• 2007-05-20

    Downsizing's hidden Downside


      When companies run into deep trouble,they all too often look as far as their workforce.In their eyes,The people,the employees are a major dead-weight on corporate bottom line,whose payroll amounts to a factor that keeps offsetting operating profits.So when financial crunches hit,they invariably fall back on the same "silver bullet"- Massive job cuts.

      And in some headline-making job-cuts news,the move seemed to be well justified.Why?!!At least the stock market responded fairly favorably,sending the message that job cut is music to ears of the shareholders out there.Is it truly the case?

      According to James Surowiecki with New yorker magazine,this couldn't be more wrong.

      As usual,James cites plenty of data and research results to back his counter-claim.Take this one:"Over the past decade, many academics have looked at how layoffs affect stock prices, and they’ve found that the seven-per-cent rule is bunk. Instead of rising sharply, the stock of companies that trim their workforces is likely to fall. A recent meta-study that surveyed research from several countries, covering thousands of layoff announcements, concluded that, on average, markets had “a significantly negative” reaction to job cuts."

      As for the media hype that help cement the corporate myth,James offers the following explanation,something called "vividness heuristic" ,i.e.the tendency to give undue weight to particularly vivid or newsworthy examples.And to exacerbate the problem,the professionals that are supposed to be clear-minded about this all surprisingly turn starry-eyed,scrambling to try this out.

      James further points out,rather wittily,that "The increasingly short-term nature of C.E.O.s’ jobs, along with the pressure on them to deliver results quickly, doesn’t help matters",which may help explain the sudden loss of rationality on the part of decorated CEOs when it comes to layoffs.

      Anyway,this is yet another wonderfully incisive piece from Surowiecki,busting still another myth in the business world.BTW,this is also the piece that prompted Stephen Dubner of Freakonomics to do a post on this very topic.

      You may read the piece here.