- Since salaries make up the lion's share of corporate costs, cutting jobs is one of the fastest and most readily accessible ways to significantly reduce expenses. Layoffs, then, make great fiscal sense in the current down economy. Right?
Not necessarily in IT, especially if you consider the many and varied long-term risks of layoffs, which can range from a plunge in worker morale and productivity to higher costs for recruiting and rehiring technology professionals when the economy bounces back.
"Layoffs aren't cheap," says Ken Orr, a research fellow at Cutter Consortium, an IT consulting and research firm in Arlington, Massachusetts. "They're usually done in response to earnings pressure from Wall Street, which looks only at [near-term] financials. But there are other costs associated with layoffs."
Consider Cisco Systems, where worker productivity plummeted, resulting in sales of $US470,000 per employee in October 2001, down from $US710,000 a year earlier. In the interim, Cisco laid off 8500 workers, among other cost-cutting moves.
A different approach
A growing awareness of these collateral costs has companies searching for creative alternatives to handing out pink slips at the first sign of financial distress. Job sharing, shortened workweeks and voluntary pay cuts are among the measures companies are taking to trim costs before cutting jobs. They may not always be 100% successful, and some layoffs may still eventually be required. Yet the long-term value of such alternatives helping to preserve morale and leaving a door open for key employees to return in better economic times is golden, according to managers who have used them.
"We've already seen a payoff in terms of some of the programs we put in place," says Jeff Standridge, the executive in charge of organisational effectiveness at Acxiom, a $US1 billion database and information management company in Little Rock, Arkansas. About 60% of Acxiom's 5000-plus employees work in IT.
Last April, Acxiom instituted a 5% mandatory pay cut for all workers (except those earning less than $US25,000). In exchange, employees received stock options equal to the amount of salary they forfeited. Acxiom then followed up with a voluntary pay cut plan under which workers could elect to forfeit up to an additional 15% of their pay in exchange for twice that amount in stock options. More than one-third of employees volunteered for the additional pay cut.
"The immediate benefit we received from that is when we did get to the point of layoffs, we were able to get by with laying off half of the employees we would have had to lay off otherwise," Standridge says. In June 2001, Acxiom laid off 400 people, or 7% of its employee base, which now stands at 5400.
"The intangible benefit is that 85% of our employee population became stockholders in the company. They have skin in the game, and now the company's future can be determined by people with a greater stake in the company," Standridge says.
When Acxiom does resume hiring, it will give preference to laid-off employees, who upon leaving were issued a special code to use when they submit their résumés online.
"Studies say that it costs one and a half to two times their annual salary to recruit and train an employee," Standridge notes. "Those costs are reduced considerably by bringing someone back on board that you laid off."
Cisco offers employees an option to retain one-third of their salaries plus their health insurance benefits and stock options if they voluntarily leave to work for any one of 29 approved non-profit organisations. Cisco says the employees don't earn a salary from the nonprofit agencies, nor does Cisco receive a tax break under this programme.
"At the end of that time, if they're interested in coming back and there are positions here, they're considered [preferred] internal candidates," says Michael Yutrzenka, senior manager for community investments.
So far, about 80 employees have signed up for the programme, which Yutrzenka says costs Cisco about the same as a more traditional severance package. The key benefits for the company are positive public relations and the ability to keep tabs on workers it may want to rehire once the economy rebounds.
Prior to laying off 2500 employees beginning last August, Hamilton, Bermuda-based Accenture, a global IT consulting firm, began piloting a one-year sabbatical programme under which workers retain 20% of their salaries, all benefits, their profit-sharing allocations, use of a company laptop and access to Accenture's intranet in exchange for taking the year off. Employees can travel, take classes and even take another job as long as it's not with an Accenture competitor. At the end of the year, the workers also get their jobs back -- guaranteed.
With 2200 US employees signing up for the sabbaticals, the programme is now closed there, but it has been expanded to Accenture employees in the UK, Sweden, Germany and Japan. "The primary goal of the programme was trimming our costs in the short term plus keeping our access to people we've spent a lot of time and money recruiting and training," says Larry Solomon, Accenture's partner in charge of internal operations.
"By paying them 20% of their salaries, we're saving approximately 80% of salary costs plus [future] recruiting and training costs," which can run as high as $US40,000 per employee, Solomon says.
Even though layoffs occurred at Acxiom, Cisco and Accenture, experts agree that having opted to exercise alternatives first will serve them well in the long term.
"Certain companies know how to treat their employees in good times and in bad," says Kazim Isfahani, an IT hiring and human resources analyst at Robert Frances Group in Westport, Connecticut. "But it's in the bad times that the good companies really establish themselves."
Jobs for life
Lincoln Electric calls it "guaranteed employment for life." After working three years at the $US1 billion Cleveland-based manufacturer, employees are guaranteed a lifelong job at the company.
Memphis-based FedEx has what it calls a "philosophy" of no layoffs. That doesn't mean they won't ever occur, but "if we get to a layoff situation, it would absolutely be as a last resort," says company spokesman Greg Rossiter.
The employment practices go by different names, but the spirit and business strategies behind them are the same. By shunning downsizing as a matter of corporate values, both companies are looking to create a fiercely loyal and productive workforce, which in turn generates high customer satisfaction ratings and bottom-line results. And so far, it's a strategy that seems to work well, in both good economic times and bad.
Lincoln Electric CIO Chuck Mehlman says he can't remember the last time anyone quit his firm's 100-person IT group -- before or since the dot-com boom and bust.
FedEx, meanwhile, has reduced the hours of certain hourly workers, such as warehouse employees, but so far the company hasn't laid off anyone, which Rossiter says positions the shipping giant well for when the economy bounces back.
"We feel we'll be extremely well positioned when the economy does turn up, because we'll reap the benefits of morale and have avoided the negative impact to morale that layoffs engender," Rossiter says. "What differentiates a company in any services industry is its people, and we simply can't afford to put that at risk."