Downsizing: The Easy Way Out

By Vijay Mehrotra

The following is a true story. The names have been changed to prevent a large corporate entity from being easily identified.

I have a friend — let's call her "Leia" — who was working at an Internet company — let's call it "Skywalker Corporation." About 18 months ago, the leadership at Skywalker, aware that their stock was highly overvalued in the marketplace, made a most prudent decision to sell the company.

Leia and her friends viewed this decision as treasonous, for the acquiring party was an industry colossus and fierce competitor — let's call it "Vadar Incorporated." Vadar was a vast empire with a hierarchical and bureaucratic corporate culture, and thus Leia and her friends feared for their homes, their jobs and their freedom to wear whatever they wanted to at work. Paradoxically, Vadar claimed to have acquired the group at Skywalker for their innovative spirit, and pledged to leave the Skywalker group intact.

Alas, soon thereafter, the Vadar pledge to preserving Skywalker's autonomy was under siege by the likely suspects: the Vadar corporate accountants, with their thirst for profitability and cost reduction, and the Skywalker dot-com reality, which featured neither.

Within a year, changes began at Skywalker, and many of the Skywalker loyalists jumped ship, while many of Skywalker's remaining employees were told either that: (a) their services were no longer needed, or (b) their jobs were being moved to the faraway Vadar headquarters.

Meanwhile, in the face of a recession, Vadar faced the more basic problem of maintaining its promised level of profitability. So its human resources professionals decided that all Vadar employees should understand the connection between their work and the bottom line. To this end, they conceived of a seminar entitled "Vadar's Financial Success and You," and contracted an outside firm — call it "the Solo Group" — to develop and deliver the curriculum for this day-long course, which every individual in the far-flung Vadar empire would be required to attend.

Solo did an excellent job in developing the VFS&Y; materials, which included presentations, discussions and quizzes. Most notably, Solo developed a simulation game that had participants play the role of Vadar executives who are faced with making decisions in a turbulent market full of random events.

One day theremaining band at the Skywalker facility was asked to attend the VFS&Y; seminar. Actually, "asked" is not quite right, for the Skywalker employees were told that they would have to pay the seminar costs out of their own pockets if they did not attend.

The irony was that many of the remaining Skywalkers had been told that they were to be laid off two months later — yet they were still somehow being required to spend the day examining their role in Vadar's Financial Success.

These abandoned Skywalkers walked into class with a jumble of emotions — confused about why they had to be there, bitter about the evolution of the Skywalker group's role and largely resigned to their own fates. As the day went on, however, several of these individuals began to engage in the course discussions. Yes, they agreed, Vadar was in a challenging position. Yes, they realized, Skywalker's operations were more expensive to maintain. Yes, they accepted, these were tough decisions to make.

Indeed, several soon-to-be-released Skywalker employees, when faced with some difficult trade-offs during the VFS&Y; simulation game, actually made the decision to lay themselves off. When asked why, they replied that they were just trying tothe game and capture the prize: a Vadar company T-shirt.

Again, I am not making this up.

Sadly, this game is not atypical of what actually happens. Leading abusiness, I worry constantly about maintaining growth in order to preserve jobs while wanting to be fair to our employees, all of whom participate in our profit-sharing program. It's tough out here.

On a larger scale, as a Hewlett Packard shareholder and Bay Area resident, I have had a ringside seat for the nasty fight around HP's proposed acquisition of Compaq. Yes, I agree that HP cannot stand still — but I am suspicious of the optimistic consolidated cash flow projections (see my last column on "Real Options"). Yes, I agree that further plunging into the PC business by joining forces with Compaq is risky — but I am not at all clear on a solid alternative. But mostly I think of the 15,000 plus employees to be laid off as a consequence of this deal, while the execs rake in fat bonuses for "increasing shareholder value."

In the end, I'm suspicious of management that fire employees to please Wall Street without simultaneously making fundamental changes to their business. It is easy for executives to say that they are in the wrong place, but without some real reflection on how they arrived there or where they intend to go — or some senior management actually sharing in the pain — investors should remain dubious.

However, firing people seems to be viewed by Wall Street as a panacea, even for some awfully sick companies. The immediate positive feedback that seems to accompany announced job cuts only reinforces this type of management behavior.

So why do we reward companies for laying off employees? Mostly because downsizing is really easy for management and investors to understand.

Even the laid off Skywalkers could see how expedient it was to meet their short-term goals this way. They get to keep the T-shirts, if not their jobs.



Vijay Mehrotra (vijay@onward-net.com) is the CEO of Onward Inc. in Mountain View, Calif.