Jan 2009 has been a bad month for US with around 598k jobs being laid off. This is on top of the 2.3M layoffs in 2008. One of the trends that we saw during this cycle was lay-offs by profitable companies like Microsoft, IBM, Intel etc. This garnered a lot of press coverage and prompted a big debate on whether layoff's by profitable companies is ethical.
IMHO layoff by profitable companies is ETHICAL. Here's are some of the reasons why i feel it is ethical:
IMHO layoff by profitable companies is ETHICAL. Here's are some of the reasons why i feel it is ethical:
- Shedding excess baggage: Most large companies over a period of time build up a lot of fluff (redundant positions, over staffing etc) in their operations and this typically goes unnoticed when they are growing well and are profitable. When the going gets tough and margins are starting to take a hit they wake up shed lot of these excess baggage, trim down their operations in order to be more efficient & competitive.
- Rollback of excess hiring for anticipated growth: It normally takes between 6-12 months to induct a new employee and have him fully productive in a typical enterprise. Lot of companies do anticipatory hiring based on their targeted growth. When a downturn occurs, most companies realize that a slowdown is occurring only when they start feeling the pinch. When growth suddenly starts tapering out and they don't have sufficient work for the folks that were hired ahead of time. Hence leading to lay-offs.
- Declining Demand/Consumption: One of the key reasons for economic slowdown is decline in consumption. People tend to spend lesser due to risks/tough market conditions and this leads to worsening of the condition. A lot of industries take a hit due to reduced consumption/demand. Its only natural that they reduce operating expenses(shutdown factories, layoff workers etc) to remain profitable.
- Weeding out the Non-Performers: Weeding out the bottom x% of non-performers is a standard practice in most enterprises. When the going is good the tolerance level in the system is higher and non-performers get more leeway and lesser folks are laid off. Non-performance related lay-offs also get very little attention/coverage. During difficult times, companies utilize this opportunity for flushing out the non-performers. In most Fortune 500 companies the bottom 2-3% itself can be sizable(few thousands). This whole process also gets more press coverage in tough market conditions.
- Protecting share holder interests: One of the key agenda's for boards and CEO's is to maximize shareholder value. These days there is an enormous amount of scrutiny on company performance, operational metrics, profitability etc more so when the going gets tough. We as share holders & individuals also demand better performance and improved value from corporates. Due to this boards and CEO's take a very conservative & precautionary approach during tough economic conditions to optimize their operations, reduce costs and minimize risks. If boards/CEO doesn't take these tough decisions they will be replaced with folks that can take these decisions.
11 comments:
Great Post Nandu. I agree with you that some companies use this tough time to adjust their head count, but i think that is unethical.
A) Bottom x out happening all the time at end of year performance review.
B) They have to hire contractor or temp. workers for anticipated projects.
Companies like Microsoft shouldn't do layoff at tough times. They can do something like this at high time would be unnoticed and who cares...
Subba
I think it is ok. We never think that loss making companies in good times should not give hikes to employees. That is never talked about. :-)
Well it could be that to remain profitable they need to do it. It is also about tolerance levels. When I wake and am fresh in the morning my kids more chance to be naughty. But at 10 P.M on Friday they definitely don't get so many chances. :-) :-)
Thanks for the comments Subba. Microsoft employs around 100k people the layoff announced by them in around 5% of their workforce. It would be a combination of low performers and removing/consolidating redundant positions. I agree that they have deep pockets and can ride thru this. The law of economics also comes to play here rite. I'm sure they have margin pressure and may have to cover up.
Thanks Kumaran.
'We never think that loss making companies in good times should not give hikes to employees. That is never talked about. :-)' - Thats a good one and very true.
Whether profitable or not if lay offs are done to improve productivity, weed out poor performers, prepare for down-turn and so on I am of the opinion that business ethics does not come in picture at all.
To paraphrase my own point, I think the reaons you mentioned are actually valid reasons to fire somebody and nothing really unethical about it IMHO.
I think Business Ethics covers shady business practices
For ex., hiring and firing for avail tax or other government benefits or Firing somebody so they could recruit their choice (nepotism / favoritism) and so on.
My 2 cents.
Thanks Ram. Some people refer to this as ethics its more corporate social responsibility. As you stated ethics is slightly different.
I think big companies with loads of cash should make this decision carefully. They have responsbility, they have to carefully make their decision so as to not to be culprit for the downward spiral.
Companies like CSCO and MSFT regulary cut the bottom rank of employees. They dont need a recession to cut the people. Instead they should better put the people to use. Check out the link below, more relavant on this topic.
http://www.marketwatch.com/news/story/story.aspx?guid=%7B5D689E6C%2DD61B%2D4EC3%2DA204%2D24133109152B%7D&siteid=rss
anand
Thats an interesting article. Cisco made big lay-off during the dotcom bust. It will be interesting to see if it sticks to its stand as economy weakens more.
While i do agree with you that large companies with deep pockets need to consider before laying off we are in a capitalistic world and it will be tough for CEO/Boards to hold up against investor/market pressures.
Nice post Nandu. Yes, I feel the same. It is about corporate responsibility rather than ethics.. If a company fire s all the people over 40 in the company or something like that.. would definitely be unethical.. but to cut down workforce based on demand, performance and available projects and choosing the low performers for that.. is necessary.. unless they are highly conservative in hiring the best performers at all times.. ! (which never happens with big companies :))
To maintain their profitability and credibility.. they have to keep restructuring the workforce as needed.. and also their other operations and processes...I think its essential to business performance.. in this competitive world..
Mr. Nandu,
I am not going to debate the points you put forward as this is YOUR own blog and you have rights to express. That said, I would like you to look at the following point closely
Declining Demand/Consumption
Layoffs have a direct relationship to declinign demand as the purchasing power of individuals goes down with the loss of job and this results in busiensses laying off people due to downturn in busienss and this is a vicious circle.
This is what I heard Mr.Obama stating clearly.
There are several ways to keep shareholders interests alive.
Some of them are, keeping track of hiring and hire only when needed. Never hire in anticipation.
Head-to-Dollar ratio should be defined at the beginign of the year and resource loading should be done accordingly.
How about exec management and board conducting their meetings in office instead of five star hotels
for ex: In recent satyam episode, I have seen that board met in a five star hotel in mumbai and spent the money more than once.
I refuse to believe that satyam does not have a board room...
Last but not the least, human resources should be not considered same as physical assets like cars etc which can be dumped when not needed
My 2cents...
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