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Saturday, 9 October 2010

What Is The Relationship Between Layoffs And Bureaucracy

I've been reading the stories on the major layoff at HP this last week, and it really struck a nerve. HP announced this week that they are going to reduce their workforce by 14,500 people over the next 18 months. It was no big shock, since HP has been paring down their employment levels, and has been generally concerned about their cost structure, for the last several years. Their main competitor, Dell, is a lean and tenacious predator that has set their sights on crippling the HP computer and printer businesses. And actually, the cuts weren't as deep, and the timeframe longer, than many analysts had predicted. Still, it represents nearly 10% of the workforce of this venerable technology company.

There are many reasons that layoffs occur, and sometimes they are well thought out, and necessary. I'm going to focus today, however, on a common situation I've seen repeated over and over, using the HP story as a model.

HP is of special interest to me because I'm an HP "Alum", having worked there for 5 years back in the eighties. I have also worked with the company since I began my consulting practice. I have many friends and acquaintances still there, and have always had positive feelings about the company. So while I'm a long way from an insider, I'm also not exactly a dispassionate observer, either.

More than a special story, though, this is the very common one of a once revered technology giant whose growth has slowed. DEC, COMPAQ, WANG, IBM, the list is long and the downstream results mixed.

There are two basic ways to view this story, and I am on the fence between the two. The first looks at it from a financial point of view. HP, in the opinion of most financial analysts, has become bloated, with high staffing levels and other costs. This is undoubtedly true. It's an unfortunate fact that when a company has a lot of success over a long period of time, inefficiencies and excess tend to creep in.


And make no mistake; HP was VERY successful for an almost INCREDIBLE period of time. Even today, the company is hardly a train wreck. It's still making a lot of money, and to my knowledge, never had a money-losing year. That's in a corporate history of around 60 years. It's a very enviable record, and one that didn't happen by accident. I'll touch more on that later. With this kind of success, unfortunately, comes the freedom to be not very disciplined. One of the most common mistakes that occurs as a result is that PEOPLE GET HIRED BECAUSE THEY CAN. The cash flow allows it--so more people get hired. In this respect, companies seem to follow the same path as humans. You don't see to many fat people in poor, developing countries where food or incomes are limited. The same with developing companies with limited cash flow--there are very few "fat" Bureaucracies.

When starting out as a company, there is always a lack of the people resources to optimize the business. So in the beginning, hiring with growth is a good idea. But at some point a line is crossed, and the net impact of those additional people becomes a negative, rather than a positive. This is the "Bureaucratization" of a company, and it's a very bad thing. It's not something that happens overnight, but more of an incremental, gradual occurrence. But once it does seep in, it changes your company culture in profound ways.

Discussions become more internal, rather than externally focused on the customer. Individual success becomes more reliant on internal political skills, rather than business skills such as increasing revenues, decreasing costs or creating great new products. In the extreme, this leads to "empire-building", which happens when success is defined by the size of your domain, rather than its performance. At HP, Bill and Dave (Hewlett & Packard) instituted early on a policy of holding annual staffing growth to a set fraction of revenue and profit growth. I believe that this policy was one of the keys to holding off the inevitable bureaucratization of the company for a very long time.

Once started, the Bureaucracy is a self-sustaining organism. Because you have some many people and so much overlapping of responsibilities, the lines of communication grow ever more long and complex. So you need to add more people, to make sure that all of the busy work that is created in the process is done. It's the ultimate vicious circle, and causes huge inefficiencies that permeate throughout the company.

Unfortunately, this seems to be the inevitable fate of every company that grows big enough. While not necessary theoretically, from an empirical perspective it seems to be a natural course of events. Some stave it off for a very long time by being cognizant of it, usually by keeping individual business units small and decentralized. HP became a very big company before its bureaucracy got a foothold--but it did occur. Often, but not always, the rate of bureaucratic growth is inadvertently quickened, when a small company that is growing fast decides it's time to bring in "big-time" management. This inevitably leads to hiring senior managers from larger organizations, who are used to the trappings and management methods of bureaucracy. And so it goes. It seems that it happens to all companies at some point if they continue to grow, no matter how successful they've been. Companies grow so big that they eventually implode under their own weight.

Bureaucratization, I believe, is the major phenomenon that leads to layoffs in large, successful companies like HP. The financial manager within me says that this layoff needed to happen and is long overdue. The company's costs need to be brought closer to Dell's or disaster is looming. I strongly believe the company has the ability to do more with a lot less people, as I opined in the discussion above. But there is another side of this that needs to be considered, and often is given short shrift by financial and industry analysts. Businesses exist to make a profit, and this must be the first and foremost consideration. So we'll put aside the tremendous personal cost that is being inflicted on these affected 14,500 people being laid off, as well as their families. I strongly believe that these layoffs with cause a deep cut into the flesh of this company, one that will negatively affect competitiveness. In the case of HP, I feel this is particularly true. Here's why.


HP had traditionally one of the strongest, most positive corporate cultures in high tech history, called the "HP Way". It's treatment of employees, and the loyalty they returned, are legendary. Having experienced it for myself, I can testify to its power. Frankly, it's a little difficult to fully explain to someone from outside the company. But HP people know. At HP, you felt as if you were part of a favored, select family. The policy was to hire slowly and carefully, and the dismissal process was the same. People were valued and treated with great respect. The effects on an individual were generally considered upfront in any decision that might include them. PEOPLE were correctly viewed not as just an important resource, but the very flesh and blood of the company. The company was highly decentralized for a long time, and individuals were given great responsibility within their sphere of competence. No doors on offices, even senior managers, and NO LAYOFFS. I worked in a $350M division, but it felt like I was working in a small, entrepreneurial company. Decisions happened quickly and they weren't handed down, but were likely to flow up the chain of command for approval. As a result of this culture, employees were unusually loyal, and worked on behalf of the company in a manner that an owner might--with the company's best interests in mind. And most people at the time were not even option-holders. If not completely unique, it was highly unusual within big corporate America.

And most importantly--it worked. HP had a run of great financial success that lasted more than a half-century. The creation of this corporate culture wasn't some touchy-feely, social experiment--it was good business. Yet even today, most of the lessons of HP's success, and other like-minded corporations, appear to be lost on corporate America. In most large corporations, employees are treated like expensive desk chairs. They are welcomed when new, but are worn down by usage by the corporation over time. When they become a bit frayed along the edges, or there are too many in number for the current level of operations, they are discarded quickly and without much regret. They are downsized, right-sized, or part of a reduction-in-force--an impersonal transaction hardly appropriate for the "flesh and blood" of the company. To some corporate managers, they are little more than another balance sheet transaction. Most corporate executives seem to see it as maybe a bit unfortunate, but simply a normal and necessary part of doing business.


I view it differently, as I'm sure you've ascertained by now. I believe in most circumstances major layoffs have profound, negative impact of the company's long-range ability to maximize financial results. This is hard to measure, of course. The short-term impact on the income statement from large layoffs is comforting to senior management, since the results come quickly and are easy to measure. In the case of HP, the new CEO, Mark Hurd, inherited a situation--he didn't cause it. He has been generally well received within the company, and seems a much better fit in style and substance than his controversial predecessor, Carly Fiorina. He was brought in to improve the company's fortunes going forward, and I'm sure that he's just doing what he believes needs to be done. There is a good chance that he will greatly improve the performance of the company in the near term. It's been done many times in similar situations before--IBM comes to mind as one. IBM is a solid company, but not what it once was. Like IBM, HP has been changed forever, and I doubt it will ever regain its former greatness. I can't think of another case where the major company has reverted to its prior form after a severe traumatic restructuring. The HP culture has been eroding for many years, and this latest layoff may be the final nail in its coffin.

So, should HP have executed this massive layoff? I can't answer that--it's a complex situation with good points to be made on both sides. Its competitive position has been weakened by poor expense controls, and as I stated previously, can undoubtedly operate more efficiently with fewer people. However, one has to remember that HP isn't hemorrhaging cash--it is making money, and has plenty of liquid resources. So the other view can be taken that a massive layoff is a drastic step.


Either way, my takeaway message is that layoffs happen far too often, are to be avoided at almost all costs, and should be used only in dire circumstances--as a last resort. Most importantly, corporate management isn't doing its job if it allows conditions that necessitate layoffs in the first place to take hold--the unrestrained growth of the bureaucracy, during periods of growth. Bureaucratization may indeed be inevitable, but it should be RESTRAINED and DELAYED as long as possible. Hacking large numbers of employees periodically during slow times doesn't take much management skill, or creative thinking. Shareholders shouldn't reward it. Mass layoffs have a hard-to-measure, but very REAL, negative impact on the company's ability to compete in the long run. That's my opinion--and I'm definitely in the minority on this issue. Send a comment and tell me why I'm wrong.

Phil Morettini is the Author and President of PJM Consulting, a Managment Consultancy to Software and High Tech Companies. PJM Consulting executes special, strategic projects and can also supply interim senior management in General Management (CEO, COO, Division Manager), Product Marketing, M&A, Distribution Channels and Business Development. You can contact Phil on the PJM Consulting Website (


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