warrant intervention within any department or division. Staffing decisions no longer are initiated by the CEO or chairman, but by the head of each business unit. That means that while one division may find itself shrinking, another may be growing. Coffey thinks that that has created a far more responsive and effective management team.

Last year, when the firm's New York Telephone found itself needing to trim the number of engineers from 500 to 400, the program worked flawlessly. After creating a formal business case, which included reasons and rationale for the staff reductions, all 500 employees received notification that a reduction would be taking place. A special team established updated criteria and requirements for what an engineer's job would be during the next few years. Managers then compared workers to the new job description. That created three bands of employees: retained, eligible for voluntary severance and at risk. Says Coffey, "We were saying that all these people are equal among themselves, but they aren't equal to the other bands."

Once the evaluations were complete, New York Telephone engaged in a legal and HR review process at both the business level and the corporate level. Lawyers checked for EEO violations; HR made sure that the process was administered correctly and fairly. The firm then advised the engineers of their status and told them that the downsizing would be completed in 60 days. Those in the at risk and voluntary categories received severance and bonus packages each valued at roughly $50,000 to $500,000, as well as extensive outplacement counseling. Anyone in the retained category who decided to leave did so on his or her own. Those individuals weren't eligible for benefits.

"There's no magic formula. There's no magic plan design," says Coffey, who has managed to trim 3,000 managers companywide during the last two years. "A downsizing has to be conducive and parallel to what you're doing culturally. We, like many corporations, have been living off the fat of the land. We built up middle management and used these people for unnecessary work. There was a need to shed our monopoly-entitlement mindset. We needed a plan that could work with our present-day culture, but one that also could work in the future."

"There's no way to eliminate the anxiety involved in downsizing, but you can minimize the problems. The key is to create effective HR policies."
Gary Thomas,
Florida Power & Light Co.

Other human resources executives also have found that a successful downsizing requires a tremendous commitment on the part of HR as well as the company's senior executives. Not surprisingly, a forward-looking outlook is essential—especially if the company already is profitable. Florida Power and Light Co., a Miami-based utility that has 3.2 million customers and revenues in excess of $5 billion, is a good example. In 1989, Gary Thomas, the company's HR director, realized that despite having won numerous awards, the company needed to become far more efficient and streamlined. In fact, an internal self-assessment found that the organization was overly bureaucratic and that it suffered from sluggish decision making.

Two years later, the company instituted an entire reselection process for its 15,000 employees. New job descriptions—based on present and future work requirements—were written from the ground up. Everyone, including the company's chairman, participated in the process. Key managers chose the best candidates all the way down through the organization. When a manager couldn't find someone to meet specific qualifications, the position remained open. Ultimately, all open positions were posted within the company, and other employees were encouraged to apply. In the end, the company eliminated more than 1,500 positions. More importantly, the internal placement program helped 300 displaced workers find new positions within the firm. Of the remaining 1,200, all but two accepted a voluntary-separation severance package. In fact, Florida Power and Light hasn't had a single employee file a lawsuit against it.

When mergers and acquisitions take place, the problems can be especially vexing. Fradley, Minnesota-based HealthSpan, the nation's third largest not-for-profit secular health-care provider, was forced to hand out pink slips to 1,200 workers when it closed an unprofitable inner-city hospital in 1991. The fact that five labor unions were involved complicated matters. The firm had no choice but to use a seniority system to determine who would stay on and who would be laid off.

But that didn't present a serious problem, says Tom McLaughlin, Health Span's vice president of human resources. Outside consultants and union officials helped formulate the policy, which included:

  • A placement and career-transition center off site
  • A comprehensive communications plan with twice-weekly updates to employees
  • Sessions that identified employees' concerns
  • A sophisticated job-matching process to ensure internal placement of up to 400 employees.

Moreover, the firm established a voluntary early-retirement program and froze 600 open positions in other facilities for a job-matching program.

In the end, the company placed 90% of the affected employees in new permanent jobs—the majority were placed within the first month the placement center opened. A full 45% continued to work within HealthSpan. The early-retirement program, which involved another 275 employees, slashed $5 million in severance liability. The final cost of the program? Just over $1 million. The cost if the firm had simply handed out pink slips? As much as $10 million, if one weighs potential liability.

"Part of the motivation was altruistic, and part of it was selfish," McLaughlin admits. "The altruistic part was that we have a set of corporate values that said we want to be the employer of choice in this marketplace. It was important for us, strategically and long range, to be viewed as a good place to work. We already were seeing an erosion of employee loyalty because the old social contract had pretty much been broken over the years. We wanted to see if we couldn't do something to change that."

Strategic HR planning can mean the difference between success and failure.
If there's one thing that differentiates the winners from the losers, it's having a strategic plan in place from the beginning. "There are two ways to deal with the issue," says Marks. "A company can either be proactive or reactive. The problem with being reactive is that once a company recognizes that it needs to make major changes to stay afloat, it's almost always in a crisis situation." The fallout can be enormous. "Every day a firm waits to make cuts, it loses more money. That creates tremendous pressure to do things quickly and not very carefully," he adds.

Reacting to negative financial results can lead to a slash-and-burn approach to downsizing. In most cases, a CFO looks at the books and realizes the company has to close plants and cut its work force to stay afloat. It's mechanical, it's quick, and it's driven almost entirely by numbers. Whether the layoffs total 500 or 10,000, it's little more than an exercise in crunching numbers on the balance sheet. Usually, it's done in the absence of a clear-cut HR strategy.

The problem with simple headcount reductions, experts say, is that they fail to account for many of the problems that crop up during layoffs. To begin with, a company can't grow if it's shrinking, says Eric Greenberg, research director at the American Management Association. AMA data show that the mid-to-long-range effects of downsizing generally aren't good. When a portion of the work force is lost, so too are valuable contacts, knowledge and experience. "One of the risks is that you'll make a misjudgment, and that you'll eliminate people that you later need. You wind up not only cutting the fat out of the organization, but the muscle and bone as well," MacKinnon explains. That can lead to costly increases in overtime, temporary and contract work—expenses that can exceed the savings created by job cuts.

Another danger is worker burnout. As an organization eliminates positions, a person who once had just his or her own job to contend with winds up handling the equivalent of two or three positions. There's nobody to handle correspondence, nobody to answer phones, and the individual winds up taking work home at the end of the day. "You get people who not only work 12-hour days, but see no letup in sight and no chance for a promotion. They eventually become demoralized," says Marks. Adds Ryan, "If you don't eliminate work when you eliminate positions, the decrease in productivity is absolutely devastating."

Traditionally, seniority has been the tool to determine who stays and who goes during a downsizing. However, one of the problems with using seniority as the basis for decision making, says Mark DeMichele, president and CEO of Phoenix-based Arizona Public Service Co., is that the senior people are the highest paid, but they aren't always the most knowledgeable. "More often than not, they're the ones who want to leave. As a result, you wind up losing many of your brightest young employees."

Performance evaluations are another tool that managers have long used to determine who stays and who leaves. Yet, consultants say that it's a method fraught with danger. For example, in February 1992, Houston Lighting & Power announced that it would lay off about 1,000 employees and provide a benefits package that reportedly totaled $40,000 per employee. Six months later, the company was the target of a class-action suit. More than 900 employees were seeking collective damages of more than $516 million. Among their contentions: that supervisors used a point grading system that was "inaccurate" and "prejudicial." And that, they claimed, affected their ability to obtain future employment because other companies viewed them as poor performers.

"Companies that force rank generally make bad decisions," says Bob Marshall, president of The Marshall Group, a Scottsdale, Arizona-based consulting firm that worked with Sea-Land on its zero-based staffing program. The standard, he argues, shouldn't be other employees, but how well individuals rate as compared to their job descriptions or a group of jobs. "A person may rank very high for an existing job, but poorly for one that will exist after a downsizing," says Marshall. Factors such as seniority or continuing education shouldn't be ignored. "They should be used as a tiebreaker rather than as the means to making a decision," he adds.

When Sea-Land instituted its staff reductions, 60% of its personnel ultimately changed positions. "It was an energizing, positive experience," says Ryan. "We tried hard not to have top-down decision making. We wanted the people who had to live with the decisions making them." And when it came to those who would see their positions eliminated by the downsizing, Sea-Land made sure the process was entirely voluntary. Everyone in the redundant category who lived more than 50 miles from work or whose position would fall by two levels or more became eligible for a severance package. They could then go straight into outplacement or look for another job within the company. Ultimately, about one-third of the employees found another job at Sea-Land. Those who decided to turn down the severance package were given assistance in finding another job at the company, though the company told them that if one couldn't be found, it would have to lay them off without benefits. "The fact is, we never had to do that," says Ryan.

It's an approach that appeals to a growing number of strategy consultants and HR executives. Because employees exit the firm on their own free will, a company can greatly reduce its exposure to lawsuits and can almost entirely eliminate unemployment claims. Even with severance pay and bonuses, the payback time is usually no more than six months to one year. The downside? Like a seniority-based system, a company can lose the wrong people and suffer a brain-drain if the program doesn't have built-in safeguards.

Last year, when Novato, California-based Fireman's Fund Insurance was forced to lay off 10% of the staff (about 110 employees) at its headquarters, it opted for a voluntary program. After announcing a voluntary-resignation program and providing an informational package, Lawrence Koch, vice president of human resources, gave all employees—from top executives to clerks—two weeks to make a decision on their future. The HR department stamped all claims with the date and time received so that it could process them on a first-come, first-serve basis. Once the sign-up period had lapsed, nobody could reverse their decision. Recognizing that it could lose a large number of employees from any given unit, the firm reserved the right to impose limits. It didn't allow supervisors or managers to discuss with employees whether they should participate in the program. "We wanted it to be strictly voluntary," says Koch. "We didn't want management to influence the process."

It all went better than expected. The firm suffered no major disruptions during the period, there were no emotional outbursts or incidents, even the messages on the company's E-mail were largely positive. "Instead of everyone sitting around in shock, everyone knew the truth about the company, and they felt as though they controlled their own future. There were no hard feelings. Those employees who left and those who stayed felt good about the process and their future," Koch explains.

The bottom line for Fireman's? It recouped the cost of the entire program, including outplacement services, within nine months. Moreover, it virtually eliminated unemployment claims that could have reached upwards of half a million dollars, and legal liability that could have rocketed well into the millions. The company has further strengthened its financial standing, and though Koch admits that the company did lose some valued people, its overall productivity is up.

But strategic planning is no easy task. "It requires a vision and a commitment from the top team to buy into that vision," says Marks. "It requires complicated human resources planning and modeling to support the goals. In the end, it's necessary that everyone agrees that there's one core business or a variety of businesses in five or ten years. It's crucial that turf battles over resources and people be kept under control. Managers who try to protect their own staff or product line can easily undermine [the strategic plan]."

The financial costs associated with a haphazard downsizing can be enormous. Not only must a large organization incur an expense of $40,000 to $100,000 every time it terminates an employee and offers a benefits package, those that miscalculate or find themselves on the upside of the growth curve again must hire new workers, something that can easily run $5,000 an employee. The price tag for hiring and relocating managers and top executives can zoom to more than $50,000 per employee. Says Thomas, "It's expensive and it's often unnecessary. Many employees can be absorbed by a good internal placement program." If a person is transferred to another unit, there's no severance, no layoff, no unemployment, no rehiring and no lawsuits.

A Commonwealth Fund study of more than 400 members of The Conference Board found that companies that create strategic downsizing plans and carefully map out their direction fare much better in the end. Forty-six percent reported an overall decrease in morale, compared to 77% at reactive firms. When it came to the issue of losing the wrong people, only 8% of the proactive firms suffered negative consequences, compared to 38% of the reactive companies.

A successful downsizing must balance HR issues with short-term financial matters.
Many human resources departments are far better equipped to hire than to dismiss large groups of people. Shifting the corporate engine into reverse is a process that not only can strip the gears of corporate efficiency, but can create problems. "Many HR departments simply aren't equipped to handle the complexities of a downsizing," says MacKinnon. "It requires an entirely different set of strategies and ideas than running a department on a daily basis."

A successful downsizing must balance HR issues with business issues. Experts say that it's crucial to have HR sitting at the table with senior management as the company decides its future. "If decisions are being made outside HR, then it's reflective of an old personnel-based organization," says Ryan. "These days, it's just as essential to have someone sitting at the table looking at the human side of the equation as it is to have a CFO at the table focusing on the financial side of the enterprise."

"These days, it's just as essential to have someone sitting at the table looking at the human side as it is to have the CFO focusing on the financial side."

Ryan was involved in Sea-Land's strategic planning from the beginning. He designed many of the programs and processes that were used in the company's restructuring, and sat in on every crucial meeting. "It was important that the project be viewed as a collaborative effort that was business-driven and not an HR intervention," he explains.

Experts say that HR should consider itself a watchdog to ensure that decisions about the work force are based on solid reasoning. Ultimately, says Marks, "A person wants to know that the company is doing the right thing to become more competitive in the future. They'll endure some pain if it will result in a stronger organization down the road. But the pain must be distributed in a fair and equitable way, and co-workers who leave must be treated well. If top executives and managers don't participate in the downsizing—and if they choose to have their buddies stay—it will produce cynicism and failure."

One of the biggest responsibilities of HR is to ensure that effective policies exist to deal with the explosive issue of laying an employee off (see "How HR Can Help Managers Lay Off Employees in a Dignified Way"). "It's an emotionally charged atmosphere. There's a tremendous potential for problems," says Coffey. At NYNEX, supervisors notify employees in a brief and direct manner, and then turn the individual over to a counselor. Employees have the opportunity to vent their feelings, and within a few days, they're already looking for a new job. Throughout the process, the outplacement center offers positive reinforcement, including a celebration for each individual who finds a new job.

HR, however, shouldn't be the final frontier. At Sea-Land, for example, an individual can take a grievance to a review board, which has the authority to reverse any decision that violated company policy or procedures. "The board doesn't exist to question management's judgment or HR's policies, but to make sure that everything was done properly. Nobody at the company feels bad when the board reverses a decision. The idea is to do the right thing," Ryan explains.

Yet it's HR's ability to effectively communicate a downsizing plan to workers and collaborate with other departments that's most crucial of all. Even if human resources isn't involved in strategic planning, it still can play a major role in a downsizing effort, says MacKinnon. And, regardless of the approach, honesty remains the best policy. "Anything less is unacceptable, especially when you are dealing with emotional, volatile situations impacting on people's lives. Dishonesty can also have a devastating effect on the reputation and standing of an organization—among customers, workers who are left behind and the general community," says MacKinnon.

When New York City-based Chemical Bank undertook a complicated merger with Manufacturer's Hanover Trust in 1991, it immediately established an intensive communications program. It mailed attitude surveys to employees almost every other month, and then used the results to keep employees informed about what it had learned and what actions the firm would or wouldn't take. Regular bulletins reported on the merger's progress and timetable, detailed the new organizational structure, and identified executives who would handle various functions. According to Martin Zuckerman, Chemical Bank's VP of human resources, the survey provided management with valuable information on how to carry out the process.

When Florida Power and Light embarked on its ambitious downsizing effort, Thomas made sure that employees received weekly handouts, letters from the CEO, videotapes and a slew of other materials. "There's no way to eliminate anxiety, there's no way you're going to go through a downsizing without morale taking a hit. But there are plenty of things you can do to minimize the problems. The key is to create effective HR policies," says Thomas.

In the final analysis, says Marks, downsizing can be the genesis of a new, more efficient company that's better able to compete and succeed. "Every company will face a time when it has to deal with these issues," he says. "It's a very painful process that always has some negative fallout. A company can operate in a state of denial and not acknowledge potential problems, or it can begin formulating a strategy before a crisis ever occurs. The companies that are proactive almost always wind up on top."

Personnel Journal, November 1993, Vol. 72, No.11, pp. 64-76.