'Extreme Downsizing' May Hurt Companies Later

During the Great Recession, companies laid off workers in record numbers as firms struggled to survive and eventually return to profitability. Despite the slow economy and high unemployment, profits are returning at many companies. But companies that made deep job cuts may suffer in the longer term.

Alcoa, the big aluminum maker, was one of the biggest job cutters in the recent recession. The company slashed payrolls in its core business by about one-third.

"We essentially eliminated 30,000 jobs," Alcoa spokesman Kevin Lowery says. For Alcoa, and for many other companies, the immediate goal of mass downsizing during the recession was the survival of the company.

"The way we look at it, is we have about 60,000 employees left," Lowery says. "Some of the things that we were doing were to actually preserve the jobs of those 60,000 employees, so that we would have a business that would be sustainable moving forward."

And Lowery thinks the strategy will prove to be successful in the long run.

"If the economy fully recovers back to the levels that it was at prior to the recession, we would think that both revenues and obviously earnings would [be] in line with that," he says.

In fact, Alcoa showed a significant profit in the most recent quarter, exceeding analysts' expectations.

But Wayne Cascio, a management professor at the University of Colorado in Denver, says evidence suggests Alcoa may falter in the longer run.

"What we find with extreme downsizes is that in the long term, they really do suffer relative to competitors in the same industry facing the same sets of economic conditions," he says.

Cascio says extreme downsizers are companies that cut their workforce by more than 20 percent. He says research suggests that most of them lag their industry for as long as nine years after a recession.

It is true that deep downsizing can produce short-term profits, Cascio says, because trimming labor costs boosts the bottom line.

"A lot of this is done for short-term profitability, or to send a signal to the market that a CEO is taking strong action to try to reassure shareholders," he says. "And what happens is No. 1, they tend to cut out some of the very things that made them successful in the first place, for example research and development."

Cutting a workforce so deeply can also have a negative impact on the morale of employees who remain, Cascio says. Ex-Alcoa worker Shane Sexton agrees.

"You can imagine if every day you wake up you go to work, but you don't know if that's the last day you're going to go to work," he says.

Sexton escaped the first big round of layoffs at the aluminum plant in Alcoa, Tenn., during the recession. Then he lost his job early this year.

He says anxious workers can create problems. Especially if your job is in a dangerous workplace like an aluminum smelter, where molten metal is heated to over 1,500 degrees.

"Some part of you is going to be watching what you're doing," says Sexton. "But you're not going to be ... Your mind's not going to be totally committed to focusing on what you're doing, when in the back of your head you're thinking, 'Man, am I getting laid off? I wish they'd tell us something. All we hear is rumors.' "

Extreme downsizers do see an immediate boost in productivity as fewer workers do more. But it can also lead to burnout and eventually the departure of top performing employees. Still, Cascio says, it's not easy for companies to resist the short-term benefits of deep downsizing. But he says some, like Southwest Airlines, have.

"Airlines were not hiring at all during the recession," he says. "A lot of them were laying people off. But Southwest didn't lay off people. So, what does it do with the recruiters that normally would have been involved in new employee hiring? Well, it redeployed those people into frontline customer service positions."

So far, that's worked out well for Southwest. Whether the opposite path -- extreme downsizing -- works or doesn't will become more obvious over the next few years. That's because during the recent recession, almost 40 of the country's largest companies chose that course.

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