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Downsizing and outsourcing.

The downsizing of corporate America and the new philosophy of "lean and mean" has revealed some interesting phenomenas that distinguish this recession from those previous. At a time when the downturn seems to be ending, when we should be expecting employment to rise, firms continue to lay people off in massive numbers. Firms claim that in the new international environment cost control is essential, and layoffs must continue even after the economy picks up. Also, in this recession the layoff impact has walloped the white collar work force.

A firm's revenue is often fixed, especially in the case of heavy industry, when sales are committed long before actual production takes place. Management demands for a rapid improvement in the profit picture can only be achieved on the cost and not the revenue side. Blue collar workers must be retained because products have to be delivered to generate revenue. Therefore, the most obvious segment of the work force to be cut are the white collar employees where the impact is felt more in the long run. This is analogous to cutting the library budget at a university during hard times. In the short run there will be no perceived negative impact; in the long run a university cannot exist without a good library.

Huge White Collar Losses

The data support these statements very convincingly. During the last five recessions from 1960 through 1982 blue collar employment fell on average by about 2 million with relatively little variability. During the present recession blue collar employment also declined by about 1.8 million, very much in line with history. But when analyzing white collar employment we find a very different picture. During the last five recessions the white collar work force grew on average, although at slower rates than during expansion times. The average increase in white collar employment was 310,000 during recessions which included a decline of 320,000 during the 1973 recession. During the present downturn, though, white collar employment actually decreased by 640,000, twice the amount of average increases of the previous recessions.

The trend is very clear. White collar employment, especially in the areas of planning, analysis, and research is being eliminated to improve the profit picture. While there is no doubt that an improvement can be achieved instantaneously, the question is what will happen in the long run as a result of this crash diet? Some strategies work better than others. A leg amputation will reduce weight immediately but is not the best solution in the long run.

Significant Contributions

The function of these white collar workers is to help management plan, track, and analyze projects. Their work results in better decision-making. As their numbers grew so grew their sophistication. Unfortunately, many of these technocrats lost vision of why they were employed. I vividly remember interviewing a Ph.D. economist who told me of his technically very competent and intellectually stimulating models to predict the economy of the Netherlands for a major bank. He answered every question I asked except what the bank does with his forecasts. Economists might describe the process by saying that we tried to optimize an objective function without proper constraints. Or, in real people's language, we were trying to come up with the best planning, strategy, or whatever without regard to cost. The pendulum first swung too far in the direction of very high quality and now falls too far back in the direction of decapitating the white collar work force because cuts are needed.

White collar work has two perils. Like the university library mentioned earlier, its impact is mainly long term. This means that the tendency exists to cut it in the short term because "we can (and will) bring it back." Long term thinking, at least in the United States, will always lose to short term profit pressures. The second problem is that the benefits are difficult to quantify. It is much simpler to assess the value of an assembly worker than that of a financial analyst who is called upon to suggest to management a new method of doing business in order to take advantage of developments in Europe in the coming years.

Where Are We Headed?

Where will this slimming down lead us? A computer analogy may be illuminating. It is extremely difficult to prove that computers are cost effective. They enable white collar workers to do more and better work but cannot be tied explicitly to increased profits. But there are no people or organizations that I know of that decided to eliminate computers. The rest of the world is moving in an opposite direction from the U.S. Long term thinking is preferred over short term results and white collar employees are valued more than blue collar workers. Our attempts to become internationally more competitive by cutting thinkers over doers may backfire and result in even further loss of competitive position.

The need to do careful analysis does not disappear with the layoff of analysts. Management still asks the same questions and expects answers despite having much leaner staffs. The result is the proliferation of the use of consulting services which has its good and bad points. On the positive side the increased use of consultants may save money. Consultants get paid much more than permanent employees but get no benefits and are hired only as needed. Because "real money" is spent, management is more likely to listen to their recommendations than those of regular employees. Because they have no vested interests in the organization (except for renewing the contract) consultants are generally viewed as being more objective. On the negative side, consultants don't know the specific firm and all the details of what really is needed. They also often don't really know the industry very well. Finally, there is always the danger of consultants trying to guess the answers management wants instead of doing objective independent work.

The outcome of all this delayering and downsizing is, paradoxically, a move toward the relatively more flexible Japanese model of firms having a large percentage of temporary workers. Is such a system good or bad for our economy? We'll need some consultants to figure that out.

ADAM M. PILARSKI, Ph.D., is the chief economist at McDonnell Douglas Corporation and has written extensively in the field of economics.
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Title Annotation:Economic Outlook; reducing the white collar work force
Author:Pilarski, Adam M.
Publication:Business Forum
Date:Sep 22, 1992
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