Help! I shrunk the company!

Can HR save companies from getting carried away with downsizing?

Stories of downsizing run amok are not unfamiliar. Take one former electronics-industry leader that ran into hard times in the early 1980s. Costs were spinning out of control. Its core business was focused on an outmoded

The company's first crack at a turnaround: Slash the workforce. It also was the second crack, the third and so on. Last year, after more than a decade of downsizing, the company filed a Chapter 11 reorganization plan under the U.S. bankruptcy code.

Why did downsizing - a cost-cutting panacea that has become an integral part of doing business in the United States - fail to save this company?

Management gave little thought to how the work would be done after people were let go, according to a former HR manager. "There was still an expectation to produce . . . the same or more [product] per hour." He asked that neither he nor the company, where he spent 10 years, be named.

Emboldened by the success of management gurus like General Electric Co.'s Jack Welch, chief executives have jumped on the downsizing bandwagon in droves. For every company that has rebuilt itself in GE's image, however, many more, like the one mentioned above, are floundering. Trimming a workforce is often harder than it appears, especially when management fails to envision how the company will operate after the staff shrinks.

Several companies have learned this lesson the hard way. A recent survey of 500 HR executives by outplacement firm Lee Hecht Harrison based in Woodcliff Lake, N.J., illustrates this point. Just under one-third of those polled felt that their company had let go of too many workers. The survey also found that one-third of companies that downsized since 1994 restored jobs that had been cut. Nearly 75 percent refilled those slots with temporary or contract workers.

HR's Role

Such statistics have HR professionals wondering what they can do to make downsizing work for their businesses - and how to determine when downsizing is the wrong choice. Part of the problem lies in the fact that HR has yet to be considered a full business partner in many organizations. As a result, it often is not included in downsizing plans at an early stage.

But the earlier HR is involved in the planning process, the more likely a downsizing will be successful. Even an HR department that has previously been limited to a compliance role can help smooth the downsizing process. That's because downsizing is a chaotic, emotional and uncertain experience. To survive it, companies must rely on skills that are at the heart of the HR profession: workforce planning, training and skills assessment, and communication.

By easing the downsizing process, HR departments can help their companies remain competitive while boosting the image and acceptance of the profession as a business partner.

Downsizing Gone Bad

When HR is not involved in the planning stages of a downsizing effort, many things can go wrong. Valuable employees can jump ship - and so can marginal workers who could have been retrained to better perform other jobs within the company. Incorrect information - or a lack of information - can breed mistrust of management and dampen employee morale among survivors of layoffs. Or, the company can cut too deeply into its workforce, forcing it to rehire laid-off workers.

Take AT&T Corp. The Basking Ridge, N.J.-based telecommunications giant lost 15,300 managers in one year when it offered very attractive early retirement incentives. Early retirement offers are popular because they divert painful layoffs when enough company veterans opt in, but they are blunt cutting tools at best. No one can be sure which jobs will be vacated, which makes workforce planning difficult.

AT&T is pleased with its cost-cutting results; however, it is trying to temporarily rehire former employees until it can absorb the shock. In some cases, AT&T is paying recruitment firms upwards of twice the laid-off workers' salaries to find them and bring them back. AT&T has long held a reputation for bringing back former employees as contractors after those same employees were laid off or encouraged to take early retirement. "It seemed like they would fire someone and [the worker] would be right back in their desk the next day," recalls one former AT&T manager.

Since becoming AT&T's chief executive in 1997, C. Michael Armstrong has staked his reputation on trimming staff and on meeting other cost-cutting goals that his predecessor, Robert E. Allen, had promised but failed to reach. Armstrong pruned 18,000 workers last year. More important, he cut overhead costs to 24 percent of revenues, down from 29 percent and nearing the industry average of 22 percent.

Why then, if the plan was to cut staff and overhead, is AT&T searching for ex-employees? Company spokesman Burke Stinson calls it a "stopgap" solution. He stressed that a relatively small number of workers are returning temporarily as contractors. Also, some outgoing managers have been asked to stay past planned exit dates.

"You don't [cut costs] by bringing people back you let go," says Stinson. "Does that happen? Sure, it happens to every company from time to time."

Frank Carrubba, a recently retired operations director for one of AT&T's network maintenance groups, contends that contract arrangements with former employees are not as common as AT&T's reputation suggests: "lt doesn't happen that much, but who better to bring back than someone who knows the ropes?"

Workforce planning, however, can help avoid that mistake altogether. For example, the opening salvo in a recent two-phase downsizing at a Fortune 500 manufacturer was plagued with problems that could have been avoided, recalls a former HR director with the company. Management was well into the process before it brought in HR. It turns out the plan would have created an age discrimination issue and had to be scrapped.

Better preparation and an enhanced HR role improved the effectiveness of the second phase of downsizing. Human resource managers brought the plant directors together so they could compare lists of eliminated jobs. They alerted each other when a cut in one area might hurt company performance in another. "We didn't hire many of those folks back," the HR director says of the workers they agreed to lay off.

Workforce Planning

A stopgap measure like the one employed by AT&T doesn't make for sound business strategy in the long run. HR has to position itself as a workforce strategist with a system for the ongoing downsizing and upsizing expected to occur at companies in the future.

To take a page from GE's play book, HR needs to weave the necessity of occasional downsizing into its company's cultural fabric. At GE, everyone knows that if a business unit is not No. 1 or No. 2 in its market, it is ripe for downsizing, outsourcing or a shutdown.

Here is where HR partners with managers to plan workforce sizing. GE uses a highly structured system to rank employees and evaluate performance. Managers slot their employees in a percentile range on a bell-shaped curve. When it comes time for downsizing, the employees most likely to be let go know who they are. Workers at the bottom of the curve will be among the first to go.

GE give employees a chance to move out of the bottom bracket. Each employee gets a grade of A, B or C. Grade A players are carefully cultivated and promoted so that when downsizing happens they do not jump ship, as the top talent in other companies often do. Grade B players are counseled on what they need to do to become grade A players. Grade C players must improve or move on. HR monitors the ranking and grading system to make sure that employees are graded fairly and consistently. HR also checks that managers are keeping the A players challenged and satisfied.

This system also works to stave off the plummeting morale among survivors that often follows layoffs. Surviving employees fare better when they understand the business goals of the company and how they can help achieve them. HR has to make workers see themselves as a part of the business plan by soliciting their advice and showing them what their goals need to be.

Support from upper management for HR is critical to make this type of system effective. Unfortunately, that support is not always available. John Gaffney, the lone HR professional in a 300-person health care company, recalls butting heads with management about how to handle a downsizing effort. "Things were being discussed without HR's input," he says. "We'd find out about [the decisions] and have to make eleventh-hour changes to our plans."

He tried to offer managers a structured system for deciding whom to let go, which included a close study of performance evaluations. He called it "a great theory in process." In fact, managers were given so little time to make decisions that Gaffney doubts the plan was much help. Carrubba encountered similar difficulties during the past downsizing at AT&T. He tried to persuade the powers-that-be to use a more targeted approach, one that would cap the retirement offer so that only one-third of managers could retire from each of his unit's offices around the country. He felt that service continuity, was crucial because of the group's close contact with AT&T's largest customers.

His bosses balked at the notion. The result: More than half of the managers left; in some offices, not a single manager stayed.

AT&T later decided to cap some units by allowing no more than 15 percent of managers to take the retirement package. But the move sowed ill will. Many employees with long years of service missed a fat retirement bonus by just a few names on a first-come, first-serve list.

Training and Skills Assessment

Retraining and outplacement assistance programs are an effective way for HR to thrust itself into the planning of a downsizing effort. A solid skills-training program may even open opportunities within the company to downsized workers. Human resource managers can reassess workers' skills so as not to lose motivated employees in this tight labor market. Just because workers are not doing one job well doesn't mean they are unqualified to do other lobs.

If supported by management, HR can help managers redesign the flow of work in their departments and assess the skills needed to get the work done after a downsizing. The first step is to understand the business, advises Brenda VanderMeulen, SPHR, of River Hills Consulting, an HR consulting firm in Holland, Mich. Human resource professionals cannot expect managers to take them seriously in a business discussion if they do not understand the products, marketing, technology and finances of the business, she says.

Case in point: One HR manager helped halt layoffs altogether in a business unit she was to help downsize. Business was expected to grow rapidly in the future and the unit expected to hire new employees with different skill sets to handle emerging work needs. So, HR assessed the skills of the existing workers and drafted a plan to fill those needs and increase output with the same staff.

Similarly, workers at GE are given a chance to come up with an alternative strategy to downsizing, says Bob Burnaska, manager of personnel relations. In about 5 percent of cases, the workers do save their jobs. In some cases, employees won't take advantage of training and other options unless you prod them. AT&T was one of the first companies to offer outplacement and retraining when it began downsizing in 1985. Fewer than one-fifth of downsized workers have taken advantage since then.

Thelma Hagood, a Washington, D.C.-based HR director, learned over 14 years of downsizes at her company, which she asked not be identified, that she needed to actively draw people into outplacement and retraining programs. "You're dealing with people who go into a denial mode. They become emotionally paralyzed," she says.

To increase participation, consider extending access to the programs until well after workers are laid off, to give them time to recover from the emotional blow. Such generosity also wins points with survivors. Open Communication

Communication is key at every stage of a downsizing. Employees tend to look closely for signs that management is hiding information from them. Workers resent layoffs less when management is open, honest and generous.

Bad communication can lead to misunderstanding among the workforce and the public at large. Linda Villa, AT&T's vice president of HR in Basking Ridge, says the company's 1996 redeployment mission collided with the company's public relations mission, which Stinson calls an outright "blunder." AT&T announced plans to slash 40,000 jobs over three years. The magnitude of the planned cuts shocked the public and led stock market analysts to wonder if AT&T was in financial trouble.

Stinson admits that the company's failure to explain the plan confused analysts and depressed workforce morale. Its intent was to drop an average of 1,100 jobs a month over three years, up from a 900 job-cut monthly average since 1985. In fact, its net workforce grew from 1996 to 1998.

Poor communication can also lead employees to speculate about management's intentions and knowledge of the organization. A former district manager who left in 1997 speculates that the 1996 announcement was meant to boost AT&T's stock price. He adds: "A lot of the higher ups . . . their long-term commitment to a company is only a couple of years now. They are all out to make a mark and move on. . . . They don't understand what happens down below."

Portfolio manager Michael Metz of Oppenheimer Investment Managers in New York disputes the view that CEOs are lopping payrolls for the sole purpose of boosting stock prices, and says Wall Street analysts study downsizing companies in depth for signs of real cost-cutting progress. A clear focus on a specific cost cutting goal - to cut overhead to 22 percent of revenues - is what distinguishes AT&T's latest downsizing efforts. Past downsizing amounted chiefly to a reorganization of the workforce.

AT&T's shares climbed when Armstrong began to deliver on his cost-cutting promises. His plan has been better targeted, some AT&T veterans say. For example, many outgoing managers came from flagging international units. Armstrong brokered a joint venture with British Telecommunications and closed existing operations with an eye to improving AT&T's own international service.

The Future

After downsizing, the first question on everyone's mind is, "When will it happen again?" An honest answer doesn't have to kill employee morale. Gaffney admires the technique of one manager who came right out and told people that it could happen again. Then he reminded workers to focus on the goals before them and stressed that success was the best way to prevent future layoffs.

Just like at GE, HR must use honest communication to prepare its workforce for the realities of the competitive marketplace.

Such straightforward responses can help prepare employees for the possibility of future workforce cuts. This is critical because the downsizing trend is here. Any employer who doubts it simply hasn't seen the statistics: Amid the tightest job market in decades, and with worker shortages abounding, layoff announcements so far this year are running ahead of last year's level, according to the Chicago outplacement firm of Challenger, Gray & Christmas.

And last year's total set a record for the decade.

Sherry Kuczynski is a freelance writer based in Alexandria, Va. She previously worked as a business reporter at Investor's Business Daily in Washington, D.C.