Companies should look for less drastic alternatives, Morgan professor says


November 19, 1990|By Blair S. Walker

With the economy moving along listlessly and showing few signs of imminent recovery, cost containment has become a pre-eminent concern for many businesses. Companies are actively resorting to layoffs as a means of reducing expenses.

Layoffs shouldn't, however, be viewed as a panacea for the economic-downturn blues, because they won't work for every company, says Homer E. Favor, a professor of economics at Morgan State University.

Personnel cuts might allow a small to medium-sized business to weather lean financial times. Or, they might have a negative impact offsetting any short-term benefits.

Companies that use layoffs as a knee-jerk reaction to hard times may needlessly lose customers and sacrifice their market share, Mr. Favor says. To avoid such problems, he recommends trying some less drastic alternatives first.

Nationwide, companies have been laying off workers in recent months, says Thomas J. Plewes, a spokesman for the federal Bureau of Labor Statistics.

Layoffs rose appreciably in August, September and October, according to the bureau. At the end of October, for example, more than a million people were out of work as a result of being laid off; for October 1989, the number was 780,000, Mr. Plewes says. Those statistics include both employees who have been furloughed and those who have been permanently let go.

"It signifies that things are getting slower," Mr. Plewes says. "It's consistent with what we have seen with employment cutbacks, particularly in the manufacturing sector." Service-sector industries, particularly retail trade, have also been trimming personnel, he adds.

Such moves have been triggered by the Middle East crisis and by gloomy economic forecasts, Mr. Favor says.

"Business revenues are down because the public is somewhat disquieted in terms of high interest rates and uncertainty about the Middle East," he says. "The economic indicators over the past several quarters are indicating things are going to turn down -- there's sort of a tacit admission we're about to enter into a recession. So, the businessman is caught between dropping revenues on the one hand and rising costs on the other."

But cutting personnel in anticipation of rougher times often can be a self-fulfilling prophecy for small and medium-sized companies, he adds.

Such companies "have an overriding concern with market share," Mr. Favor says. "If they respond in a dramatic fashion to the downturn in the economy and lay off workers, when we get into a state of recovery, they may find their larger competitors haven't done as much and have been able to maintain market share through sustaining a squeeze on profits or minimal short-term losses."

Labor represents a major variable cost that companies traditionally reduce during recessionary times. But that doesn't necessarily mean that workers have to be let go.

"You may find yourself losing a lot of good people you might want later on, so a lot of times you will absorb those high labor costs, anticipating an upturn in the economy," Mr. Favor says.

He strongly recommends an incremental approach to reducing labor costs, with layoffs being viewed as a last resort.

The first, and least disruptive, cost-cutting move from a labor standpoint is to let attrition take its toll and not replace those who leave.

But Mr. Favor notes that "if you have a young work force and you don't have people going out for medical reasons or mortality, then you don't have this option in a meaningful way."

In addition, small to medium-sized companies usually don't have the luxury of waiting for attrition, he says.

The next incremental step is to curtail the workweek for some employees. A typical 37 1/2 -to-40-hour workweek could be lTC reduced by a day, cutting labor expenses and other variable costs as well.

This option also would be likely to cut into a business' profits and is viable only if the remaining profits still exceed average variable costs, Mr. Favor says.

"The reason that you can curtail the workweek and, in effect, ask labor to make sacrifices, is because workers don't have the option of going elsewhere in a tight labor market as easily as they would in one in which there is no cyclical unemployment," he says.

Managers aren't usually involved in workweek reductions, but they should be asked to make sacrifices too, Mr. Favor says. They need to give the company more hours by coming in earlier, leaving later and putting in some weekend days.

Following voluntary retirement packages, layoffs are the last step for reducing labor costs, and one that should be approached cautiously by small to medium-sized businesses.

Companies that shrink by shedding personnel don't have to be weakened as a result if they keep an eye toward the future, says Virginia Lord, an executive with a management consulting firm that specializes in outplacement and career management.

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