A CEO and author explains why layoffs should not be seen as inevitable and to do so is corporate insanity.
The conventional wisdom that layoffs are inevitable is nuts. It's corporate insanity. And it's wrong
Business has been taking a beating lately, and we've been taking it lying down. We've been getting hit from the right, the left, and the center. Pat Buchanan accuses us of promoting trade deals that send American jobs to the Third World. Robert Reich talks about a growing wage gap and the rise of the anxious class. But, above all, there are the stories about layoffs -- about companies that do layoffs amid record profits, about a stock market that rewards companies for eliminating jobs, about CEOs who fatten their own portfolios by putting thousands of people out of work.
And we've had nothing to say about all that. We've let politicians and pundits define us as ruthless downsizers, wreckers of communities, greedy monsters who care about nothing except "the bottom line of a balance sheet," as Buchanan likes to say. I know. He says he's talking just about "corporate butchers," but if no one stands up and takes him on, we all get tarred by the same brush.
Frankly, it's mind-boggling that more corporate leaders haven't spoken up for business, that no one has said, "Look, we can solve this. We are the most creative businesspeople in the world. Yes, there are problems with the way we've run companies in the past. We can fix those problems. We are the only ones who can fix them. There are no political solutions. There are only business solutions. All the answers lie in the private sector."
So why do we sit here like rabbits frozen in the headlights of an oncoming truck? Part of it, I suppose, is that we hope all of this is just campaign craziness and will go away. I doubt it. These issues have emerged now because of real anxieties that have been nurtured very deliberately -- about the wage gap, about technology, about outsourcing, and so on. The layoffs have become a lightning rod for all those anxieties. Especially layoffs at companies with record-breaking profits. Or layoffs that produce a bonanza for the managers who ordered them.
Now, I don't blame people for getting mad about layoffs. I have no patience with CEOs who make excuses for layoffs, who say they're cutting jobs only to make the company more competitive in the future, to protect the interests of shareholders, to avoid bigger layoffs down the road, or whatever. The implication is that, by downsizing, the CEOs are just doing their job and earning their salaries.
Layoffs are a sign of management failure. You lay people off when you've screwed up, when you've guessed wrong about the market, when you haven't anticipated some critical development or created adequate contingency plans. Reality comes along, smacks you in the head, and forces you to cut costs. Most managers will look for any other costs they can cut before taking away people's jobs. When downsizing is the only choice, it's a sign of how badly management has failed, and the people who get hurt are invariably those who had nothing to do with creating the problems in the first place.
That is a tragedy. It is a terrible injustice. It may be necessary in some circumstances, but it's something most people would work very hard to avoid. I frankly don't understand how some CEOs can take away the livelihood of thousands of people and then pocket millions in bonuses and stock gains. I don't know how they live with themselves. Of course, I also have a hard time understanding why the stock market would bid up the price of a company's stock after a downsizing. Obviously, investors believe lower costs will translate into future profits, but they underestimate just how devastating a layoff can be.
Layoffs are terrible for businesses. They destroy the mutual trust and respect needed to make a company successful. If you're forced to do one, the message should be, "This stinks, and none of us take any satisfaction in it." You should do everything possible to harness the anger of the organization so that you never, ever have to have another layoff. The CEO needs to come right out and say it: "I hate this, it's painful, I'm not going to let it happen again." Even then, it will take a long time to repair the damage.
Let me add that I realize there are times when a company has no choice but to downsize, regardless of who's to blame or what the consequences may be. What's more, the CEO is the only one who can make that call. We certainly don't want the government involved. If you try to discourage layoffs by regulating the process, as the Europeans have done, you will stifle job generation, weaken the economy, and promote exactly the kind of corporate behavior that is the greatest threat to job security in the long run. You have to let the market work, even if it hurts.
But that doesn't mean we as businesspeople have to buy into the crazy notion that layoffs are all right -- a normal, inevitable, maybe even necessary condition of doing business in today's economy. You know the line. Companies have to eliminate jobs, even in good times, we're told, just to remain competitive. We hear the same message, over and over. Here's one version from a recent Wall Street Journal column by Michael Hammer of reengineering fame, titled, "Who's to Blame for All the Layoffs?": "No company knows what its customers will demand, what its products will be, or even in exactly what business it will be five years hence. How can such a company offer its employees more than interim employment?"
There's something seriously out of whack about that whole way of thinking. Forget the theory behind it. Forget the credentials of the people who spout it. Look at it as a CEO. Anyone who runs a business today knows that finding and keeping the right people is more important than ever. We know how critical it is to break down the barriers in a company, eliminate the internal marketing and the corporate politics, and get everybody working together, moving in the same direction. We've tried one thing after another -- total quality management, self-directed work teams, participatory management, you name it -- in an attempt to achieve a sense of common purpose and focus. Even the accounting profession has had to recognize the market value of a company's internal spirit and to quantify its "intellectual capital." So how can we square all that with the idea that in today's economy every company has to lay people off from time to time, and there's nothing much we can do about it, so we might as well just sit back and accept the inevitable? It's nuts. It's corporate insanity. And it's wrong.
Preventing layoffs is management's responsibility. It's management's primary responsibility. In a sense, it's management's only responsibility. Because to prevent layoffs, you have to do a lot of other things right. And you're much more likely to do them when you're constantly reminding yourself that jobs are at stake and that you're responsible for the livelihood of real people who have put their trust in you.
So you try to figure out how to protect those jobs, and pretty soon you realize that you need a process to achieve sustainable growth. I'm talking about a rate of growth you can maintain year after year, through good times and bad, despite down markets, wrong projections, fickle customers, devious competitors, nasty surprises, whatever. In my company, that rate is 10% to 15% a year. This is not just a goal; it's a mind-set. Everyone knows the number, thinks about it, looks for ways to achieve it. When we sit down to do our annual plan, our whole focus is on determining where the growth will come from in the following year -- and what contingencies and trapdoors we have in case we're wrong. We call this process "high-involvement planning," and its key ingredient is paranoia. We look for every potential booby trap and figure out what we'll do if we step in one. Once we have the final plan, we build our compensation program around achieving it. Anything we earn above our targets bounces up to a bonus program. We set our base pay at a level we know we can handle, even in a bad year. So the bonus not only drives the profits of the company but ensures that people take home more money when things go well.
And what happens if we run into trouble despite all our planning? The first thing that goes is the bonus program. The second is the increase in profits. Only then are we forced to look at our people costs -- and the answer still may not be layoffs, because we have places to put people. We have subsidiaries that are growing. We started them partly to create opportunities for our middle managers and partly to give us another layer of protection against layoffs. We could launch them because we had people already trained to run companies, thanks to the Great Game of Business, the open-book-management system we developed in the 1980s. We didn't want to lose those people, and yet we felt -- and still feel -- the same pressures to reduce overhead as everyone else. The subsidiaries give us a way to keep our overhead in check without laying anyone off. Of course, they also represent the future of our business, and the means for driving shareholder value.
Why do we do all this? Because we believe we're here to create jobs, not eliminate them. We know what it's like to go through layoffs. We know how it feels to manage a workforce filled with fear and uncertainty, anger and mistrust. We never want to be in that position again. This doesn't guarantee that we won't fail, but if we're ever forced into a layoff, at least people will know that we did everything possible to prevent it.
And our way is certainly not the only way. Far from it. I believe the vast majority of businesspeople have the same goals and values as we do. Business, after all, has always been the engine of opportunity in this country. It's the means by which we create better lives for ourselves, better communities for our families, a better future for our children. We do have solutions to the problems the politicians are trying to exploit for their own purposes. It's time to stand up and say so.* * *
Jack Stack is the president and CEO of Springfield Remanufacturing Corp., in Springfield, Mo., and the author, with Bo Burlingham, of The Great Game of Business. His column, Critical Numbers, appears every other month.* * *
Contributing editor JACK STACK is president and CEO of SRC Holdings Corp., based in Springfield, Missouri. The company's innovative style of open-book management -- financial information is shared among managers and employees -- is summarized in Stack's book The Great Game of Business, coauthored with Inc. editor at large Bo Burlingham.