Bad Management Results in Layoffs

In response to Is Laying People off Really Anti-Lean?:

Let’s say you, a Lean enthusiast, are named CEO of a mid sized manufacturing company. Let’s also assume your market has turned down and the constraint is clearly the market. Let’s also assume you need to improve operating income above all else. The final assumption is the company you inherited is not even good at mass production. They just stink at everything.

If you come into this situation and realize that you can implement some basic lean and six sigma principles and only need half the workforce to meet customer demand what do you do?

Layoffs are a failure of management. If the company has not been executing a long term strategy to respect people and manage the system to continually improve, manage for the long term, working with suppliers… it might be they have created an impossibly failed organization that cannot succeed in its current form. And so yes it might be possible that layoffs are required.

It is very easy to jump to layoffs as the “answer” though. While it is possible to construct a situation in which they make sense that such a hypothetical situation it rarely is the case that an organization is committed to lean and then makes layoffs. Instead they just think the same old way and mention the word lean since they see others doing it and layoff sounds like it is lean to someone that doesn’t know the first thing about lean thinking.

I would not see, “a focus on improving operating income above all else” as a lean way of thinking. Improving that is one focus among many that are needed to achieve long term success.

Does that mean a organization doing a great job of managing in a truly lean way may not find itself in a position where layoffs are necessary? No. Failing to predict and execute may have consequences and those may include layoffs. In your example things are confused a bit by separating the responsibility of getting into the mess from what to do next. Definitely, riding out a few poor quarters would be preferable. I have absolutely no question about that.

At exactly what point some layoffs are necessary and how much other stakeholders are squeezed to avoid layoffs is not simple to answer (just as employees are squeezed to avoid suffering by other stakeholders). I think to have any pretense of lean thinking and layoffs management must say what specific failures lead to the situation and what has been done to fix the system so such failures will not reoccur. Those explanations should seem to be among the best applications of 5 why, root cause analysis, systems thinking, planning… that you have seen. Layoffs should be seen as about the most compelling evidence of failed management. Therefore explanations attempting to justify the layoffs have as high a barrier to overcome as any proposed improvement to the organization/system.

Some mealy mouthed vague thoughts about the market changing, competition, wall street demands, “realities” don’t come close to cutting it. Management is not just responsible to manage well given no change in the world over time. Management must create and develop an organization that succeeds over time in a world that will undoubtedly be undergoing dramatic changes. Claiming some “outside” shocks as evidence of something outside of their control is very faulty thinking. I don’t know what outside shocks organizations will face but it is management job to develop an organization that is robust and resilient. How the organization senses changes (not just in today or in the next 6 months but significant long term trends as well…) in the marketplace and reacts needs to part of any plan. It is rare when an explanation of how that will be improved would not be a significant part of the case why layoffs are justified now.

The only real option I see is to view employees essentially as expendable variable expenses. Those costs are reduced through layoffs when necessary. That way of thinking I think is common in many organizations and MBA programs. In fact, that thinking pervades to the extent that I would say such thinking is the accepted conventional wisdom. Hopefully that will change. And for a company that practices what I think of as lean thinking it must change.

Since I believe management is much more responsible for the type of decisions that can lead to a failed organization (one that cannot succeed as it is currently structured) I would expect most of the explanation to be what went wrong with management decision making and execution and how those failures are being addressed.

The change in thinking is profound (from seeing employees as extremely important stakeholders instead of variable costs). The senior management leaders need to feel the weight of responsibility to all the stakeholders. Layoffs should feel awful for any lean manager. That is hard to measure but how a true lean leader would feel. And I don’t see evidence of that from most who proudly declare to wall street they will now save the day by laying people off. They then make the rounds of interviews declaring how positively wall street has reacted to their leadership. If they don’t repeat in each interview that management failed and therefore layoff were necessary and we are taking these steps 1,2,3,4… to as best we can make sure the failures of management do not have such a result in the future, I will have trouble believing they truly value lean thinking.

18 thoughts on “Bad Management Results in Layoffs

  1. Great points John, as usual. Let me elaborate more on this situation as I didn’t do as good a job on my blog as I should have. You recently inherited a company that is a total mess. There was indeed bad management before you. Now you have been hired to fix it. The bad management, before you, had hired many more employees than required due to their terrible mass producting methods. Now you realize after some kaikaku and kaizen that you have more employees (i.e. 30%) than you need, even accounting for increased demand once customers trust your company again. So what do you do? Wait for more demand? How long do you wait? You are the CEO now.

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  2. I would put employees to work creating demand. I would accept decreased short term financial results to avoid layoffs. Managers would not get bonuses based on profit goals met only due to laying people off. Somehow any incentive for performance based bonuses would factor in layoffs and that would be a very bad mark that would not disappear even in just one year (for example, charging 1/2 of the salary of anyone laid off for 2 full years against any metric used to calculate bonuses…). I would want to make it very clear that layoffs were not an easy way out for our organization. No part of our organization was going to be able to benefit by manipulating the system to achieve results through things like layoffs (if layoffs were necessary we do not view only the financial statement costs of such failures) since the true cost would be unknown and unknowable I couldn’t point to a figure but I would factor in the belief that it costs us to have done so more than financial statements show.

    I would encourage some of the excess employees to go into other jobs (possibly temporarily until they can return to their preferred job) if that seemed a reasonable option. Those temporary jobs might be jobs they don’t really want to do, but if that is all that is what the organization needs done then that is what they would have to do. It might be that some employees would like the chance to try out a new profession (I am thinking of a new job inside the company). As CEO I would accept paying to train and develop staff we have even if it would seem better to just hire what we need from the outside. Again to what extent would depend on the financial realities but my bias would be for making such investments (sub optimize short term success for building long term success).

    If lowering prices would increase demand (even if it would not increase our profits) and allow us to keep more people productively engaged I would do so. I would look to find creative ways to keep people employed. Even if our company didn’t have a system before that valued employees extremely highly that is what I would want to create. I would look at options of putting those people to work even if that did not bring us the returns we would look to get out of new business (part of the “return” would be creating that culture that we value all our workers). If we had reasonable options to pick up some lower margin business to keep people employed I would do so.

    My vision is that as CEO it is my job to keep all of our employees productive (and provide owners a return, and provide our customers good value and…). My measure of successful options would need to meet that criteria. If I absolutely could not find a way to do so I would use layoffs as an option but it would be after quite a bit of effort to avoid doing so. I would see if any of our suppliers or customers could use our employees. I would offer them temporary employees (and full time if that was in everyone’s interest) I would even subsidize the employment of those employees (again within the real financial limits). Luckily since I get to be the CEO I have some power to do things that would be fairly unlikely normally. In reality, few boards would likely hire me to be the CEO as my beliefs are a bit too outside the conventional wisdom but they are not unheard of.

    Depending on the magnitude of problems it might be that other employees (including managers…) would have to suffer (take less pay) just as stockholder might have to take reduced returns in the short term. These would not be easy trade-offs. And layoffs might be necessary (given the level of trade-offs stakeholders could accept…). Avoiding layoffs cannot be the only focus, just as short term profits cannot be the only focus. My views are largely colored by the weaknesses I see now with management in the USA which is that of using any excuse to have layoffs even while claiming sentiments such as “people are our most important asset.” But I would expect not just a change in our focus as an organization to respect everyone but for everyone to focus on how they can help the organization get through the tough time. I think now many have little loyalty to the organization for good reason – many organizations have taken many actions to disabuse any sensible person of such notices – to me obscene CEO pay packages are near the top of that list.

    As a result of this we also have a weakness (in many organizational systems) of people wanting to avoid any pain themselves (they take as an absolute that fairly substantial constraints on individual flexibility are not allowed to optimize the system – some of these make perfect sense to me but I think it would be better to reduce these in some circumstances and trying to avoid layoffs with a huge over-capacity of labor is a situation where that may be required), even while complaining that management can’t find creative solutions. Options such as reassigning workers (again including managers) based on business needs should be an option. Not everyone can move from one job to another job as the needs shift but to optimize the whole system it might be that some people have to take on different responsibilities. It might also mean everyone has to accept lower pay… Or owners have lowered returns or…

    I would not want to wait too long but the length of time would related to how much we can financially absorb and what the long term prospects are. If the future really holds no hope at all of expanding to make productive use of everybody then get started making the tough choices now. And if there are no real options to some layoffs, do what can be done to help those that will have to leave (use buyouts, help them find jobs…). And don’t see the obligation as closed once they are laid off. If things pick up for us keep those workers in mind. Just because we failed them and did all we could do at the time does not mean our obligation is over. If later we can do more then I would strive to do so (re-hiring or other things training, encouraging a supplier we are increasing orders with to consider our former employees…).

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  8. One of the most progressive views on Lean I have ever seen. As a lean leader one needs to understand the

    value the shop floor can generate. Impressive viewpoint and look to learn more from you experience and insight.

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  14. John,

    This is a great post about and I agree that laying people off can be purely from a failure from management. I’ve worked in places where the last thing they wanted to do was lay people off, and even in a down time, they kept everyone on payroll and invested in training or improving processes.

    I guess my question is, now that we are about 2 years later, and the US economy is in severe recession, unemployment is at an all time high, do you feel that in this kind of arena, that it is justifiable to have layoffs now? At some point, even if management was solid, with a significant downturn like we have experienced, are layoffs justified?

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