Productivity paradox

When the going gets tough, organizations typically do a knee-jerk reaction to cut cost without considering the long-term impact. Business owners have an economic responsibility to remain profitable, and one of their largest expenses is payroll. So to survive, top management may feel that it only makes sense to get the ax out and start trimming personnel costs through a reduction in force (RIF) or by cutting benefits.

A RIF is unpopular because it also creates morale problems and puts a heavier burden on the “lucky” souls left behind. For politicians, it is career suicide—especially prior to an election—and so it is discussed in theory but rarely seen in practice. That is why the infamous firing of 11 personnel by the enigmatic Ken Wright struck fear in the hearts of not only NMC staff and faculty, it sent a shock wave throughout the government community. Government employees questioned, maybe for the first time, that if this happened to their compatriots, could it or would it happen to them?

Organizational euthanasia is an attempt to fix a money crunch problem or boost productivity, and employers throw people overboard in a last ditch attempt to save their sinking institution. These efforts are shrouded in euphemistic terms such as “layoffs,” “downsizing,” or “rightsizing” but they all mean the same thing: People lose their jobs.

Does it really help? Here are some things to consider before using this tactic:

* In a study conducted by the American Management Association, only 43 percent of 547 organizations that had downsized experienced an improvement in profitability.

* Another study revealed that 75 percent of downsized companies believed their performance did not improve, and another 67 percent reported no productivity increase.

* An article in the Human Resource magazine by Kenneth P. DeMeuse, et al, stressed that firms that had large-scale layoffs did not show financial improvement. “Rather, their performance continues to decline following announcement and at a greater degree than firms that had no layoff announcements.”

From these studies, and looking back at Wright’s debacle and the situation he placed the college in before bailing out, one begs the question: Is a RIF the best answer? Desperate cost-cutting measures or a RIF can create what is called a “productivity paradox.” Despite the initial cost savings, organizations appear to be no better off than before, and many times the situation is worse.

Even the term “reorganization” has become synonymous with RIF, because companies that reorganize subsequently downsize and also experience the productivity paradox. Productivity plummets along with morale, and paranoia spreads among the remaining “survivors.”

When an on-island bank was going through corporate “reengineering” several years ago, no one in the organization knew if his or her job was secure. We were friends with the local manager, and he was even paranoid about losing his job. Even though the angel of termination passed over his position, the low morale and the crass manner that headquarters had treated him and those in his charge eventually caused him to resign and work for another bank.

We are not saying that a RIF should not be considered, but that the psychological damage to individuals loyal to an organization must be weighed against the dollars saved from cutting costs. Feelings such as shock, fear, anger, and depression are not conducive for high productivity. Instead of thinking about the job, people spend their efforts talking about what’s going to happen next, or looking for other work.

Like zombies, “survivors” tend to quit in spirit, but still show up to work in body to pick up their paycheck. Companies that are desperate to cut costs are operating at the “survival” level of human needs and will create a survival-type atmosphere within the organization.

Organizations would achieve greater results if they first sought to understand the needs of their team and then applied motivational methods that inspire champions. We tend to work harder for people than we do for money. One of the most powerful motivating factors is the confidence of those we serve and those who cheer for us. People are anxious to be part of a winning team and will exert great energy for the chance of a comeback. Create an atmosphere of winners instead of survivors. There is little difference in the effort between the two, but a substantial difference in the bottom line.

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Rik is a business instructor at NMC and Janel is the owner of Positively Outrageous Results. They have consulted with over 400 businesses in 40 different industries. For better business results go to BizResults.biz to read previous articles.