DOWNSIZING FOR PROFIT IN A RECESSION
When my small manufacturing company grew to more than a hundred employees, I was thrilled. Years later, after a recession struck and the company downsized to thirty-five employees , I was also thrilled. (Eventually we eliminated layoffs altogether.) When we were a hundred employees, our labor cost had reached 13 percent of sales; profits ranged between 3 and 5 percent. When we were thirty-five employees, our labor cost dropped to 5 percent, with a profit of 15 percent of sales. At thirty-five employees, our sales, after a 30 percent recessionary decline, eventually exceeded the peak we had attained at a hundred employees.
How did this “miracle” happen? It was due, in part, to an innovative team incentive program. It was also due to a new openness between management and employees; the employees were given control of their jobs and invited to participate in management decisions. When we first introduced these measures, we had focused strictly on their assumed benefits: increased productivity for the company, and increased income for the employees. But as downsizing took place, we were amazed at how rapidly costs plummeted and profits increased. Shutting down a million dollar production machine or temporarily closing a facility did not result in savings that were nearly as dramatic.
It didn’t take us long to realize that when we eliminated an employee, we reduced our expense by more than that person’s wage. Because our company provided generous benefits to its employees, we were also excising the costs of skyrocketing health insurance premiums, life insurance premiums, workers’ compensation and unemployment benefits, profit sharing plan contributions, and vacation and holiday time. The cost of these benefits, which seemed negligible when they were adopted, had grown stealthily over the years. In most cases, they had increased an employee’s effective wage by one third to one half. Only after we began cutting back did we appreciate this fact.
Our new awareness of what an employee really costs guided our employment policy from then on. As business improved, we strove not to return to the excesses of the fat years. We purchased new, more efficient equipment. We hired part-timers and temporary workers, who received no benefits. Management also struck a bargain with the workers: in return for a willingness to work overtime in good times, the company would guarantee steady employment in bad times. In short, we avoided having to hire more permanent people unless absolutely necessary. This policy went beyond the worker category; it was even more stringently applied to the supervisory and middle management ranks, where the company’s benefits were even more generous. (All the above measures are discussed more fully in other chapters.)
Although our downsizing was good for the company, it certainly wasn’t good for the economy. Business rebounded swiftly from that recession as most companies, turned on by a resurgent borrowing and buying splurge and much optimism, resumed their profligate ways, hiring people as never before. As everyone knows, this is happening in the recent prosperity. Business is much less cautious this time. Our company’s experience offers a classic illustration.
Most of today’s companies have forgotten what we learned more than a decade ago. Employees are expensive and getting more so. Reducing their number has a positive multiplier effect on the bottom line. The likelihood of mandatory and higher health benefit costs is frightening, especially for smaller companies where price competition is generally keener and financial resources leaner.
When government increases a company’s costs, whether as a result of regulation, taxes, or imposed benefits, it actually provides disincentives for the company to achieve what the government seeks: success, more employment, and thereby more revenue. Rather than intrude into the marketplace, whether of goods or labor, government would do well to install incentives that encourage business to grow and hire and train people.
The government could contribute to a company’s employee training costs. It could terminate the business income tax altogether. It could aggressively support startup ventures and innovative companies short on capital. It could encourage banks to be less risk averse. It could, as it now hopes to do, reduce the cost of health benefits for business and employee.
With proper incentives, the private sector will react more swiftly and perform more efficiently, and at least cost, than any government can. As unemployment declines, the quality and skill of those permanently employed will improve. The point is, let the human drive to succeed and enlarge its domain be the engine of our nation’s prosperity.
How did this “miracle” happen? It was due, in part, to an innovative team incentive program. It was also due to a new openness between management and employees; the employees were given control of their jobs and invited to participate in management decisions. When we first introduced these measures, we had focused strictly on their assumed benefits: increased productivity for the company, and increased income for the employees. But as downsizing took place, we were amazed at how rapidly costs plummeted and profits increased. Shutting down a million dollar production machine or temporarily closing a facility did not result in savings that were nearly as dramatic.
It didn’t take us long to realize that when we eliminated an employee, we reduced our expense by more than that person’s wage. Because our company provided generous benefits to its employees, we were also excising the costs of skyrocketing health insurance premiums, life insurance premiums, workers’ compensation and unemployment benefits, profit sharing plan contributions, and vacation and holiday time. The cost of these benefits, which seemed negligible when they were adopted, had grown stealthily over the years. In most cases, they had increased an employee’s effective wage by one third to one half. Only after we began cutting back did we appreciate this fact.
Our new awareness of what an employee really costs guided our employment policy from then on. As business improved, we strove not to return to the excesses of the fat years. We purchased new, more efficient equipment. We hired part-timers and temporary workers, who received no benefits. Management also struck a bargain with the workers: in return for a willingness to work overtime in good times, the company would guarantee steady employment in bad times. In short, we avoided having to hire more permanent people unless absolutely necessary. This policy went beyond the worker category; it was even more stringently applied to the supervisory and middle management ranks, where the company’s benefits were even more generous. (All the above measures are discussed more fully in other chapters.)
Although our downsizing was good for the company, it certainly wasn’t good for the economy. Business rebounded swiftly from that recession as most companies, turned on by a resurgent borrowing and buying splurge and much optimism, resumed their profligate ways, hiring people as never before. As everyone knows, this is happening in the recent prosperity. Business is much less cautious this time. Our company’s experience offers a classic illustration.
Most of today’s companies have forgotten what we learned more than a decade ago. Employees are expensive and getting more so. Reducing their number has a positive multiplier effect on the bottom line. The likelihood of mandatory and higher health benefit costs is frightening, especially for smaller companies where price competition is generally keener and financial resources leaner.
When government increases a company’s costs, whether as a result of regulation, taxes, or imposed benefits, it actually provides disincentives for the company to achieve what the government seeks: success, more employment, and thereby more revenue. Rather than intrude into the marketplace, whether of goods or labor, government would do well to install incentives that encourage business to grow and hire and train people.
The government could contribute to a company’s employee training costs. It could terminate the business income tax altogether. It could aggressively support startup ventures and innovative companies short on capital. It could encourage banks to be less risk averse. It could, as it now hopes to do, reduce the cost of health benefits for business and employee.
With proper incentives, the private sector will react more swiftly and perform more efficiently, and at least cost, than any government can. As unemployment declines, the quality and skill of those permanently employed will improve. The point is, let the human drive to succeed and enlarge its domain be the engine of our nation’s prosperity.
posted by Hugh Aaron at 1:45 PM
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