A fair retrenchment – Part II

“Why aren’t layoffs taught as a subject at business school?” Robin Astrigo asked himself. “Boards expect executives to do them well, but nobody knows how.” – “The Layoff”- Harvard Business Review [2009]

As the phenomenon of retrenchment shifts focus from central government employees to those in the state-owned enterprises (SOEs) and, inevitably to those in the private sector, last week’s column on the procedural requirements of the Employment Rights Act 20102 that apply to both of these will assume a substantial degree of practical relevance.

Moreover, the boards and executives of these entities must be prepared for a greater militancy on the part of the workers’ organisations that might not have obtained in the consultations with central government. We have already seen some evidence of this with the insistence of the Barbados Workers’ Union consultant that the “last in, first out” mode of selection for retrenchment is non-negotiable, whatever may be the arguments against it.

To be fair, the union quite rightly bases its insistence on the fact that this had been the mode of selection for retrenchment previously agreed by the Social Partnership, of which all the relevant parties are members or represented by delegates.

While the existence of this compact should settle this issue at least for now, it is notorious that there are alternative modes of selection, some of which may serve to assuage some of the concerns expressed by the voices of labour thus far.

And although I am not given to telling people what material they should read, the students in my UWI classes of course excepted, an interactive story, “The Layoff”, by Bronwyn Fryer, published in the March 2009 issue of the Harvard Business Review, might prove instructive to this debate for local private enterprise. It may be found at layoff

There, a fictional firm, Astrigo Holdings, a home-improvement concern, had missed its earnings estimate by 20 cents a share. Profits had dropped by double digits, regardless of efforts to slash inventory and expenses. Despite aggressive promotions and price cuts, the Astrigo stores were losing sales to cheaper retailers with far worse customer service.

Robin Astrigo, the Chairman of the firm sees one option only – an aggressive reduction in head count…

The rest of the story relates the discussions between senior members of staff as to the optimal way to reduce numbers and the likely effect of these solutions on company morale and cultural health. To a suggestion of employing a last in, first out policy for retrenchment, the head of HR responds, “I understand but this isn’t just a financial transaction. Think about Yukio, that young woman we hired a few years ago to run new business development. We courted her hard. She’s a first-in-class MBA from a top school, and she’s full of bright ideas. Two of our competitors were after her, but she decided to come with us in the end because she likes our corporate values. If we do a blanket last-in, first-out plan, people like her would be out of here!”

The vice-president of marketing and strategy offers another opinion – “I know it’s really painful …but it seems like we should consider something a bit more imaginative. Just pick a number. How about a 5% across-the-board pay cut, maybe a bigger one for people making six figures? We’re not a union shop. We have the flexibility to do it. If we get pushback, that’s OK.”

Most engaging in the article however are the suggestions from readers who care to comment as tothe optimal strategy for Astrigo. In a joint submission, the co-founders of an executive career management and board advisory firm counsel – We believe Astrigo should borrow a page from the McDonald’s playbook. In its annual report McDonald’s clearly states that its business will focus on the interests of long-term shareholders. When a company explicitly seeks out such shareholders, its board has reason to assume investors will be more patient with the vicissitudes of the market. Moreover, once the economy strengthens, we think an increasing number of institutional investors will take a long-term view. In the United States the explosion in baby-boomer retirees will create a huge pool of investors who desire a safe train ride up and down gently rolling slopes. They’ll give up the thrills and agony of high risks and high returns.

With its unique size, strategy, cash position, and culture, Astrigo would be well suited to the interests of long-term shareholders. If the board issued a McDonald’s-like statement, it would establish a clearer framework for Robin’s tactical decisions, and he could make them with more precision and flexibility.

The chairman of a Swiss firm is more critical – Astrigo has more than a cost problem. The company also appears to have strategy, management, and cultural problems. Its governance is a cipher. Marketing doesn’t seem to be working. And nowhere is it evident that the poor employees who will be so drastically affected by a layoff will have any opportunity to offer their input. While rumours fly and morale sinks, two of the top managers are off having an expensive lunch in a private dining club, discussing the fates of thousands of people and their families. This is no way to run a company.

Finally, a professor of management science at Stanford University puts his perspective – Unfortunately; too many executives blindly assume that layoffs are the best way to cut costs. With the exception of a lower-level vice president, none of the managers in this case seriously challenges the notion that 10% of the employees must go. The top executives don’t discuss alternatives such as pay cuts, reduced benefits, unpaid vacations or days off, or incentives for voluntary departure.

Nor do they consider how long it will take for the savings from the head-count reduction to kick in. A Bain & Company study of layoffs at S&P 500 firms during the 2001 downturn showed that it took them six to 18 months to realise savings from job cuts. And, when calculating savings, most executives fail to account for the cost of recruiting, hiring, and training new people who will be needed when good times return – let alone consider the damage to morale and productivity. Those costs are often much higher than people imagine, which helps explain why the study also found that firms that made layoffs their last resort and cut the fewest employees performed better than their competitors did.

There are some cautionary tales in this fictional account for us as we go through a similar conundrum in all sectors of employment. Of course some of the suggested initiatives may not be practicable, such as the enforced pay cuts in the public sector where they are precluded by a contrary constitutional measure, and in the private sector where it would be considered a fundamental breach of the employment contract if effected unilaterally.

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