How is it that so many companies have found it possible to slash their work forces? What is behind the fad of “downsizing”?
How is it that over the last decade so many companies have found it possible to slash their work forces? We have learnt that we can run British Steel, or the electricity generation industry, with half the people we once employed. And it is a reduction in numbers, not a rise in output, which brought about the dramatic rise in manufacturing productivity in the 1980’s.
Were we really once so inefficient? And can we continue this progress indefinitely? In British Steel, or the old Central Electricity Generating Board, we really were once so inefficient. But in most business sectors, the economics of downsizing is more complex.
Once upon a time, most industrial and commercial processes were organised around fixed structures, routines and jobs. There needed to be a man at every stage on the production line. There had to be an assistant behind every counter in the store. Each newspaper had a fixed complement of staff, and so did most bureaucracies.
Even those processes which were once organised like that now rarely are. Most activities in modern economies are performed by teams of flexible and indeterminate size. How many journalists do you need to write a newspaper? What size of staff is required in a superstore? Much of what happens in a water company, or a modern production line, happens automatically without explicit human intervention: how many people do you need to supervise the process?
None of these questions has any clear answer. You can write down-market newspapers with very few journalists: but if you want stories that are properly researched and well written you will need rather more people to write it. You can let the supermarket customers pull the groceries out of cardboard boxes themselves, or you can have staff at the checkout to help them pack their bags. And you can cut the number of water company employees to very low levels if you accept that there will be fewer people around to notice, or to help, when things go wrong.
When you see visualise activities in this way, you can also see why it is not too difficult for almost any business, faced with an edict from its Board, it regulator, or the firm that has just acquired it, to make an arbitrary cut in its labour costs. The ability to make such a cut might demonstrate that there is great scope for increased efficiency. Or it might reflect a different judgement about the size of team you need to produce a quality newspaper. Or another opinion about how tolerant shoppers will be if the shelves are less rapidly stocked and the checkout queues are longer. Or an acceptance of a higher level of risk in the water supply business.
All these things – how many journalists you need, what quality of service your supermarket customers are willing to pay for, how much risk it is prudent to take – are matters of fine judgement. Only over time, and then not at all clearly, will you see whether a smaller staff can maintain journalistic standards, your customers will accept the longer queues, or whether you have assumed more risk than was wise. It is easy in that context for a macho manager to demonstrate that substantial savings are possible. He might be right. But his ability to make the savings doesn’t actually prove that he is right.
There is another factor which makes downsizing look attractive. If you cut your labour work force by ten or twenty per cent, you will try to focus your cuts on the weakest ten or twenty per cent among them. Thus the operation improves the average quality of your staff. This benefit won’t last indefinitely, of course – you will make as many mistakes about recruitment and promotion in future as you did in the past.
And it is a benefit which is won quite expensively. It costs a lot – and not just in cash – to get rid of ineffective but long serving employees in a humane way. You increase the feeling of insecurity right across your organisation – sometimes this is positive in its impact, but not often. You impose further costs on the public purse, which takes the strain when the under-employed are turned into the unemployed.
None of this is intended to suggest that companies should not be constantly trying to improve their efficiency. They should. Or that they have a public responsibility to employ people even if there is nothing for them to do. They don’t. But when we read on the same day that Barclays has embarked on yet another round of staff reductions, while Tesco has decided to take on additional workers to provide services in its existing stores, we should not be too hasty to conclude that one of these firms has got it right and that the other is wrong. Perhaps both are right – or both wrong. The only relevant test is the long run judgement of the marketplace, and at the moment that would seem to give Tesco the edge.
Less is better is true only if you can be sure, not just that the quality of output is unchanged, but that all the other dimensions of output are unchanged as well. In modern economies, it is difficult even to be certain that is so. Downsizing is an ugly euphemism, and few people would shed tears if the word is going out of fashion. Perhaps we should not shed too many tears if the concepts associated with it go out of fashion as well.
We are all used to the fads and fashions of management writers. Is it really possible that the belief that companies could get more for less out of their workforce will prove to be another fad as well? As Mr Roach of Morgan Stanley tells us that slash and burn may no longer be the order of the day, perhaps even downsizing and business process re-engineering go the way of all the other business buzzwords.