Study: No layoffs at highly productive companies

Could layoffs be more of a management fad than a credible solution to a company's problems? SearchCIO.com contributor Jason Jennings says the most productive companies are pretty parsimonious with the pink slips.

Jason Jennings

You're familiar with how the scenario is played out at a lot of companies. The CEO proudly tells employees they're valued just like family and then days later, announces a massive layoff.

According to Linda Trevino, chair of the Pennsylvania State University's Management School, "Layoffs have become a management fad, and companies do them because they think they're expected to do them and because everyone else is doing them. It's almost as though if you aren't doing layoffs, you're somehow not lean and mean."

By stark contrast, the people who head the most productive companies in the world don't lay off workers. In fact, each company has made a promise to its workforce that the corporate coffers won't be balanced and profits won't be manipulated by laying off employees.

Is it coincidental that the most productive companies in the world don't engage in layoffs and are able to prosper and thrive in a roller coaster economy? 
Jason Jennings,

The most productive companies

My research team and I evaluated the financial results of more than 100,000 publicly traded and privately owned firms, searching for the most productive companies. Eventually, we ended up with eight companies whose annual sales, operating income, return on assets and invested capital per employee topped the performance of all the others.

A few of the companies that made the final cut include Nucor, a steelmaker in Charlotte, N.C. The company managed to reduce the length of time it takes to produce a ton of steel from 11 hours to 30 minutes and increased earnings 30 years in a row.

Also on the list is World Savings, which has 450 branches with nearly twice the amount of deposits as its nearest rival. It also kept its operating expenses roughly half of other banks and achieved 20% compounded growth for 40 years.

Ryanair, a large European discount airline, also made the list by outperforming Southwest Airlines in every operating metric.

One of the most striking findings is that all of these companies has a policy of not using layoffs when demand slackens, the economy hits the dumpster or as a way of pleasing shortsighted shareholders.

Putting their money where their mouth is

Nucor manufactures rolled steel and steel joists in the toughest and most commoditized business in the world. Most steelmakers with high fixed cost structures haven't proven nimble enough to survive. More than 40 U.S. steel companies have gone bankrupt in the past few years and not a week goes by that the steelmakers and their unions aren't in Washington with begging bowls in hand asking the government to rescue them.

Contrast that with Nucor: It has grown revenues and dividends for 136 quarters, the average steelmaker makes between $80,000 and $100,000 per year and it has never had a layoff. "The right workers," said Dan DiMicco, CEO of Nucor, "are our single most important asset. When business is bad, as it's bound to occasionally be in a highly cyclical industry like ours, the first thing to go is every executive perk and bonus followed by every plant manager and supervisor giving up theirs. Only then," DiMicco said, "are the workers affected and we reduce the work week to five days and then four and, on rare occasions, even three, but we don't lay people off."

Twenty years ago, savings and loans in the U.S. were prohibited by government regulation from making adjustable rate mortgages (ARMs). Keenly aware that issuing fixed rate mortgages for as long as 30 years without any idea of what they'd be forced to pay for future deposits was risky business. Herb and Marion Sandler who have jointly headed World Savings for more than 40 years decided to force the government's hand and simply stopped making mortgages and publicly challenging the government to change its policy.

During the lean year and a half when it wasn't making any mortgages, World Savings kept its loan salespeople and underwriters on the job, doing everything from manning branches to pruning hedges outside the branch offices. Other S&Ls slashed their overhead expenses and personnel costs to the bone.

Eventually, the government caved in and allowed World Savings and all other S&Ls to begin issuing ARMs. The difference was that World Savings who'd kept everyone employed gained a huge advantage over all its rivals who had to begin recruiting, staffing and training all over again.

In the aftermath of Sept. 11, as airlines worldwide began slashing schedules and laying off hundreds of thousands of workers, Ryanair gave away 300,000 free seats, priced another 1,000,000 seats at $30 and plastered posters across Europe proclaiming, "Don't let the terrorists win!" While other air carriers went on to lose billions of dollars, Ryanair hired people, placed an order for 250 new airplanes, added routes and scored its biggest profits in the two years that followed the terrorist attacks.

The ugly truth about layoffs

Leaders of highly productive companies figured out long ago that increases in productivity won't be achieved without the right people, and that layoffs cause several things to happen.

  1. When workers see layoffs happening around them, they become preoccupied with their own personal finances and the security and protection of their family unit.

  2. Because they're afraid they might be the next in line, valuable workers begin seeking more stable work environments, leaving the business staffed with the undesirable employees.

  3. After a company has a layoff and when demand for its products or services return, the company will face the expense of recruiting, hiring and training to fill the same jobs it earlier eliminated.

  4. As workers are laid off institutional memory becomes lost and is gone forever.

  5. No culture, certainly not one based on productivity, can exist in an enterprise where people fear for their jobs.

Is it coincidental that the most productive companies in the world don't engage in layoffs and are able to prosper and thrive in a roller coaster economy? Or is it because companies believe that the right employees are their single biggest asset and winning formula?

Perhaps Pennsylvania State University's Trevino sums it up best: "Any company which sweepingly lays off workers is unlikely to be productive and must be judged as poorly managed. If a layoff is needed, it's because the company wasn't managed very well to begin with."

Jason Jennings is the author of the bestselling, Less Is More, which profiles the world's most productive companies, and the 2001 worldwide bestseller, It's Not The Big That Eat The Small … It's The Fast That Eat The Slow. His next book, Think Big, Act Small, debuts in 2005. Contact him at Jason@jennings-solutions.com.

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