Downsizing: is it aimed at the right targets?

• Author: Franklin, Daniel
• Position: Employee downsizing - Cover Story

When Robert Stempel became chairman of General Motors at the end of 1990, sales were beginning to fall, but even in his darkest moments Stempel probably didn't imagine how bad 1991 would be. That year, the nation's No. 1 automaker started losing more than $500 million a month, and all eyes turned to Stempel. There was no question that unless he turned GM around, his days in Detroit were numbered. "Mr. Stempel and his top management team," The Wall Street Journal reported, "must take drastic action, or else."

"Drastic action" was a euphemism for job cuts, and the rumor mill churned out plenty of speculation about how deep they would be. The New York Times reported that Stempel would cut 10,000 of the company's more than 400,000 workers. The Journal guessed the number would be twice that.

But they weren't even close: On December 18, Stempel announced that 74,000 jobs and 21 plants (one-fifth of GM's North American holdings) would be eliminated. Speaking to GM employees over a closed-circuit television network, Stempel predicted that the company would never again dominate the industry as it once had, and it was time for the company to face that fact.

The GM story is one of the more dramatic examples of downsizing, but it is hardly the only one. Ever since 1984, when Tom Peters and Robert Waterman's book In Search of Excellence argued that the nation's companies had to break down their rigid hierarchies or risk obsolescence, American executives have been hungry for fresh answers to the question: How do we compete? The late eighties brought renewed interest in the rise of Japan and its startling rates of efficiency, and suddenly American executives were snapping up book after book on how to copy the Japanese by cutting extraneous workers and divisions. The most notable of this genre was The Machine That Changed the World by James Womack, Daniel T. Jones, and Daniel Roos, a 1990 book that asserted that U.S. automakers could produce the same number of cars in half the time, half the space, and with half the human effort. "Lean and mean" became the goal for any executive interested in holding on to his job.

The onset of the recession in 1990 gave fresh urgency to the drive to limit labor costs and boost efficiency, and the downsizing movement hit its stride. Others quickly followed GM's announcement: Boeing cut 30,000 jobs; Sears, 50,000; AT&T, 83,000; and IBM, which had had a no-layoff policy since its founding in 1914, announced that it would cut 85,000 workers from its payroll. As companies hustled for the distinction of being the leanest and the meanest, news of corporate downsizing was as much a staple of U.S. newspapers as the comics.

Most announcements met with praise from boards of directors and from Wall Street. GM's stock, for example, rose 10 percent in the three days after Stempel's announcement. IBM's stock rose 30 percent in the months after its plans became public, and Boeing's shot up 31 percent. To everybody except the workers who lost their jobs, downsizing was a hit.

So it shouldn't have been surprising when the federal government--the nation's single largest employer--decided to get into the game, proposing a downsizing scheme that made the others look paltry by comparison. On September 7, 1993, the Vice President delivered The Gore Report on Reinventing Government to the President, which recommended the federal government eliminate 252,000 jobs (or 12 percent) from its 2.2 million employee payroll. Congress--under fire from voters who assume Washington is too big and too inefficient--liked Gore's numbers so much it quickly voted the reductions into law.

Although we've now had a few years to see what a downsized corporate world looks like, there have been remarkably few attempts to find out whether the job cuts have worked and what they could teach us about The Big Downsize now underway in government. Earlier this year, The Wyatt Company, an international business consulting firm, released a sobering study of 531 U.S. companies that had caught downsizing fever, and the results debunked many of the assumptions held by executives only a few years ago. Less than half of the survey's respondents, for instance, said that downsizing led to greater profits. Fewer than a third reported an increase in competitive advantage. And while downsizing helped reduce costs more often than not (61 percent of the time), it was nowhere near as effective as had been hoped. And some companies have found that they shrunk their work forces too quickly. In September, GM workers in Flint, Michigan, struck for nearly a week because they--the survivors of the cuts--were being forced to work longer hours (57-hour weeks) to meet demand for cars and trucks because there were fewer people to do the work.

A broader consequence of relentless downsizing could be inflation. As reduced work forces produce fewer products, the resulting shortages could lead to an increase in prices [see "Stop...