Why the lay-off culture is far more damaging than offshoring

Ever since President Obama proposed to change the IRS tax code that regulates how US corporations declare income from international activities, I've been thinking about other measures governments can take to slow the recession and help businesses become less myopic with how they navigate these rough waters. 

Reading between the lines, he appears to be targeting a revenue grab, while making political overtones against companies which use offshore resources.  However, he's simply penalizing firms from being more productive with their exports.  Sure, there are issues with tax fraud from havens such as Bermuda or the Caymens, but this is primarily an issue with individuals, not large enterprises. 

Why penalize a US conglomerate for manufacturing diapers in Brazil for the


Brazilian market?  It saves a fortune in both production and shipping costs.  If that firm produced those same diapers from the US, it opens the door for competitors to take away their business.  Without going deeper into this proposed legislation, the point I am trying to make here is that we live in unprecedented times where major banks are effectively nationalized and governments are printing money to stimulate broken economies.  

Why not go a step further and intercede with firms' rampant layoff tactics?  One of the reasons why our corporations are failing is this culture of knee-jerk reactions to adverse circumstances, without an eye on the long-term.  Surely this recession provides an opportunity to change this mentality?

Meanwhile, the majority of US and British firms have developed an alarming mentality to cut staff as quickly and deeply as they can, as opposed to taking measures to get to the root cause of their uncompetitiveness, namely poorly integrated business processes and an inability to operate as a global enterprise.  Laying off vast numbers or workers often impedes development in becoming more globally effective and more efficient at streamlining business workflows on a global ERP backbone.  Why not give firms incentives for retaining the vast majority of their workforces?  If firms are encouraged to look at other measures beyond laying off,  they will be forced to dig deep into their internal operations to eliminate waste, drive out hidden costs and explore innovative methods for doing things more efficiently. 

Simply eliminating workers is far more harmful to an economy than offshoring some labor:  it harms the culture of that firm for being focused on developing long-term careers for its staff, and immediately adds to the unemployment ranks.  By retaining staff and exploring outsourcing as an alternative, the firm is broadening the experience and value of its staff, in addition to globalizing the support operations.  This data point from our recent study shows why firms are motivated to explore outsourcing in this environment:

Outsourcing-drivers

For example, one company I have spent time with has recently rolled out a new procure-to-pay platform, which has helped it manage its expenditure far more effectively, and enabled it to standardize its processes at a global level.  The firm now finds itself in a far better position to explore outsourcing these processes at a far more beneficial business case then prior to its internal transformation.   Hence, firms should use this market as an opportunity to get their internal processes and global operations in order.  Laying off staff is simply preventing them from being more competitive – I wish politicians were focusing their anger on eliminating jobs than "shipping a few overseas".

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8 Comments

  1. Allen Laudenslager
    Posted May 25, 2009 at 10:11 am | Permalink

    When the focus is on staff as costs rather than as a resource, businesses fall into the trap of short-term thinking. If employees are a resouce, most businesses will try to maximize their use of that resurce instead of the more simple attempt to cut costs that leads to layoffs.

  2. Jeff Swindon
    Posted May 25, 2009 at 8:06 pm | Permalink

    Phil – you’re definitely onto something here. Companies laying off too heavily are often not addressing their fundamental business problems, and are going to lose the loyalty of many key staff when things improve. I agree that government should penalize companies which are too trigger-happy in this environment.

    Allen – I agree that this issue of viewing people as resources is very dangerous.

    Jeff

  3. Rosemary Coates
    Posted May 26, 2009 at 5:51 pm | Permalink

    What I have seen lately is companies laying off 15-20% of their staff first, and then making noise about reengineering their processes. The problem is, there is no one left to work on the reengineering, so it never gets done. US companies are rapidly losing their edge because of this. The China price for outsourcing manufacturing is 40-60% less. Better processes are one of the few areas left where US companies can compete.

    Rosemary Coates
    Blue Silk Consulting

  4. Jesper Lillieskold
    Posted May 27, 2009 at 12:28 pm | Permalink

    Business is to volatile to choose either or. Eliminating waste is often = to reducing staff and offshoring is mostly used in business processes where the type of labour investigated can actually move. I guess you mean that governments could intervene by supporting training of current staff into other areas that makes more sense in having onshore. If so, it would be the right strategy. Also, it’s important to remember that increasing productivity by lowering amount of manual labour (lay-off) needed or by reducing cost per produced hour (offshoring) is in the end good for all of us in all countries. It is the key factor to generating economic growth. It might not feel good at first it but we will all gain.

    Jesper Lillieskold

  5. Douglas Holzworth
    Posted May 27, 2009 at 2:30 pm | Permalink

    An excellent observation, Mr Fersht!

    Mr Lillieskold raises the issue that businesses do this due to volatility; however, I’d suggest that attempting to externalize these risks and pass them to employees is a short-term solution that is good for an individual company — if few other companies follow suite. However, like the saving-spending issue among consumers, what is “good” for an individual company becomes a macro-problem if everyone does it. Further, these kinds of efforts are good for short-term effects, but are typically harmful for long-term growth and productivity.

    Unfortunately, our system is geared towards the near-term results (next quarter’s numbers) and “looking out for yourself,” so we miss these macro-conditions and it rarely occurs to us to look at the issue from a systemic or cooperative perspective.

    “Individuality” is great and we should cherish it; however, our system is big enough and complex enough that establishing systemic controls can provide big returns and increased stability. Government seems a logical source for this, but I’d be open to other means that promised viability.

    It would also help if Business evoplved its perspectives to appreciate that the workforce is not only a tool to utilize (with its current approach of minimizing costs) but also, ultimately, its customer base. When every company works to push business externalities out to its workforce (and/or consumer base), the result will eventuially be the impoverishment of its customer base, resulting in death for Business, as well.

    Henry Ford once said “A fair day’s wage for a fair day’s work.” Somehow that has been forgotten, in favor of “Pay as little as you can get away with.”

    Douglas Holzworth

  6. Lepeak
    Posted May 29, 2009 at 2:28 pm | Permalink

    10-20% of employees in any large organization are dead wood and should be laid off regardless of economic conditions. Another 10-40%+ of work in many firms could be eliminated via automation or elimination of irrelevant work. If the main purposes of a business is to create jobs this would be a bad idea. If the main purpose is to be productive, deliver core offerings, and provide a return to investors/shareholders this would be a good idea. In the People’s Republic of Obama clearly the former sentiment reigns which is to be expected in a current era of entitlement.

  7. Phil Fersht
    Posted May 30, 2009 at 9:46 am | Permalink

    Lepeak,

    I don’t disagree with your percentages, my concern being more centered on this culture of firms whacking staff before even attempting to look at process transformation, elimination of irrelevant work or automation. Too many corporates today view staff as a commodity that can be axed at will, and simply jump at the layoff option before the harder work of trying to become more efficient, more innovative and (god forbid)creating a culture of development for their key talent.

    In fact this “era of entitlement” you mention is tied to this era of protecting the entitled and sacrificing the non-entitled. I cannot tell you how many companies have simply taken out staff they could easily have redeployed in other capacities, with very little forethought for the future, beyond satisfying shareholders’ myopic concerns.

    At least with outsourcing, companies are encouraged to do some serious navel-gazing to understand what is core/non-core, where processes are broken, where technology is lacking and which people are important to retain. Outsourcing is a great alternative to laying off. It’s not so easy to build a business case to outsource once you’ve already ground SG&A costs to the bone.

    PF

  8. Posted June 13, 2009 at 6:45 am | Permalink

    I too think that job cutting or salary cut is ore dangerous than doing offshoring. While you become totally dependent upon the outsourcing companies, you loose your control over quality and policies. Apart from that new recruitment made according to the offshoring policies affects the organizational behavior.

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