Layoffs Go Beyond Fat, Experts Fear

By LISA GIRION and ELIZABETH DOUGLASS

Aug. 8, 2001 12 AM PT

TIMES STAFF WRITERS

Mounting layoffs are beginning to stoke fears that companies are cutting so deeply into their work forces that they will have trouble bouncing back when the economy turns around.

With fresh memories of the tight labor market of the late 1990s and the unemployment rate holding at 4.5%, most companies are resorting to job cuts only after slashing other expenses.

Already there are signs that layoffs have hurt production orders and customer service at some companies. And, historically, businesses that have big job cuts take longer to rebound when the economy improves.

But as the red ink continues to rise, the pink slips are flowing. Job cut announcements, led by the telecommunications and computer industry sectors, hit a new high last month. According to one survey, nearly a million job cuts have been announced so far this year.

And although that may make Wall Street happy, it can’t be good for business, experts said.

“You have to just assume that there will be damage from such large cuts,” said Will Gordon, vice president at Adventis, a Boston-based management consultancy for technology. “I don’t think any CEO worth his salt will say that he can cut 20,000 heads without doing any damage to the company.”

In the telecommunication sector alone, companies have announced plans to shed at least 175,000 jobs so far this year, including almost 39,000 at Lucent Technologies, 20,000 at LM Ericsson and 15,000 at Alcatel, according to a monthly survey by Chicago outplacement firm Challenger, Gray & Christmas.

Computer companies have said they plan to cut 101,000 jobs this year. Automotive companies have announced 91,800 planned cuts and the electronics and industrial sectors have said they intend to shed about 162,000 jobs.

Although cutting fat can improve corporate health, many American companies were running fairly lean before the slowdown.

“We are reaching the point now where companies have cut back, particularly in manufacturing employment, pretty much to the bone,” said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis.

“If they were to delay too long in hiring new people as the expansion takes hold next year, they could impair their overall productivity,” she said.

Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis, said he has seen signs that some companies already have cut too deeply and are failing to meet customer service needs or production orders. One bank lost major customers when it replaced live service representatives with a toll-free telephone line and some telecom companies have had trouble handling normal service calls, much less the installation of new DSL lines, he said.

The problem is that too many companies are placing too much emphasis on meeting earnings expectations, Sohn said. “So they do almost anything to please Wall Street because if you don’t meet earnings expectations, it almost kills you--literally. In the process of putting out the fire, I suspect that some of the muscle has already been cut.”

History suggests layoffs can be a bad strategy over the longer term. Companies that laid off 15% or more of their work force during the recession of the early ‘90s performed significantly below average during the three-year period after the recession, according to an analysis of 288 Fortune 500 companies by Bain & Co., a Boston-based business strategy consulting firm.

Layoffs carry costs that go beyond the obvious severance pay and outplacement fees, said Russ Hagey, managing partner of Bain’s Los Angeles office.

“The non-dollar costs could actually be greater--the loss of knowledge, of skilled workers,” he said. “There’s the time and energy recruiting those employees, knowledge about the business, knowledge about the customer, intellectual capital, the cost of damage of trust and credibility within an organization.”

When the economy turns, it will be harder for companies that have made steep cuts to expand, said Adventis’ Gordon.

“They won’t have the people or the talent” to grow again, he said. “They will have made cuts that did the job for the balance sheet but caused difficult-to-repair damage to the company.”

Some companies have taken steps to mitigate that damage.

When Charles Schwab Corp. announced in March it was reducing its work force by 13%, it also said it would pay a $7,500 bonus to any affected employee rehired within 18 months. In an effort to keep those employees available, Schwab also created a $10-million educational fund, which will pay up to $20,000 in tuition over two years to affected workers.

“They are trying to ease the pain of the people who are leaving so when things do turn around, those people will feel favorably about returning,” said Bill Hollett, senior vice president with Drake Beam Morin, a management consulting firm.

“Companies are looking at other options too--four-day weeks and cuts in pay, primarily because when the economy goes sour, it’s a temporary thing,” Hollett said. “They’ve trained these employees and they’ve invested in them. They are trying to keep from losing them or get them to return” if they lay them off.

It’s unclear, however, just how many people can afford to cool their heels until former employers are ready to hire them. As a result, some companies may turn to temporary staffing agencies for help in hiring on the rebound, said John A. Challenger, chief executive of the firm that tracks job cut announcements. They also will have to spend heavily on training, yet there’s no guarantee they can replace what’s been lost.

“No matter how many temps you hire, they are just not going to be as good as the people who have been with you and had corporate knowledge,” Challenger said.

Kathy Egan, a spokeswoman for Ericsson, which expects to reduce its global work force from 107,000 to fewer than 90,000 by the end of the year, pointed out that job cut announcements don’t always result in layoffs or reduced production capacity.

“It’s a reduction in head count for Ericsson, but it’s not necessarily a job loss,” she said. “It can be a transfer of employment. With these big numbers, there are a variety of measures that we take. We have drastically reduced the number of consultants.”

Ken McGee, a vice president at the Gartner Group in Stamford, Conn., said deep payroll cuts by telecom companies are an overreaction.

“This is the second time in recent years that this industry has put aside common sense and good judgment,” McGee said. “The first was when they ramped up and started presenting outlandish growth projections. They sinned in excess and now they are going to repent for a very long time.”

Telecom’s job-cutting frenzy is not limited to the hardware makers. Service providers ranging from WorldCom to Verizon Communications and Qwest Communications International also have plans to reduce payrolls.

What could hurt companies most when they want to resume hiring is that despite widespread layoffs, the unemployment rate has remained historically low.

“In the last [down] cycle, we had unemployment that reached as high as 8%,” Banc of America Capital Management’s Reaser said. “Today the unemployment rate might peak at 5%. Companies will need to be more cognizant of the challenges that the upturn will bring in restoring staff levels.”

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Big Cuts

Announced layoffs by industry:

Telecommunications

2001*: 175,350

2000: 6,848

Computer

2001*: 101,044

2000: 10,976

Automotive

2001*: 91,808

2000: 27,637