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Layoffs carry risk of destroying companies

Wednesday, 8 April 2009

This year 50 million people will lose their jobs, according to the G-20. The United States shed 663 000 jobs in March and has the worst unemployment figures in a quarter century, and in South Africa mines and manufacturing shed more than 31 000 workers late last year.

Finance Minister Trevor Manuel said the biggest concern for South Africa was “growing unemployment.”

But a range of experts are saying slashing the workforce may be the worst thing to do in a downturn. Toyota, which is experiencing the worst sales and profits ever, is not shedding jobs; it is continuing to pay workers and is using downtime to train workers or use them on public service projects.

FedEx has imposed graduated pay cuts, less for front-line workers and more for managers.

Widespread anger about high executive pay and bonuses saw the G-20 last week agree on new global rules to cap the pay and bonuses of bankers and that is already spilling over to other industries.

“Employers have to be very careful with retrenchments,” Liza van Wyk, CEO of leading Johannesburg training companies AstroTech and BizTech said.

“It should be treated as a last resort option, as once you start the retrenchment process, you risk causing panic among all employees and losing some of your best performers as they seek better job security elsewhere. Wherever possible, re-deployment and natural attrition should be considered.”

She said that now was the time companies needed to invest in training to ensure employees were more productive.

Geoff Colvin, writing in the latest edition of Fortune, suggests that “layoffs greatly increase the chance that you’re firing a future company leader.” And job-cutting increases stress and fear in the workplace which impact on productivity.

He noted that “workers who remain after a layoff file dramatically more medical claims, reports a study by Cigna and the American Management Association.” He warned that job cuts in listed companies were seen as a sign of “trouble and send your stock down.”

Van Wyk and Colvin say that employers who take a slash and burn policy toward employees risk becoming companies talented staff avoid, and sabotage their own efforts to hire the best to prepare for an economic upturn.

Colvin gives the example of “New York-based Simpson Thacher & Bartlett, who figured this was the year to offer associates a year off to work on a public service project and get paid $60 000 plus benefits – less than half their normal pay, but a lot better than nothing. And it makes the firm much more attractive to the next crop of law school graduates.”

Van Wyk added that because South Africa was a low skills economy, government had set in place an array of mechanisms to help employers earn while staff learn.

“For example, with Broad Based Black Economic Empowerment grading, for every R100 you spend with a Level One certified provider you get credit for spending R135 and for every R100 you spend with a Level Eight provider you get credit for only R10.

“One of the BBBEE pillars is Skills Development and to score full points as a company you need to spend two percent of payroll on training previously disadvantaged individuals.

“The Skills Levy too makes allowance for claiming back training costs at accredited training providers.”

And intellectual capital in a company has a far greater value in today’s knowledge economy than physical capital. As an example, University of Washington Professor, Steven Muensch, wrote that "intellectual capital is the only source of competitive advantage within a growing number of industries.

“For instance, the $296 billion market value of Microsoft in June 2004 far exceeds the value of its physical assets.” In other words: a company can only grow as fast as the creativity of the brainpower its workers and managers share.

Few organisations understand this as well as South Africa’s Council for Scientific and Industrial Research, which is a client of AstroTech. The CSIR has a system in place to measure the effectiveness of their training, and Vlok was able to report the achievement of a massive 17.7% improvement in leadership capabilities to his executive following leadership and management training of CSIR staff with AstroTech.

Awie Vlok, head of CSIR Innovation Leadership and Learning Academy (CiLLA), observes: “The whole field of human capital development is very important in the scientific community, and given the kind of challenges we have to deal with, we need to grow that capacity.

“We started on a huge strategic drive two and a half years ago, to focus on getting more people into the science sector and to get the quality right. Our business is about multidisciplinary research, the biggest need is for people who can think beyond their area of research expertise.

"If it is a choice between training and retrenchment - if you are in a company where industry is in a collapse mode - an employer might be tempted or forced to retrench. Every industry has peaks and valleys, but a company needs to build the strength to get on top of the mountain again. If they cut staff too much they might wake up one morning and find a competitor, who kept staff and trained them, has captured their market share.”

Van Wyk said: “In 2007, Northwest Airlines in the USA went through tough times and fired hundreds of pilots, they tried to rely on a small core, but pilots are not allowed to fly more hours a month than regulators allow. When the industry began picking up, Northwest had to spend millions recruiting and retraining laid-off or new pilots.

In the end, their cost cutting, as they saw it at the time, cost them millions more over the long run. The best investment is always in people. Companies should spend more on training.”

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