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Prune Employees Carefully

HR Magazine, April 2008 Layoffs may be a necessary evil as a short-term cost-cutting goal, but HR professionals must keep company leaders focused on recovery by retaining top talent.

Many companies in diverse industries face the economic downturn by cutting their largest expense: head count.

In the United States, January layoffs rose a whopping 69 percent from December 2007 to 75,000—the highest amount since August 2007, according to outplacement firm Challenger, Gray and Christmas in Chicago. Housing and financial sectors were hit hardest, confirm Challenger officials.

The rest of 2008 looks just as ugly, according to Career Protection’s Annual 2008 Layoffs Forecast survey of 1,375 corporate executives nationwide conducted in January. The survey predicts a 37 percent increase in layoffs this year compared to last, making this year’s forecast the worst in five years.

“This year, you will see a breadth of industries predicting layoffs,” including automotive, pharmaceutical, retail, leisure and hospitality industries as well as professional and technical services, says Kirk Nemer, SPHR, president and chief executive officer of Denver-based Career Protection, an employee-focused human resources and legal consulting firm.

Managers in many HR departments are in the midst of planning for or conducting layoffs, Nemer reports. He has advice for those who haven’t yet received the call from chief financial officers looking for ways to cut staff: Be prepared.

“Corporations are going to have to get leaner,” he predicts. “There will be more layoffs throughout the year.”

To determine if your company is at risk, “study your business and your industry,” advises Nemer, adding: If hard times have come or are forecast, work with managers to determine parts of the business that can slash staff or cut operations, as defined by the business plan. Then, turn to the performance management system and reviews to determine employees who can be let go. Nemer counsels HR professionals to:

  • Make sure appraisals are up-to-date.
  • Identify top performers and get them working on the company’s future.
  • Have leaders committed to the company’s turnaround.

In short, have faith in your performance management system, never lose sight of the big picture—and retain top talent.

The Groundwork

A robust performance management system constitutes the first piece of the layoff puzzle that should be in place long before managers contemplate job cuts. Unfortunately, that’s not the reality, experts find.

“Organizations do themselves a disservice when they don’t have a rigorous performance management system that supports HR decisions, particularly around layoffs,” says Matt Angello, founder of Bright Tree Consulting Group in Lancaster, Pa., and former vice president of HR at Armstrong World Industries.

“If you don’t have a vigorous performance management system, you don’t have an operating plan; you have an operating hope,” says Angello. And when it comes time to select people for layoffs, your decisions are based on guesswork rather than fact, he adds. “You get into a fuzzy area where managers start picking those who look like them to stay,” opening up the company to legal risks. (See "Limit Legal Exposure.")

Bob Kustka, founder of HR consultancy The Fusion Factor in Norwell, Mass., says companies that “don’t closely manage their performance appraisal systems suddenly learn during a reduction in force that everyone has been ranked a ‘four’ out of ‘five,’ ” says Kustka. “That information is meaningless.”

Managers should conduct workforce planning in advance, he adds. “You should always look at the demographics of your workforce and ask, ‘Do I have the right number of people? Do I have the right competencies?’ ”

Kustka recalls the workforce planning he conducted as an HR executive at The Gillette Co. “Technology was a core competency and we relied on experienced engineers [at Gillette],” he says. In the early 1990s, “We had a lot of 50-year-old experienced engineering talent in the middle and didn’t have a feeder system. We had put hiring on hold for six years [in the 1980s], and that was the result.”

Deep cuts or long-term hiring freezes during this economic slump could come back to haunt companies trying to compete long term, as it did at Gillette, says Kustka.

If you haven’t been engaged in workforce planning and your chief financial officer calls for a major reduction in force, a big-picture mind-set becomes helpful. While belt-tightening may be the order of the day, in the near future, with baby boomers retiring, you will need top talent.

Leaner Staffing

Leaders of many organizations have been staffing smarter in recent years, perhaps having learned the hard lesson of the 2001-02 shallow recession that rebounded into a competitive labor market soon after.

Kustka has seen many such economic cycles, but forecasts a different scenario this time: “Companies are making reductions in force, but [managers] are much more concerned this time around about how they make those reductions because talent has been harder to get,” he says.

As early as 2006, companies started slowing their hiring activities, when the number of positions filled decreased 23 percent from the previous year, according to the Society for Human Resource Management’s (SHRM) Human Capital Benchmarking Study: 2007 Executive Summary. A shift was also noted when the SHRM/Rutgers University Leading Indicator of National Employment (LINE) index showed a downward turn in hiring expectations in fall 2007. According to the March 2008 LINE report, hiring for the manufacturing and service sectors will be down sharply.

Companies are leaner than in recessions past, according to experts, because of the proliferation of worldwide mergers and acquisitions, outsourcing, and the “rightsizing” management philosophy that eliminated redundancies in positions.

Nuera Communications Inc., a provider of voice-over-Internet-protocol infrastructure solutions in San Diego, is a product of “rightsizing” after being acquired in 2006 by Israel-based Audio- Codes, a communications company.

AudioCodes reduced Nuera’s workforce from more than 200 employees to roughly 40. “It’s been painful,” says Mike Rinehart, vice president of business operations for North America at AudioCodes. He handled HR for Nuera before the acquisition.

AudioCodes’ leaders wanted to eliminate redundant positions, “so some of the senior manager positions were cut,” recalls Rinehart. The companies had similar product lines, and AudioCodes discontinued developing Nuera’s products. That gave rise to reductions in research and development (R&D) positions and some manufacturing operations in North America. The consolidation led to layoffs.

Streamlining as a result of the acquisition was a “healthy process,” says Rinehart. But in the first quarter of 2007, AudioCodes didn’t meet Wall Street’s profit expectations, and leaders looked at further consolidation—and job cuts—in financial, manufacturing and R and D.

That consolidation process wasn’t clear, causing problems when AudioCodes’ leaders didn’t communicate well. “Being based in another country didn’t help communication,” says Rinehart. “It’s gotten better over time. But in a situation like layoffs, you need to over-communicate.”

Say It Often

Once you have decided to reduce your force, how you communicate and when you communicate are key. “Don’t put a rosy spin on it,” says Kustka. “And don’t be afraid to go to employees when you don’t have all the answers. Employees find out about it right away and get concerned.”

(View chart "Layoff Events and Unemployment.")

That was Rinehart’s experience at Nuera. “Turnover was high because of the angst about what AudioCodes was going to do and not knowing what the future held,” he says.

A similar sense of uncertainty spurs calls to Nemer from employees at Sprint, Bear Stearns and Citigroup, among others that have announced layoffs.

“Employees are shocked and scared,” he reports. “We’re even getting calls from people who are hearing rumors of possible layoffs at the end of the year, and they’re asking what they can do to protect themselves. We tell them to continue to perform at a high level because no matter how stressed the economy gets, companies still need top performers.”

The rumor mill undermines morale and can put top performers at risk, Angello warns.

Retain Top Talent

Indeed, companies need top performers. Corporate leaders can’t assume that because the economy may tank—and workers seemingly have no place else to go -- employees won’t try to jump ship.

It may seem oxymoronic to focus on retention when conducting layoffs, but there’s no other time when retention becomes more paramount than when a company lets workers go.

HR professionals need “to get in front of the line managers and critically assess [who] is the talent they must retain,” says Tim Brown, manager of staffing at a Fortune 100 company and a member of the SHRM Staffing Management Special Expertise Panel. “Ensure that you have some capability in place to help the talent be part of the solution.”

Rinehart says turnover at Nuera stabilized when team members were given a defined role in the turnaround after the layoffs. “Those teams that had a part in meeting the company’s goals were focused and productive,” he explains.

AudioCodes redeployed top performers if they worked in areas where there was redundancy or product elimination. “There were some retention bonuses, but I personally believe that money doesn’t retain top talent,” says Rinehart. “You have to give them more of a reason to stay by finding a meaningful role for that person where he or she can contribute to the success of the organization and have room for growth.”

Brown agrees: “While you retain the person, you won’t necessarily retain the spirit or the will to contribute. The key is to help the retained folks have a part in enabling the turnaround.”

Brown challenges employees to come up with strategies to help the company rebound. “Encourage entrepreneurial spirit among your employees and challenge them to find new opportunities,” he says. “See how they respond. In times of trouble, how employees respond really separates your leaders from the rest of the pack.”

Ready for Rebound

Economists disagree on whether the country is in a recession or will go into a recession or how long a recession will last.

“Typically, once a recession is announced, you’re almost out of it,” says Brown. “You have to be ready to rebound.”

To ward against future layoffs, leaders of the 600-employee AudioCodes remain cautious about growth. The strategy: “Make sure to not hire too many people when times are good,” says Rinehart. “We are very careful about who we hire so that we have the right people ready when we need them to take on leadership roles.”

Adrienne Fox, a freelance writer in Alexandria, Va., is a contributing editor and former managing editor of HR Magazine.

Web Extras

SHRM articles:
Putting Forecasting in Focus
(HR Magazine

Pros and Cons of Forced Ranking and Other Relative Performance Ranking Systems
(Legal Report) 

SHRM data: SHRM/Rutgers Leading Indicator of National Employment (LINE) 

Legislation: The Worker Adjustment and Retraining Notification Act
(U.S. Department of Labor) 

Web sites: Fusion Factor
(Massachusetts Institute of Technology)

Bright Tree Consulting Group LLC 

Porter Wright Morris & Arthur LLP

Limit Legal Exposure

Profits fall, and staff must be cut. Managers convene and start making decisions on who should be laid off. They may say things like, “Mark is not really that great of a worker; let’s put him on the chopping block.” Or, “Sue hasn’t been as productive since she started taking intermittent Family and Medical Leave Act leave.” Or, “I know Brenda hasn’t been meeting her sales goals lately, but I have a gut feeling that she’s going to be a better performer in the long run than Bob, who has been here a long time.” The managers come up with a so-called “blacklist” of names for layoffs and write it all down.

Only then does someone say, “Let’s contact human resources” and ask if there are any problems with the list.

The above scenario demonstrates exactly what shouldn’t happen but often does when planning layoffs, says Michael J. Underwood, an employment lawyer at Porter, Wright, Morris & Arthur in Columbus, Ohio, adding, “You’ve already dug a hole, and you have to hope it’s an OK hole.”

Instead, Underwood advises HR professionals to get in front of the layoff process and to help managers “focus on what they want the organization to look like after the reductions. Ask managers, ‘What are the job functions that have to be performed, and how are we going to manipulate job functions by either combining jobs or eliminating jobs?’

“Identify those objectives and then begin to analyze the jobs that remain after the reduction in force,” advises Underwood. “The mistake managers make is saying, ‘Who are the folks we want to let go?’ and then [trying] to justify that decision later.”

In addition to reviewing strategic elements, managers making a reduction in force (RIF) need to review termination decisions and ask whether the termination decisions will leave the company open to lawsuits or discrimination charges based on age, race, sex or disability.

“In any RIF, there is the possibility of one or more terminated people challenging the decision,” says Underwood. “Frequently, the claim made is a discrimination claim, and it’s common for that claim to be an age discrimination lawsuit.”

Seek counsel for advice on layoff targets. Underwood advises offering severance pay and requiring the employee to sign a general release of potential claims in return for the pay. Also, company leaders must determine if they are obliged to give prior notice to employees under the federal Worker Adjustment and Retraining Notification Act (WARN) or similar state laws. WARN requires employers with 100 or more employees (generally not counting those who have worked less than six months in the last 12 months and those who work an average of less than 20 hours a week) to provide at least 60 calendar days of advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single site of employment.

Also, Underwood says, “if affected employees are represented by a union, determine if there are any applicable labor contract provisions and evaluate the duty to bargain with the union.”

He concludes, “Follow a structured approach, seek legal counsel before final decisions, and offer severance pay and waiver documents. Then, you’ve done everything you can to minimize legal risk.”


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