Case Study: Layoffs

The Harvard Business Review Online puts out case studies and even has interactive versions online where anyone can take their shot at being an executive and provide comments on the solution. This month’s case study is especially interesting to me because it’s about layoffs.

I’ve written about both layoffs and talent management during a dowturn, but those were articles written from an outsider’s perspective… and in a predominantly theoretical, in an ideal world, what not to do fashion. Now it’s time to look at a realistic scenario to answer well, what would I do?

The Cast:
Robin Astrigo, CEO
Morris Meyers, CFO
Lisa Warren, Head of Legal
Marzita Vasquez, Head of HR
Bob Slater, Exec Director of Strategy
Sushil Bhatia, Vice President of Marketing and Strategy

About the Company: Astrigo Holdings (Chicago)
Astrigo is made up of 12,000 teammates whose highest goal is to ‘Take Care of Our Customer.’ Astrigo Holdings accomplishes this by selling the highest-quality goods at the best price, with the best customer service, in the world. Great customer service begins with talented, innovative team members.

“Pop” Astrigo, the founder, had started out as a hardscrabble midwestern lumberyard owner. A fiscal conservative, he steadfastly believed that a strong cash position was crucial to the company’s health. But he also taught his son that to keep its reputation for great customer service, the company had to treat employees well. He always insisted on keeping several million dollars in the bank just in case the company needed to make critical acquisitions. After “Pop” Astrigo’s death in 1996, Robin Astrigo has taken over the company and has ran the firm well.

The Challenge:
Astrigo Holdings had missed its earnings estimate by 20 cents a share. Profits have dropped by double digits, regardless of efforts to slash inventory and expenses. Despite aggressive promotions and price cuts, the Astrigo home-improvement stores were losing sales to cheaper retailers with far worse customer service. The recession was hitting the firm hard. Though the company had millions in the bank thanks to values passed on by “Pop,” Robin didn’t want to risk Astrigo’s future health by burning that cash now. The company has a policy of holding a big cash reserve for acquisitions but isn’t it a little hard to justify a big bank account at the same time that people are losing jobs?

An aggressive reduction in head count looked like the only course of action. Pop Astrigo had been forced to let people go in past recessions but had loathed taking such an action. A large layoff would be crushing for the families of the affected employees—and for all the towns where Astrigo stores had long been a central fixture.

Robin had asked his executive committee to form teams of two to work through possible layoff scenarios, which would then be presented to the Chairman of the Board. This is what they came up with:

Option #1: First In, First Out – proposed by Morris Meyers, the CFO
A 10% workforce reduction would generate enough savings to keep profits in line with Wall Street’s expectations. Robin doesn’t want to cut back more on store associates, because that affects customer service, so the cuts will occur at middle management level with a first in, first out policy. Cons voiced are charges of age discrimination.

Option #2: Performance-Based or Rank-and-Yank – proposed by Lisa Warren, head of Legal
A performance-based layoff based on the next evaluation cycle in order to eliminate the lowest 10%. The company develops a higher-performing workforce. Cons are that people become competitive and scared all the time, office politics take a harsh turn, and the ranking system will also require a lot of effort.

Option #3: Last In, First Out – proposed by Bob Slater, Exec. Director of Strategy
Use the simplest layoff policy possible, and that’s last in, first out. That way, you don’t have to pay people a lot of severance. It’s great since the company doesn’t have the time to do anything really complex. And it’s inherently fair — everyone understands that you have to work up to seniority. But layoffs aren’t just a financial transaction. Cons are that you lose your youngest superstars — new doesn’t mean dispensable. If last in first out is enacted, what about Yukio, that young woman we hired a few years ago to run new business development? The company courted her hard. She’s a first-in-class MBA from a top school, and she’s full of bright ideas. Two competitors were after her, but she decided to come to Astrigo in the end because she liked the company’s corporate values. With a blanket last-in, first-out plan, people like her would be out. The best recruiting in the industry is for nothing when a company lets someone like her go. And that company can forget about acquiring good people in the future if there’s a history of firing best new hires.

Option #4: Lose a Unit – proposed by Marzita Vasquez, Head of HR
To look at layoffs as a tactical cost-cutting measure is shortsighted. Not only are good people out of work, but layoffs shout to our customers, ‘Look at us. We’re in trouble.’ They hurt morale, and that hurts customer service and, ultimately, investors. The problem can best be solved by looking at our overall strategy. The company is overreached. It could save the money by selling or closing the most recent acquisition, Prugh Furniture. It’s time to refocus on the core business. Cons are that a lot of thought and time and effort go into acquisitions and they’re not made lightly. Getting rid of any strategic business units may not be a wise move.

Option# 5: Pay Cut – proposed by Sushil Bhatia, Vice President of Marketing and Strategy
How about taking steps that would let the company stay truer to its core values? It’s necessary to get a bit more imaginative. Just pick a number. How about a 5% across-the-board pay cut, maybe a bigger one for people making six figures? Astrigo is not a union shop and so has the flexibility to do it. Cons are the pushback but isn’t that better than the alternatives?

Eva’s Solution:
My first thought is that nobody mentioned reviewing the budget. Was that assumed?

I will eliminate Option #1 and Option #3 right away. That is quite possibly the worst way to do a layoff. Talented employees are not just assets to an organization – they ARE the organization. You lose a few key players like this and your entire organization is at significant risk. Sports analogies are always fun and intuitive; imagine letting go your all-star just because he was “first in” … consider letting go of your rookie just because she was “last in.” That coach would be so fired, end of story. In fact, for an immediate cost savings, I’d rather replace Bob with Sushil.

I like all the three remaining options, and instead of choosing just one, I’ll turn them into a three-step process for layoffs:

STEP 1. Re-examine strategic goals.
Focus on your core business or focus on your most profitable business. Consolidate, lose a unit, or go back to the basics. Prioritize and re-evaluate spending (ahem, parties and jets), but don’t take xx% off everyone’s budget, do it selectively. Hike up the revenue-generating budgets that have a high ROI and cut off completely the support budgets that haven’t delivered value. Put a halt to any extensive reorganization or transitions. Review your company history, and put yourself in the founder’s shoes – what would you NEED to do to survive? Ask why the company is doing what it is doing…. If it makes sense-keep it, If it doesn’t-lose it. Ideally, Bob Slater (Executive Director of Strategy) has done his due diligence and not much change is needed. More likely, the reason behind financial woes has spun your entire company off-course and change is needed. This is NOT a lose the unit, therefore lose the people type of layoff. Lose the unit, repurpose the people.

STEP 2. Look at adversity as an opportunity.
Fire underperformers who have slipped through the cracks through performance-based job cuts. This is NOT the lowest 10% layoff. Ideally Marzita (head of HR) has been doing her job and this is a 0% cut. More likely, the company has kept a few weak links around longer than necessary and the best time to remedy the situation is now. This is NOT a rank-and-yank. Again, if Marzita has done her job well, the rankings have already been done and the yanking is a no-brainer. More likely, you have just cut a line of business and there are 1,000 redundant positions, all performing fairly well. In this case, performance is relative. Step 3 should weed out the losers.

STEP 3. Involve the entire team.
People are anxious, emotional contagion has overtaken all motivation, negative energy in the air has zapped concentration and productivity, and the overwhelming stress of layoffs is causing a spike in illness – oops that’s not a cost savings! Skip all this nonsense by making the issue transparent throughout the company. Let people know that they are still there and that is on purpose and they are very much needed to either step it up or step on out. Instruct managers to redefine their department’s goals to be in line with the company’s new shift in strategy and redistribute work to be most effective and focus energy on what is most needed. The worst case scenario is pay cuts across the board. Keep all but the most extravagant benefits. It stinks, but it’s just temporary and a better option than the alternative.

Agree? Disagree? What would you do?