'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.
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'Extreme Downsizing' May Hurt Companies Later

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'Extreme Downsizing' May Hurt Companies Later

'Extreme Downsizing' May Hurt Companies Later

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We already know some of the things that companies did to survive the recession. Many got rid of workers, and many are now making a profit.

But we still dont know if the companies also got rid of something else. In making such steep cuts, some may have thrown out part of their futures.

NPR's John Ydstie reports.

JOHN YDSTIE: ALCOA, the big aluminum maker, was one of the biggest job cutters in the recent recession. The firm slashed payrolls in its core business by almost a third.

Mr. KEVIN LOWERY (Spokesman, ALCOA): We essentially eliminated 30,000 jobs.

YDSTIE: Thats Alcoa spokesman Kevin Lowery.

For Alcoa, and for many other companies, the immediate goal of mass downsizing during the recession was the survival of the company.

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

YDSTIE: And Lowery thinks the strategy, including eliminating a third of Alcoa's workforce during the downturn, will prove to be successful in the long run.

Mr. LOWERY: 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 fall in line with that.

YDSTIE: 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, Denver, says evidence suggests Alcoa may falter in the longer run.

Professor WAYNE CASCIO (Management, University of Colorado Denver): 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.

YDSTIE: 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, says Cascio, because trimming labor costs boosts the bottom line.

Mr. CASCIO: 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. And what happens is, number one, they tend to cut out some of the very things that made them successful in the first place, for example, research and development.

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

Mr. SHANE SEXTON (Former Employee, Alcoa): 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.

YDSTIE: Sexton escaped the first big round of layoffs at the aluminum plant in Alcoa, Tennessee 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.

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

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

Mr. CASCIO: Airlines were not hiring at all during the recession. 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.

YDSTIE: 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.

John Ydstie, NPR News, Washington.


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