Fast Company

Wharton’s Dr. Peter Cappelli on Flexible Downsizing

Today, Microsoft announced the first layoffs in its history. Nowhere in the announcement were flexible alternatives to job cuts mentioned.  The signal this sends to other organizations is that cutting employees is the only way to achieve labor cost savings.  But, it’s not.

Since the summer, I’ve mentioned in numerous posts the need for a three-tiered, more flexible approach to downsizing that goes beyond job cuts (here, here, here and here).  This message gains importance each week as the rate of layoffs by companies, like Microsoft, continues to snowball.

There are creative, cost-effective ways to use strategic work+life flexibility to reduce labor costs while remaining connected to valuable talent. These options include reduced schedules, job sharing, sabbaticals, and contract workers.  But I didn’t realize that there’s historical precedence for flexible downsizing until I read a terrific article entitled, “Alternatives to Layoffs,” in Human Resource Executive Online by Dr. Peter Cappelli, the director of the Center for Human Resources at the Wharton School of Business (a recent blog post by AWLP’s Kathie Lingle also provides interesting historical context).

Not only does Cappelli outline the history of a more flexible approach to labor cost reductions, but he’s as mystified, as I am, that companies aren’t considering these alternatives.  In fact, he contends we are witnessing a “herd mentality” in the organizational response to the economic downturn.  Companies need to reduce costs, see their peers laying off workers, and think that’s what they need to do.  No, it’s not.

In an effort to shift the herd, I spoke recently with Dr. Cappelli.  Highlights of our conversation include:

CY: Dr. Cappelli, you wrote, “So here‘s the amazing thing: Despite the extraordinary pressures to cut costs, the knowledge from decades past about alternatives to layoffs, and the contemporary concerns about losing skilled employees, almost no one is doing anything about it?” Why do you think a more flexible approach to downsizing is being ignored?

PC: There’s a long history of flexibility in managing the workforce from the 80’s especially in Europe.  There are two types of flexibility—functional flexibility which is how to flexibly expand the capacity of work without hiring on additional employees.  And then there’s numerical flexibility, which is using flexibility to cut back on staffing while protecting your “core” employees.  This is the type of downsizing we are talking about today.

What happened in the late 80’s into the 90’s is that companies really didn’t care about protecting the “core” of their employees.  It wasn’t such a big deal if people left.  The feeling was they are easy to replace.  We can get new people.

And another reason is that there’s a focus on short-term financial benefits.  Leaders are listening to financial analysts who don’t understand the true cost of downsizing.

CY: But you’ve noted in the article such a clear cost-benefit analysis that shows it actually costs less to retain someone at a 5% reduction in pay than a 5% layoff because “there are no severance packages; the legal liability and associated costs are much less; and the savings come instantly without the agonizing administrative process of figuring out who has to go…”?

PC: We really haven’t experienced any serious downsizings since 1991.  Institutional memory is short, so many of the leaders in positions of influence and decision-making weren’t around in the early 80’s, or the last time a flexible approach to labor reduction was used.  Really, the answer involves raising awareness about all that did go on in the past, since there are so few visible examples currently.

CY: Are there overwhelming legal constraints that would limit the use of flexible downsizing as an attractive alternative to layoffs?

PC: Well, that’s a question for an employment lawyer.  Yes, there are Fair Labor Standards that need to be considered when cutting wages or reducing hours but nothing prohibitive

CY: Where’s human resources in all of this?

PC: They are out to lunch, unfortunately.  They are completely afraid to take a position, perhaps they are concerned about being seen as a wimp.  They spend so much time picking up on the CEO’s signals and executing without presenting alternatives he or she might not have thought of.  They are often so far behind the curve in terms of what the business decides to do that it’s way too late to introduce a different approach without running the risk of being seen as obstructionist.  The goal is for HR to be proactive.  The minute you see the business going down, that’s when you present the case for flexible cost cutting.  Unfortunately, what we are witnessing is that the train has already left the station.

CY: I often wonder if perhaps part of the problem is the language used to describe flexible alternatives to job cuts.  I use the term work+life flexibility because that’s how reduced schedules, job sharing, project-based consulting, etc. are described in many organizations.  But maybe “work+life flexibility” is seen as a perk or benefit, and not a business strategy in many of those same companies.   Is there another way to describe flexible labor cost savings that would get leaders to recognize the strategic application?

PC: Maybe “work+life flexibility” sounds too employee-focused.  Think about a way to make the concept attractive to an organization in an economic recession – perhaps investment retention or labor cost flexibility.

CY: I agree with your “herd mentality” theory to explain why organizations jump right to job cuts.  You wrote, “The fact that virtually every company, despite their varying circumstances, ends up pursuing exactly the same approach to cost-cutting suggests that the processes involved have more to do with psychology—herd mentalities—than to any rational processes.”  What more can be done to shift the herd?

PC: We need to get the countless examples from the past as well as the few examples from today out there.  In the article, I mention Federal Express, where they are cutting wages by 5% to reduce costs with executives taking the biggest cuts (10%).  Also, I just heard about 16 states that now allow workers with reduced schedules to draw unemployment.  This helps employers achieve their cost-savings goals with the support of public funds.

Thanks to Dr. Cappelli for sharing his thoughts.

Bottom line:  Before your company cuts jobs consider more creative flexible way to achieve labor cost savings.  If you know of companies that have used flexibility in both downsizing and broader business cutting strategy, please let me know. Let’s work together to shift the herd.

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