Perman Technical Search Group

Sent Packing…Are companies laying off too many employees too soon?

Sent Packing Are telecom companies laying off too many employees too soon?
by Patricia Brown Published in tele.com April 16, 01

This wasn’t in the plan. Profit crises, surplus inventories and canceled orders were not part of the communications revolution that next-generation executives planned to lead. Board members of tomorrow’s blue chips were not meant to be melancholy. To paraphrase Tom Hanks’ character in A League of Their Own: “There’s no crying in the broadband economy!”

Alas, there is. If there was ever any hope that today’s market contraction would be limited to the ultra-hip dot-com and Internet companies, the writing is now on … well, the severance agreements. Stodgy but supposedly dependable old telephone companies, once-fashionable competitive local service providers and even cash-rich equipment vendors are now producing more pink slips than white papers. Just a year ago, these companies struggled to attract high-tech talent by offering everything from BMWs to corporate concierges. Well, look back on those days fondly, because telcos and their manufacturers are cutting costs (and staffs, by 20 to 30 percent) in an attempt to stay competitive, or at least prove to Wall Street that they can operate cost-efficiently. But these companies are finding themselves in a catch-22. While they are under intense pressure to tighten numbers, they run the risk of destabilizing what took so long to build by laying off hard-to-find talent too quickly. As a result, telecom and Internet players find themselves walking a thin line between pleasing investors and attempting to carry on operations while understaffed and often unmotivated.

The list of companies issuing layoff announcements, amid profit warnings, reads like a who’s who of telecom brands: WorldCom Inc., Verizon Communications, Cisco Systems Inc. (San Jose, Calif.), Cable & Wireless PLC (C&W, London), Motorola Inc., Lucent Technologies Inc. and Alcatel N.V. Especially hard hit have been the competitive providers: Once flush with cash and talent, they are now hemorrhaging the former and unloading the latter.

Companies such as Covad Communications Co. (Santa Clara, Calif.), Rhythms NetConnections Inc. (Englewood, Colo.), PSINet Inc. (Herndon, Va.) and AllTel Corp. (Little Rock, Ark.) are slashing costs, sometimes in a last-ditch effort to stay afloat.

According to Challenger, Gray & Christmas Inc. (Chicago), overall U.S. job cuts from December through February totaled 377,652, compared to 130,752 during the same three-month period a year ago. That rate is currently the highest it’s been since 1994. In the first two months of this year, the telecom sector carried the biggest cleaver, cutting 42,879 employees loose. E-commerce (21,383) and computer hardware and software (16,242) followed. And March wasn’t much better: Overall announced job cuts, at a rate of 7,755 per business day, reached 162,867 last month. March was 60 percent higher than February (101,731) and 192 percent higher than March 2000 (55,783).

While almost every segment of the market has been hit, the layoffs are particularly harsh in the industry sectors that are under the most competitive pressure. With rates falling to their lowest levels in the long-distance market, for example, it is becoming increasingly difficult for companies to make money on the transport services-the traditional staple of incumbents. Many competitive providers, Internet service providers (ISPs) and applications service providers (ASPs), meanwhile, appear to be experiencing a vicious consolidation phase as their venture capital (VC) lifelines wither.

And the cuts aren’t just limited to the U.S. market. C&W last month said it plans to cut 4,000 jobs after being hit by falling prices in the United States and Japan. More than half of these job cuts will occur in the United Kingdom. The company also plans to consolidate its 47 network operations centers to five over the next two years. This month, French telecom equipment maker Alcatel cut 1,100 U.S.-based jobs in its carrier divisions, citing the U.S. economic slowdown and reduced customer spending. The news comes just two months after Alcatel cut 165 positions in its enterprise division. With a total of 17,000 U.S.-based employees, the recent 1,100 accounts for about 5 percent of its workforce. Alcatel says the brunt of the cuts came out of its Plano, Texas, office, the U.S. headquarters for the company’s carrier unit. All levels, from the executive to the administrative, were affected. Whether these companies are seeing an immediate benefit from slashing staff is not yet clear. In the meantime, for those answering to Wall Street, shareholder frustration often seems to be assuaged only by a reduced corporate overhead, which means trimming the head count and sometimes any excess infrastructure. These are the most obvious ways to shave costs and beef up whatever bottom line is left. “In publicly traded organizations, you’re managing to Wall Street’s expectations of growth and earnings. Obviously, head count is a huge factor in the cost structure,” says Lisa Hooker, managing partner with Ray & Berndtson (New York). “While it’s hard, I don’t think there are many other avenues as far as cost-cutting. I think there is a reward [from Wall Street] to the extent that investors realize management is on the ball and has the capability to effectively modify their business plans mid-course and react accordingly.”

Covad is a case in point. The company had originally committed to building out a nationwide network. Market realities, however, put those plans on hold. Instead, the company is contracting and cutting operating costs-a euphemism for reducing its nationwide workforce by 13 percent and eliminating 400 full-time positions. The move will produce savings of 20 to 30 percent in 2001-all in a matter of weeks-and advance an effort to “create a clear path to profitability,” says Covad CEO Chuck McMinn.

Profits: That was the original point of the venture. Or was it? “The markets went from ‘Grow at any cost’ to ‘Show us how profitable you’re going to be,’ ” says Covad spokesman Richard Berman. “A lot of companies got caught flat-footed.” As a result, equipment suppliers are feeling the pinch. Covad this year will cut back expenditures on new equipment to only 40 percent of the $600 million it spent in 2000. The company is limiting expansion to just over 2,000 central offices (COs), which provide national coverage to some 45 to 50 percent of homes and businesses in the country. Officials say they plan to focus on signing up more customers for its existing network instead of building out a third operations facility in Alpharetta, Ga. Any additional work will be handled by existing facilities in Virginia, Colorado and California.

Or take AllTel. In January, the company offered early retirement to some 400 employees. By Feb. 15, it announced it would reorganize its business and consolidate regional operations with 600 layoffs, for a total anticipated reduction of 1,000 employees. The slowdown has been egalitarian in that no level has been spared: Some 15 percent of the executive management team was eliminated. And AllTel is learning that asking people politely to leave a party won’t empty the room. Of the 400 who were offered early retirement, less than half accepted the offer.

With the savings from consolidation, AllTel officials say they will put more money into advertising and marketing, allowing the company to attract more customers than analysts first predicted. It currently has 6.3 million wireless customers. “The consolidation in the industry overall is making it a little tougher for everyone to compete,” says Andrew Moreau, director of corporate communications at AllTel. While supply has exceeded demand in the telecom marketplace over the last four to six years, analysts say the market has finally reached a saturation point. Many agree that supply and demand are about to equalize once again, if not turn the other way. “What we saw three to five years ago was the large incumbents going through a layoff program or people leaving the business, but they were being snapped up pretty quickly by competitive players,” says Carl Geppert, a partner with Andersen (formerly Arthur Andersen, Chicago). “Now that the layoff scenario is a little more common across industry segments, we’re not seeing quite the same activity in the marketplace.”

Indeed, service providers-and particularly incumbents-are much savvier these days. They must react far more quickly than before since they can measure output and track surplus more effectively. “Companies can cut back their production in line with a cutback in revenue,” says John Challenger, CEO of Challenger, Gray & Christmas. “With orders coming in much more quickly, they have human systems that have been worked out to conduct layoffs and slim the organization.” Wall Street drives companies to cut costs more quickly today than it did in the early 1990s. Analysts say some of today’s layoffs stem from management deciding to move proactively rather than waiting until it’s too late and having to react to a bad situation.

But being proactive doesn’t always result in the best scenario. In Covad’s case, when cuts were announced, McMinn said he was sure the company could pull off its plans with a smaller staff, but he acknowledged that operations would be tougher with a shrunken head count. Many in the industry share McMinn’s concerns. Even some Wall Street analysts say layoffs are not a panacea for today’s telecom woes. “These types of cuts are not always viewed as positive by Wall Street,” says Douglas Ashton, managing director at Bear, Stearns & Co. Inc. (New York). “Management has to do what’s right for the company. They shouldn’t just make cuts to placate their shareholders and Wall Street.” Even after a few months of layoffs, most telecom stocks have not recovered and have actually fallen, he points out. “Whatever they’re doing is not working.”

Many are questioning whether layoffs truly pay off in the long run. Several studies indicate that the fallout can have a negative effect. Watson Wyatt Worldwide (Washington, D.C.) found that fewer than half of the companies it surveyed after the 1990 recession met profit goals after downsizing. Bain & Company Inc. (Boston), meanwhile, says companies that implemented large numbers of layoffs or repeated layoffs underperformed in the market over a three-year period. Kenneth DeMeuse, professor of management at the University of Wisconsin-Eau Claire and author of the book “Resizing the Organization,” to be published next year, found similar results from companies that he tracked between 1987 and 1991. “Many executives get seduced into thinking the only way to cut costs is through head count,” he says. But executives don’t always take into account the indirect costs of layoffs, DeMeuse says. These include severance packages, outplacement service costs and the group of surviving employees that are often left overburdened and overworked. Assuming that many of the surviving employees don’t leave the organization outright, they will likely increase their use of sick leave and health care benefits, he says. In fact, a Harvard Business Review study shows that a company can expect 10 to 15 percent of the survivors to leave after any downsizing. “This happens simply because they don’t trust you,” says Gary Perman, president of Perman Willits & Associates Inc. (Camas, Wash.), a management consulting firm that specializes in telecom and emerging technologies. “Who’s to say they won’t be next?”

Add the risk of losing high-quality employees after a round of layoffs due to fear or resentment, and corporations may find themselves in a precarious position. Sibson Consulting Group (Princeton, N.J.) reports that it costs a company one and a half times a typical salary to replace an employee; sales and executive positions often cost several times that to refill.

For all high-tech market segments, these kinds of losses can be especially harsh, since experienced tech-savvy employees have always been difficult to secure. What’s worse, these most recent cuts have hit every level of the organization, affecting crucial functions in these corporations. Some positions are more secure than others: Network engineers appear to be in a better situation than operational jobs, which include those involved in colocation relations or real estate. But in today’s climate, everyone is at risk. In a recent ExecuNet (Norwalk, Conn.) survey of 947 executives, 62 percent report being concerned about their job security. Of those, 25 percent attribute their concerns to the possibility of a merger, downsizing or restructuring; 24 percent say the company’s overall pro-spects are not good.

Perman says today’s economic slowdown is different from others in the past, when talent was readily available. Before, “if you lost another 15 percent of your surviving talent, you could easily dip into a well-stocked talent pool. Today companies don’t even have a talent puddle to draw from.” Although layoffs are widespread, analysts say there are at least the same number of new jobs that are being created elsewhere, leaving a pared-down talent pool from which to choose.

In the late 1980s and early 1990s, executives quickly learned that loyalty meant very little as corporations slashed hundreds of thousands of white-collar middle- and upper-management jobs. This was the first time many executives were ever faced with layoffs. “It was like jumping into a vat of ice cubes,” says Dave Opton, CEO and founder of ExecuNet, a career management firm that formed in 1998, targeting senior-level executives making more than $100,000. “They had no idea that this could happen to them. A lot of people walked away from that experience saying, ‘I don’t want this to happen to me again, at least to not get blindsided the way I was.’ ”

But now most executives are better prepared. “Today’s anxiety level is not so much driven by someone who is working with a boss and doesn’t get along with that person. It is being in a situation over which they have no control,” says Opton. Every individual that signed on with ExecuNet in 1988 had either been laid off or was in transition. Today, 70 percent of the group’s 10,000 clients are currently employed. “They don’t come here saying, ‘I want a job tomorrow.’ They come here saying, ‘I might need one, and this is a way to protect myself.’ ” Opton says. “If I’m in telecom, I might be saying, ‘I’d better start looking at things a little more seriously in terms of what opportunities are there so I can get ahead of the power curve.’ ”

So what, if any, choices do telecom and Internet companies have? Analysts point to a number of alternatives to limiting head count, including shorter work weeks and unpaid vacation leave. This, of course, would only work if employees are willing to make these sacrifices to hold onto their jobs.

For those who believe that line of reasoning, analysts say top executives have a golden opportunity to show employees that they’re committed to riding out the storm. “Whether it’s a venture-backed startup or a large corporation, hopefully a greater emphasis will come out of all this on retaining the people they do have and creating environments that can make them flourish,” says Ray & Berndtson’s Hooker.

On the other hand, pressure from Wall Street isn’t so humanitarian, typically calling for what looks good now instead of what will work later. It may take more time to find the middle ground, but telecom and Internet companies are in a pinch to make that happen as quickly as possible. In the final analysis, the altruistic choice may well be the best long-term business decision. The question is: Can the industry still afford to make the best choice?

Layoff Etiquette 101 Miss Manners surely wouldn’t take well to the tough situation of having to lay off employees. Nevertheless, even this requires style and grace. It’s crucial that management approach the situation with care-both to help those being laid off and to retain remaining staff members, who can be left unmotivated once their colleagues have been let go. Management consulting firm Perman Willits & Associates Inc. (Camas, Wash.) offers these tips:

• Lay off once and only once. Get all critical information from the chief financial officer and vice presidents of all departments. And limit layoffs to one round.
• Save the employee’s dignity. Treat your people with respect. Before going into a layoff, put together a good package with a letter explaining the reasoning. Also include information about unemployment and outplacement firms. Never announce layoffs on a Friday-it leaves the employee with two days to do nothing but sit around and worry about his future. The highest suicide rates occur on the weekend after an employee has been laid off.
• Create a retention plan. Open, honest communication with every employee is essential. MBWA (manage by walking around) is critical at this time. Employee fears and anxieties need to be calmed-or companies could lose between 10 and 15 percent of remaining staff members.
• Look for signs of defection among the survivors and address them up front. Warning signs include such changes in behavior as coming in late and leaving early, a decline in performance, sudden complaints, references to other companies and withdrawing from others.
• Close the doors to recruiters and headhunters. Few companies take any measures to keep recruiters from poaching their employees. When companies have no retention plan in place, it leaves their top talent open to headhunters. The grass is always greener at your competitor.

Gary Perman is President of Perman Technical Search Group, a national search firm that specializes in recruiting Executives to Engineers in the technology industry since 1996.
If you have questions about this article, feel free to contact him at [email protected]

See our Blog for Technology discussions,
Interviewing advice, comments relating to
IT, Software, Technology issues.
www.technicalrecruitingblog.com