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We were struck by a recent article in The New Yorker magazine that explored the issue of downsizing and its effect on companies’ financial health. The once-sacred business rule of “Lay-Offs = Increased Stock Prices/Higher Profits” is a notion to be reconsidered in light of recent Wall Street trends, according to a meta-study cited by the magazine. While workforce reduction once was seen as a guaranteed hit with investors, well-established trends indicate that lay-offs often end up hurting a company's stock prices and profit margins.

A management professor at the University of Colorado at Denver, Wayne Cascio, looked at more than 300 firms that downsized in the 1980s. The results? Three years after the lay-offs, returns on assets, costs and profit margins had failed to improve. In recent times, “Downsizing has become . . . a default business strategy, part of an inexorable drive to cut costs,” the article states. “That is why Circuit City can proclaim ‘Our associates are our greatest assets,’ then lay off veteran salespeople because they earn 51 cents an hour too much.”

We say a big “Amen” to that and add this: Companies also hurt themselves when they fail to involve workers when financial health necessitates that costs be trimmed.

Business literacy and decision-making are usually centralized at the top of an organization for the purpose of tight control.  To boost profitability, leaders often embrace processes such as re-engineering, top-down quality improvement efforts and other interventions that  are delivered to the workforce as a done deal.  The end result is a cynical workforce where people feel helpless in creating their own future.

When cutbacks occur, companies tout achieved “efficiencies” and employ maxims like “work smarter, not harder." This attempts to sanitize the magnitude of problems, creates fuzziness about financial targets and allows no latitude on how to hit them. And it displays a significant lack of faith in the ability of core workers to help resolve financial issues.

Chipping away at numbers for managing profit and loss is a limited strategy at best, and it ignores what truly is a company’s most valued resource: the skills, knowledge and competency of the people who do the work.

Here is an example: We recently attended a meeting where a group of health-care company executives were trying to decide whether to award a juicy contract to a consulting firm that promised to cut millions of dollars in costs. The consultants said they would send in 70 people to "make sure" the health-care workers followed the plan to cut costs. After the presentation, one senior executive had this epiphany: “Why aren't we baking these cost-cutting skills into our own people? They are the ones who are ultimately are responsible for reducing costs." Exactly!

A business strategy is one that relies on building people’s capacity to understand the business of the business and take accountability for its success is a far more effective  cost-management strategy. It requires that everyone has knowledge about what is at stake, and that everyone has a stake in finding solutions to complex business issues.

For organizations accustomed to a command-and-control management strategies, this change requires that individuals:

  • Develop a different view of human capacity, especially of those who do the work.
  • Recognize that every organization is full of adults living complex lives.
  • Accept that individuals develop meaning and purpose from their own experience and that no one can force accountability.
  • Recognize that individuals are responsible for their own motivation and passion.

Accountability isn’t as difficult as we try to make it. It requires knowledge and literacy because we can’t be accountable for something we don’t understand. And it also requires the freedom to acknowledge and express our doubts.

Using this new frame for understanding individuals, the organizational strategy for building capacity becomes one of:

  • Creating business literacy by distributing unsanitized information and an understanding of how business units and individuals affect financial success.
  • Changing conversations from parent/child to adult/adult and building a culture of accountability.
  • Changing management practices, policies and procedures to support freedom and choice while allowing the people who do the work meaningful decision-making authority.

Cutting costs is not inherently evil -- to survive in today’s cut-throat business environment, it’s a necessity. But when companies define workers as Cost Centers and fail to recognize them as Value Creators, the definition of “costs” has become too narrow. Businesses that bet their survival on technology, unique processes or cutting-edge innovations alone put themselves at serious risk in today’s highly competitive marketplace. Building capacity by giving workers business knowledge and freedom to choose accountability is the best investment for an organization's long-term competitive advantage.

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