The Downside of Downsizing
Somewhere along the Gulf
coast a railroad car is lost. Actually, somewhere along the Gulf coast many
railroad cars are lost, rolling along between freight yards, attached to
locomotives they're not supposed to be attached to, carrying goods that will
arrive at their intended destinations days or even weeks late. The cars belong
to the Union Pacific Corp. In the 19 th century, Union Pacific built
the railroad that joined the nation. In the past few months, though, it's had
its hands full trying to make the trains run on time.
Aetna,
meanwhile, is having a very hard time making sure that its clients' claims get
paid. Unpaid claims have been piling up in its back offices, and last month the
insurance company announced that its third-quarter earnings had fallen
significantly because of all the administrative problems. Medical costs, at
least at the health-care providers with whom Aetna deals, have been rising, but
since Aetna wasn't paying its bills, it wasn't able to figure that out until
recently.
On the surface, these might seem to be two
unconnected stories of corporate miscalculation. But you don't have to look too
deeply beneath the surface to recognize that the problems Union Pacific and
Aetna are facing stem from the same cause, namely overhasty and overaggressive
job cutting, and that together they represent what you might call the downside
of downsizing.
Both
Union Pacific and Aetna have consummated large-scale mergers in the past year
and a half, and both are therefore attempting to deal with sizable increases in
their everyday business. Union Pacific, which has spent much of the past decade
acquiring smaller rail companies, bought Southern Pacific for $3.9 billion,
adding 15,000 miles of track to its inventory. Aetna, meanwhile, shelled out $9
billion to buy U.S. Healthcare in April of 1996, which left it with more than
11 million people in its various health-care plans. One might have imagined
that, in the face of a larger client base and the difficult task of integrating
two separate corporate organizations, computer systems, and cultures, slashing
payrolls would not have been Job 1. But then one would, of course, have
imagined wrongly.
Aetna waited six months after its acquisition
of U.S. Healthcare to announce that it was cutting 4,400 jobs and consolidating
its 44 national service centers into 12 regional centers. The stock market,
needless to say, applauded the decision. As one analyst put it, "Any time you
have an organization that pays close to $9 billion for a company that others
wouldn't have paid nearly as much for, it's natural that they're going to look
for substantial cost reductions to justify the transaction." Union Pacific's
job cuts were smaller--more than 1,000 employees were offered buyouts. But they
were even more dubious strategically, since the rail-freight business was
booming nationally, and losing Southern Pacific managers and engineers meant
that UP now had thousands of miles of new track and very few workers who had
any experience with it.
In
retrospect, the results of these job cuts seem predictable. Aetna discovered
that, in the words of its president, "We miscalculated how valuable the
experience level was, and is, in the staff that works in these service
centers." The company is now hiring back a hundred or so claims agents to speed
up processing, but it remains unclear how much long-term damage was done, in
terms of alienated clients and health-care providers and of the months that
Aetna has spent essentially flying blind. What's more, the company's stock
price has tumbled sharply.
The consequences of Union Pacific's problems
have been rather more severe. Since June, the company has had five serious
accidents--including two in the last two weeks--that have taken seven lives and
caused millions of dollars in damage. A month ago, Federal Railroad
Administration officials sprang surprise inspections on Union Pacific in 11
cities. They found overworked crews, with engineers, brakemen, and dispatchers
turning in 80-hour weeks, working six or seven days in a row. Regulators called
UP's safety record "a fundamental breakdown," and things have not improved
since then. Last Friday, the Surface Transportation Board declared "a
transportation emergency in the West," while the FRA announced that it would
step up its monitoring of crew fatigue and track safety.
Oddly,
the FRA has yet to come up with a firm policy to solve the crew-fatigue
problem, though it has promised to produce one within 30 days. Thirty days? How
long does it take to say, "Um, we think you have to hire more people right
now"? Union Pacific has, in fact, announced that it will be adding 1,500 new
workers, but analysts estimate that the crisis has already cost shippers more
than $1 billion in delayed shipments and delivery snafus. UP President Jerry
Davis has said he wanted to have "the right number of people" running the
railroad, since "it's a safety issue, not a financial issue." But one suspects
that we got something closer to the truth when, in the midst of the crisis, a
UP spokesman said, "Nobody's budget is safe when it comes to doing more with
less." Didn't anyone tell him he worked in public relations?
What both the Aetna and Union Pacific stories
illuminate is the degree to which downsizing has become simply a reflex
decision for many managers. The stock market's instinctively positive reaction
to job cuts surely makes it easier for managers to justify their decisions to
themselves. But the reality is that job cuts have more to do with an
ill-considered definition of the bottom line than with placating Wall Street.
In other words, it's easier to look at the reduced labor costs from cutting
4,400 jobs than to anticipate the potential chaos those cuts will bring. And
that's particularly true when the concept of the lean and mean corporation has
attained the status of dogma. In his A Passion for
Excellence ,
the sequel to In Search of Excellence , still an enormously influential
business book, Tom Peters wrote, "There is, then, a lot that can be said for
simply cutting staff. We find so many companies that do so much better with so
many fewer people." Perhaps Peters can issue a revised edition, with chapters
on Union Pacific and Aetna.
The
point is not that downsizing is in and of itself a mistake. The fact that
industries wax and wane is a reality of any economic system that wants to
remain dynamic and responsive to people's changing tastes. Jobs lost in one
place are often created in another (although there are serious questions about
whether the jobs will be as good, particularly for industrial workers). And a
number of large firms have downsized successfully, most obviously General
Electric, which cut an astounding 170,000 jobs worldwide in 12 years while
simultaneously tripling its sales.
But too often downsizing means what it has in
the Union Pacific case: fewer people doing more work. American workers now pull
more overtime than they did in the 1980s, and more companies have embraced
required overtime as a way of ensuring that work gets done. In theory,
downsizing should be a way of matching the size of your work force to the size
of your business. In practice, downsizing is too often about cutting your work
force while keeping your business the same, and doing so not by investments in
productivity-enhancing technology, but by making people pull 80-hour weeks and
bringing in temps to fill the gap. Downsizing itself is an inevitable part of
any creatively destructive economy. But overworked engineers and sleepy
dispatchers aren't creative, they're simply destructive.
