Chainsaw Management

Too many employees in too many companies are quivering in their cubicles or at their workstations, waiting to face the HR hangman.  This is partly the result of slumping auto and home sales, but it is more the result of poor management.  Large corporations are no longer run by entrepreneurs.  They are run by bean-counting nebbishes who only have one answer to a reduction in business–layoffs.  The results of this human-resource belt-tightening are A) the employees who remain are stressed and overworked to the breaking point and B) the company’s skilled workforce is no longer available when business picks up again.  An entrepreneur should exploit the opportunity presented by excess employees, not shed them like dead batteries from an over-indulged child’s electronic toys.

Albert “Chainsaw Al” Dunlap is the mismanagement poster boy of Downsizers Syndrome.  He killed Sunbeam in 1996 by cutting payroll by 50%, closing 18 of 26 factories and simulating profits by “channel stuffing.”  Channel stuffing is over-producing merchandise and jamming the distribution network with the excess, then reporting the merchandise as sold.  Like a Ponzi scheme, this only works in the short term and it soon became apparent that Sunbeam was headed for the graveyard of failed companies.
Chainsaw Al is only an extreme example of the Little Johnny One Notes of corporate governance.  The current crop of CEOs seem hardwired to respond to any problem with pink slips.  The bigger the problem, the more pink slips get handed out.

Publicizing layoffs often results in an escalation of the stock price.  However, that is only a speedbump in the stock’s slide and seldom has a lasting effect.

In 1996, Robert Reich, then Secretary of Labor, said “I do think it’s unfortunate to view a company’s employees as costs of production rather than assets.”  A skilled workforce is the engine that powers the organization.  Chopping away parts of the engine in response to reduced demand for products or services is foolish.  A creative, entrepreneurial management team sees excess workers as an opportunity, not a problem.

I was the chair of the board of directors of a community mental health provider when its budget was cut by 25%.  This was a situation where layoffs would impair the organization’s ability to provide services, resulting in a vicious cycle of reduced budgets causing reduced delivery of services and reduced delivery of services causing further budget cuts.  Calling the employees together, I pledged that there would be no layoffs.  As it turned out, there were some unpaid leaves taken by managers and employees and there were a couple of “pay holidays,” but no one was laid off and we survived the cut-backs until our budget was restored.  What was crucial was that the organization made it clear, as soon as the budget restrictions became known, that it would stand by its employees.  This improved morale and gave the staff the determination to weather the crisis.

The budget dilemma faced by our non-profit was the opposite of that faced by home builders and car makers.  We were expected to maintain production despite budget cutbacks.  In the for-profit world, companies may find that they have too many workers for the production demand.

There are also those managers who want to lay off employees to show how tough and frugal they are; so they cut the number of staff without regard to productivity or merit.  These are managers who think that if 100 employees can get the job done, 90 should be able to handle it.  Then they decide that if 90 can do the work, 80 employees are enough.  They are like tax-cut maniacs for whom no tax cut is ever deep enough.

What would a canny manager do instead of cutbacks?  Put supernumerary employees to work in new areas and on new products.  A car company CEO should consider moving employees into green initiatives–working on hyper-efficient vehicles.  The latest gas crisis will not be the last and sooner or later, the U.S. public will decide that they don’t need 5,000-pound SUVs to commute to work or to drive to the bodega.  If the U.S. Big Three want to stay in the game, they should stop designing the cars that they think are the most profitable and start developing the cars that are adapted to the uses people put them to.

A company that produces products for the home-construction industry does not have to cut back, just because there is a slump in new housing starts.  The CEO should think outside the big box and use the excess production capacity to start new ventures.

Many of the laid-off employees walk off with a severance package equal to several months of salary and benefits.  Figuring that cost, added to the company’s investment in those workers, it becomes apparent that a huge amount of the company’s assets are walking out the door.  These employees could work on new products or services for up to a year, at no cost to the organization!

The stock market has lost half of its value in the past year.  So what?  The money is not gone, as I recently pointed out.  Depressed stock prices and tight credit make it difficult for corporations to raise capital.  This will lead 99 out of 100 CEOs to cut back operations and lay off employees.  However, one in 100, or maybe even one in 1,000, will see the opportunities in the current market.  Instead of cutting off the hands that produce the wealth of the nation, they will find ways to keep those hands busy.  Instead of bemoaning the trouble U.S. businesses are in, they will take over troubled businesses and turn them around.  This is still the Land of Opportunity and CEOs who see that will lead their companies to unguessable prosperity.


John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
©2008 John B. Payne, Attorney

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