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Rightsizing for success.

Downsizing s being embraced industry-wide as an instant cure for flagging profitability. Yet all too often it leads to a "cycle of failure" in which low employee morale erodes service quality and market share. How can a company meet tough final objectives without jeopardizing its strategic goals and future success?

After exhaustive efforts failed to sheer up the company's sagging bottom line, the executive committee of a struggling U.S. manufacturer felt it was running out of both time and options. Faced with a faltering price-to-earnings ratio, an endlessly soft market, and heightened global competition, the committee agreed on what it deemed to be the quickest route to improved financial stability: a massive, company-wide downsizing to slash operating expenses by 30 percent. By so doing, it planned to save its way to profitability.

Yet even after the firm saved $60 million by trimming 1,200 employees from the payroll, its profitability remained an elusive goal. Within months of downsizing, the company had lost far more in revenue than it had ever hoped to save in expenses. What went wrong? Instead of invigorating the organization by paving the way for success, downsizing had created an inevitable phenomenon identified by Harvard Business School professors Leonard Schlesinger and James Heskett as "the cycle of failure." This cycle involves a chain of consequences that begins with employee dissatisfaction and culminates in organizational inefficiency, poor service quality, high customer turnover, and decreased profitability.

In this case, employee dissatisfaction developed when those who had survived the downsizing grew distrustful of management and fearful of future cuts. Organizational anxiety took root, suffocating productivity and generating large amounts of rework. Meanwhile, normal attrition slowed as employees postponed resigning or retiring in case further cuts (along with attractive severance and early retirement packages) were announced. In addition to undermining employee morale, the across-the-board cuts failed to correct the inefficiencies in poorly run departments. What's more, they severely penalized groups that were already running mean-and-lean and created hidden pockets of damage. Consider the accounts payable department. An efficient operation suddenly short-staffed and overworked, it began paying many invoices without properly verifying them, resulting in excessive cost overruns.

As employee morale deteriorated, so too did service quality. Customers reported waiting up to 30 minutes for service on the company's 800 hotline, only to be disconnected. The firm's independent distributors, concerned that the growing unresponsiveness of the company's front-line service providers would erode their own customer base, began defecting to competitors. Once the firm downsized, these defections translated into approximately $150 million annually in lost revenue.

Not a Unique Situation

An isolated case? Hardly. In a recent survey of downsized firms conducted by Right Associates of Philadelphia, 80 percent reported that subsequent employee morale problems were impeding financial recovery. A similar survey by the American Management Association indicated that nearly half of all respondents had major misgivings about downsizing and were unprepared for the aftershock. Of even greater concern is the proven impact of employee morale on customer retention. According to research conducted by the Forum Corporation, only 14 percent of customers switch to a new service business because they are dissatisfied with what they bought - and more than two-thirds leave because of apathetic service people. Such a migration takes a heavy toll on profitability. An analytic market study based on the well-known Profit Impact Market Strategy (PIMS) database reveals that high service quality firms enjoy a return-on-sales 12 times greater than that of their low service quality competitors.

All of this is sobering news to U.S. industry, where downsizing appears to be a growing trend. More than 85 percent of the Fortune 1000 firms downsized between 1987 and 1991. In the last three years alone, U.S. job cutbacks increased from 111,285 to nearly 400,000. News headlines report the grim statistics across virtually every industry: "IBM trims 20,000 workers" ... "Frito-Lay pares staff by 30 % " ... "Citicorp lays off 4,400" ... "Aetna cuts 2,600 employees."

How can companies meet their aggressive financial objectives without downsizing? And how can firms that have already downsized emerge from the "aftershock" as market leaders? This article answers these questions and profiles the traits of winning companies that continually avoid the need to downsize.

Focus on Three Principles

Although many companies struggle and downsize, others continue to grow and prosper. What makes them unique? Their products are no less mature - and their distribution channels no different - from other firms. Yet their profitability levels position them as industry leaders. Simply stated, these companies vigorously adhere to three guiding principles.

First, they focus on dearly defined market segments - and master them. Unlike companies that strive for a 3 percent share of a broadly defined market, these winners "pick their shots" and seek a 20-50 percent share of narrowly defined yet profitable market niches. For example, USAA's customer base of military officers and their families comprises less than 3 percent of the U.S. population. Yet by capturing 95 percent of all active-duty officers and 40 percent of all eligible family members, the company has sustained a 35 percent policy growth rate over the past ten years. By maintaining such a tight market focus over time, a company can master its segments and develop unrivaled insight into its customers' changing needs and expectations. Such insight leads to smarter product design, marketing, and service - thereby shielding a company's customer base from covetous competitors and fluctuating pricing cycles. As a result, a market-focused firm rarely has to cut back or pull out of a segment.

Just as important, employees in market-focused companies enjoy their jobs and rarely leave. Organizational morale is buoyed by satisfied customers who appreciate the company's dedication to meeting their needs. Such strong customer loyalty continually reinforces employee morale - and self-perpetuates the cycle of success.

Having mastered its niches, the market-focused company only spends its dollars on products and services that are highly valued by its customers. It recognizes that each segment requires different products, favors different distribution channels, and insists on different service levels. And it cost-effectively targets the right features to the right segment instead of overspending to deliver all features to all customers.

Second, members of the "no layoff crowd" master every element of the profit model. They know where they make money - by customer group, by channel, and by product. As a result, they rarely wake up to find that 35 percent of their products are unprofitable and must be eliminated, along with the cost structure behind it.

These industry leaders also know how they make money - market by market. Instead of trying to save their way to profitability, they realize that a strong return-on-equity requires more than cutting costs. One financial services company learned this lesson when it initially tried to trim expenses by reducing commissions 3 percent. Fortunately, the company quickly shifted gears when it realized the cost-cutting effort would have a far more adverse impact on profitability. It successfully addressed the expense problem by recruiting a cadre of specialized sales representatives and capitalizing on every way these specialists could improve the bottom-line. Specifically, these representatives were empowered to provide value-added services that commanded higher prices and to assume new responsibilities that eliminated redundant administrative expenses. The result? Within three years, these agents have helped to both cut expenses and boost revenue.

Third, winning companies avoid the need to downsize by mastering the process of "rightsizing" - a continuous and proactive assessment of mission-critical work and its staffing requirements. In both its orientation and results, rightsizing differs sharply from downsizing. While downsizing cuts employee headcount across-the-board, rightsizing takes a more strategic approach. It eliminates only non essential work areas, streamlines all others, identifies new market segments along with better ways to serve existing ones, and staffs up these business opportunities to position the company for future growth. Whereas downsizing is a one-time reaction to earlier mistakes, rightsizing is an ongoing planning process. And although downsizing is a top-down, financially driven activity to cut operating expenses, rightsizing is a participative approach that heightens profitability by aligning an organization to meet customer needs.

An effective rightsizing process demands a rigorously enforced counseling and evaluation program to address employee performance problems. By continually re-evaluating the employee skills and characteristics organizations need to succeed, the rightsizing process can feed this performance management program - and guide the development of new hiring strategies.

Rightsize Aggressively

As a continuing improvement process, rightsizing provides the steady incremental adjustments needed to keep an organization in step with its strategic objectives and customer needs. Occasionally, however, incremental adjustments are not enough. Symptoms such as lengthy approval cycles, six or more layers of management, excessive overtime, ineffective performance management, or complacent employees can indicate the need for a major realignment of the organization and its work processes. In these situations, companies must implement a more aggressive approach to rightsizing.

This was the case at a major division of a leading chemical company. Over time, its hierarchical structure had slowed decision-making, impeded its ability to keep pace with changing market needs, and created unnecessary work processes. Meanwhile, its paternal approach to performance management had instilled a laissez faire culture based on lifetime employment. During a major rightsizing, the division transformed its organization of 6,000 unfocused employees into an efficient team of 4,800 highly motivated people performing critical, customer-oriented work. The net result was an annualized savings of $80 million, more than three times the targeted goal. The vast majority of this progress was made over nine months. How did the rightsizing process cut so deep without creating the employee morale and customer retention problems associated with downsizing? The answer lies in the rightsizing process itself.

We began at the top of the organization, working with senior management to re-evaluate the division's strategic objectives, target markets, customer needs, competitive vision, and core competencies. This was a critical first step. In addition to facilitating executive agreement on key issues, it provided the strategic direction needed to guide the rest of the rightsizing process. With a clear vision in place, senior executives assumed personal responsibility for communicating it to all employees via departmental briefings, videos, newsletters, and memos. This communication process achieved two key goals. By explaining the competitive forces driving the need for organizational change, it generated employee buy-in for the rightsizing to come. And by detailing the division's strategic plan to emerge a winner, it invigorated the organization by infusing it with hope.

A Team Approach

As the communication program unfolded, we initiated a bottom-up process to strategically align and simplify all work activities. This step involved the direct participation of virtually all employees working together in teams. Across the division, these teams analyzed and redesigned their existing work processes in light of strategic objectives. One team, for example, improved service quality by reducing the average time required to process a customer order from 10 to 3 days. Another focused on product development. By developing a more concurrent and collaborative approach among all responsible departments, it trimmed the product development process from 18 to 6 months. In addition, it guaranteed that the new products met market requirements by including its sales representatives and customers at critical points of the process.

In effect, these teams and their counterparts throughout the division reinvented the organization. They cut costs by eliminating non essential work and streamlining mission-critical activities. Even more important, they enhanced profitability by creating the new work processes needed to meet changing customer needs and strategic goals.

As employees designed more effective business processes, their managers and supervisors defined the resource requirements and skifls needed to perform that work. Next, using a zero-based approach, they began staffing each reconfigured work process. Employees with the requisite skills and performance levels were selected back into their departments. Those whose skifls were mission-critical but no longer matched their department requirements were redeployed to other parts of the division using a custom-developed computer model. Meanwhile, the remaining employees - those with inappropriate skifls or low performance - were supported in their search for new employment through a professionally developed outplacement program.

The skills and personal characteristics identified during this "people alignment" phase formed the basis of a more aggressive performance management system. Not only does this system define the performance standards needed to manage attrition more effectively; it links coaching and counsehng to the appraisal process and includes motivational reward and recognition programs to maximize employee performance.

The benefits of this rightsizing methodology stem from its emphasis on employee involvement. By empowering employees to define strategic work and using their definition to reallocate resources, the company gave them greater control over their destiny. By chartering employee teams to meet strategic goals, the company created a more collaborative, fiscally responsible organization. In addition, the company's focus on selectively retaining employees based on customer-driven skills (rather than arbitrarily cutting headcount to meet a financial goal) bolstered morale by making employees feel like "the chosen" rather than "the survivors."

Quickly Address Aftershocks

of Downsizing

Clearly, today's economic realities can create an immediate need for the drastic financial course-corrections associated with downsizing. But just as clearly, management must anticipate the consequences and understand how to deal with them to avoid the cycle of failure.

Consider how one leading property and casualty insurer recovered from a major downsizing. Following a strategic initiative to eliminate unprofitable business lines (and 30 percent of the work force), employee morale hit an all-time-low. Before this cultural free-fall affected bottom-line performance, the company addressed the problem. First, a joint team of managers and consultants interviewed employees to identify their specific concerns. The results were revealing. Employees voiced confusion over the reasons behind the cutbacks, anxiety over the company's future, and frustration over the inaccessibility of senior management. In addition, they questioned how 70 percent of the people could be expected to perform 100 percent of the work.

Armed with the root causes behind sagging morale, the company empowered cross-functional employee teams to eradicate them. One team focused on the emotional issues underlying the morale problem. The others concentrated on reducing workload by simplifying the business processes in their respective areas. Each team began by identifying and implementing "quick hits" - immediate solutions designed to begin relieving anxiety and creating a groundswell of enthusiasm around the new organization. Within weeks, for example, a two-way communication program was put in place. The chief executive officer visited each regional office to answer employees' questions about the downsizing, discuss the reasons behind it, and share his strategic vision for the future. Meanwhile, the company installed an 800-number hotline to address employee questions and concerns on a continuing basis.

The work simplification teams made equally rapid progress. What's more, the newly streamlined business processes not only reduced employee workload; they trimmed an additional $4.3 million from the company's annual operating expenses without incurring any further headcount reductions.

Through it all, employee morale has dramatically improved. Follow-up surveys indicate that employees clearly understand the problems that led up to the downsizing and feel part of the solution. They no longer report being overworked and understaffed. In addition, they reveal a renewed confidence in their company's strategic vision and an increased enthusiasm for their role in attaining it.

As competitive pressures mount, companies must respond by seeking new ways to drive cost out of their business. The key is to do so without triggering the cycle of failure and impeding the strategic goals that fuel profitability. By focusing on the right market segments, mastering the profit model that drives its business, and continually rightsizing its organization to capitalize on emerging business opportunities and meet changing customer needs, a company can outperform its competition and transform itself into a model of profitability.

Three Steps to Profitability

Step 1 Focus on clearly defined market

segments in which you can win. Step 2 Mine every element of the profit

model that drives your market

segments. Know where you make

money - market by market. Step 3 Continuously "rightsize" engaging

all your employees in the process - to

synchronize constantly changing

customer needs in strategic

objetives, work processes and

organizational structures.

Duncan Davidson, Duane Dickson, and James Trice are vice presidents of Gemini Consulting, Inc., a global management consulting company that works with large, complex companies to help them achieve true Business Transformation. [] in Morristown, New Jersey, it has a staff of over 1,500 professionals and 17 offices of four continents.
COPYRIGHT 1993 California State University, Los Angeles
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:how to meet financial targets without job layoffs
Author:Davidson, Duncan; Dickson, Duane; Trice, James
Publication:Business Forum
Date:Jan 1, 1993
Previous Article:America at the starting point.
Next Article:U.S. defense industry in transition: can the leopard change its spots?

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