Industry Liposuction
Mark Hoover, President, Acuitive, Inc. 

You’ve got to admit, the CEOs and marketing spin-meisters that serve them in the computer and networking industries are pretty clever and amazingly flexible.  When times are good, and customers are buying up every bit of technology they can get their hands on, just because it seems like the thing to do, they can point to the high quarter-to-quarter revenue growth rate of their company and relate it directly to their inspiring yet steady guiding hand.  In doing so, they can even hint that the best is yet to come – that growth will spiral exponentially as every adult, teen, child, dog, cat, insect, and lawyer in the world gets networked twenty different ways. And if that isn’t enough for you, imagine how their market will grow when extraterrestrial life is discovered.  Imagine the need for PCs, routers, voice-over-IP switches, and supply chain management software throughout the Milky Way!  The yellow algae of Alpha Centaur have no IT skills at all.  They need outsourcing like nobody’s business!  A P/E of 180 is a pittance when you think about the growth potential of networking the universe. 

But the true cleverness of the corporate spin-meisters is not unveiled by the way they trump up the good times.  It is in the way they finesse the bad times. And we’re in a period of bad times now as actual consumption of computing and networking gear has temporarily contracted somewhat.  Normally, such a modest contraction wouldn’t be so bad or newsworthy except when it occurs abruptly and is a radical departure from the growth expectations that had been subliminally built into all of us. 

How is a clever CEO to deal with this?  Generally, the thing to do is to play victim to general and pervasive market conditions.  It goes something like this: “I’m announcing to you today that our growth this quarter will not be 28% as expected, but will be flat. This is not, I would like to emphasize, due to our muddled strategy, over-priced and ill-thought acquisitions, failure to deliver product in a timely fashion, mis-read of market conditions, or poor supply chain management.  It is due to an unexpected and unpredictable change in general and pervasive market conditions.  In other words, what could we do? We’re innocent bystanders to these unprecedented events.”

So, the fault is not theirs.  But still, to show what a great executive you are, you have to do something.  So here it comes, “We’ve thought long and hard about what to do about these present market conditions, and we have come up with a clever approach to bolster our business –get rid of a chunk of it -  i.e., we are right-sizing.” 

Ahhh.  Wall Street loves a good right-sizing.  Yet, a simple and quiet right-sizing may not demonstrate the depth and breadth of the management team’s skills. So companies are driven to differentiate in how they right-size, to show that they are the right right-sizers for the moment.  There are several techniques for how to differentiate your right-sizing.  One is to seek the first right-sizer mover advantage. In other words, be the first one to say uncle.  “ We regret to announce a layoff of 150 employees due to current market conditions beyond our control.”  The risk with being the first mover is that there is not yet enough evidence to indicate an industry-wide issue, so people will think it’s your specific problem, and Wall Street will hammer you.  The play here, as other companies make similar announcements in the future is to send out a bunch of “I told you so, I told you so” releases, in the hopes that there will be a rebound effect in your favor as Wall Street comes to believe they may have hammered you too much previously.

Another avenue is the “bigger is better” approach.  Company A announces a layoff of 750 employees. Company B then announces a layoff of 1,500 employees.  Company C says “These guys are chicken, we’re going to manage a layoff of 3,000 employees.”  These announcements tend to feed on one another as the competitive juices start to flow in reaction to other companies’ right-sizing announcements.  You can imagine the discussions in the early internal meetings. “How can we layoff more people than Company C?  We won’t let them beat us! Confound it, somebody put a plan in front of me that results in bigger layoffs, or heads will roll!… Well, actually, heads will roll either way, but if you provide the plan maybe it won’t be yours.”   It gets really impressive when the numbers hit 10,000 or more.  Of course, this only works with very big companies. An efficient market does not reward an announcement of 7,500 layoffs from a company of 7,501 employees.

The cleverest CEOs recognize times like this as not a problem, but an opportunity.  In this case, an opportunity to hide their mistakes.  This leads to a third approach to right-sizing, which is to position it as a reverse merger.  Do you have a product line or acquisition that isn’t working out?  Get rid of it.  “We’re announcing today the spin out of our buggy whip division, which we think will result in a release of the intrinsic value of this division, and which will allow us to focus on core business.”   Is the message here that divisions with intrinsic value aren’t core business? We all know what this really is is crud rejection. Get rid of the stuff whose financials you don’t want crudding up your bottom-line any more. There must be untold CEOs, CFOs, and Boards who are breathing a big sigh of relief as the unpredictable general and pervasive market conditions give them an excuse to shed employees who never should have been hired in the first place, products that just don’t make sense, and other mistakes that otherwise eventually would have made them look bad. But it’s not them, it’s the market. They are just poor victims, managing as best they can through these stormy times. 

Being my cynical self, I often have to wonder what’s really behind these right-sizing announcements.  What really happens after an announcement to lay off 5,000 employees is made?  Can a business really shed 5,000 people? And if they do, can they avoid radical impacts to their business?  And if they can, why did they employ those 5,000 people in the first place?

What you’d imagine is that companies would first target the truly non-essential employees – the team responsible for planning outside events, the “inside recruiters” responsible for shifting employees from group to group internally, the people responsible for determining the lunch menu, the people responsible for couriering the lunch menu from building to building, the liaison people between the employees and the travel planning organization, the individuals responsible for graphics and presentation standards, the group that tests the coffee and bagels for the executive breakfasts, the division that changes the oil in the motor pool, the team that selects the building paint color, the Solutions Marketing group, and all the lawyers, to name a few. 

Companies vary in how much fat they have to shed.  It gets to a theory of mine “Hoov’s Theory Of Fat Accumulation Correlated to Group Size.”  That is, if the corporate standard is to have small groups, there is a lot of fat. That’s because the 1^st and 2^nd  level managers have enough time to think of additional things their team could be doing, which inevitably leads to more hiring.  But if you have a standard that each manager has, say, 15 employees reporting to him or her, efficiency improves considerably.  Managers say “I’ll do whatever you ask, I’ll figure out how to get more done, but please, please, don’t make me manage more people!” 

So, in a well-managed company with large and efficient work groups, there aren’t that many people in non-essential positions.  Few competitive companies are truly radically wrong-sized in such a way that getting rid of non-essential employees can complete a big layoff.  So what really happens?  Tough, hardnosed, business decisions are made, right? … Wrong.  What the company hopes for is attrition at a rate large enough to meet their right-sizing targets. Attrition avoids the need to make tough decisions. You let your employees make the tough decisions for you. But here’s an irony – when times are tough companies generally have a reduced attrition rate after making a right-sizing announcement.  I think that this is a symptom that people worry more about the uncertainty of going elsewhere than staying where they are. So companies offer incentives for people to leave – often very costly incentives that pretty much negate the goals of the right-sizing in the first place.  If you are very clever, like Lucent, you try to accelerate the attrition by threatening everyone with French bosses. But I guess they got wind that that tactic would have worked too well, so they backed off.

So in practice, what really happens is that a few quarters after the big layoff announcements, the company’s costs are not significantly lower than they were before the announcements. Yet their employee headcount may be somewhat reduced. What’s going on here? It’s the time-honored tradition of hiring employees back as contractors or consultants after you’ve released them as an employee.  And the irony is, hiring them as a contractor can cost more than they did as an employee!  It’s kind of like when people use liposuction to get rid of all the fat cells around their waist.  All future fat accumulation gets done within the remaining fat cells around their neck.  The company ends up looking like Alfred Hitchcock’s head on Kate Moss’s body.  And that only goes unnoticed if the general and pervasive market conditions change back in favor of the company and they start selling products and services like gumdrops again in spite of themselves. 

(volume 4, number 5)