A mass layoff binge recently hit U.S. corporations, according to a recent U.S. Department of Labor, Bureau of Labor Statistics news release. A total of 1,280 companies laid-off 143,977 employees during the month of February 2007.
Banking giant Citigroup Inc.'s shareholders succeeded in their quest to cut costs and put more dollars into their pockets. Citigroup is sending pink slips to the first batch of 17,000 of its employees.
But that is not all—9,500 more jobs will move overseas, to places where employees are willing to work for much less than those in the U.S.
Charles Prince, Chairman and CEO of Citigroup acknowledged in a press release, "In December, I charged Bob Druskin and our management team with a simple directive: eliminate organizational technology and administrative costs that do not contribute to our ability to efficiently deliver products and services to our clients."
And no one is immune—managers and staff alike are affected by the corporate downsizing. The cost cuts are in the billions—Citigroup projects savings of $2.1 billion in 2007, $3.7 billion in 2008 and $4.6 billion in 2009.
Middle management is being compressed, forcing upper-level managers to monitor closely those at the front lines. All purchasing functions at Citigroup will be centralized by the end of this year. Executives are looking for duplicate corporate functions and are sniffing into every little corner to slash costs.
Prince announced to the press, "Ultimately these changes will streamline Citi and make us leaner, more efficient, and better able to take advantage of high revenue opportunities."
Professors at the University of Pennsylvania's Wharton School of Business don't quite believe Citigroup's intentions. Professor Lawrence Hrebiniak suggests, "[Prince] is getting pressure from shareholders. He's got to show he's doing something to cuts costs, improve margins, and make some more money. So it may not primarily be a move to restructure at all, it could be a move to get critics off his back."
Cost-Cutting Measures Are Taking on New Heights
Electronics retailer Circuit City is doing much of the same. Facing diminishing profits, management recently announced that the retailer would lay off around 3,400 Circuit City store associates.
The good news is that those store associates obtained severance packages and could reapply for their old jobs—if still available—for less salary after waiting for 10 weeks.
Competition took a toll on Circuit City and the most logical decision for the electronic retailer was to get rid of the more expensive but experienced store associates, and replace them with cheaper new hires. The company seems to be cutting costs at the expense of customer service, the opposite strategy practiced by its chief rival, Best Buy.
The associates received salary increases over the years that reached levels above market rates for employees with similar skills, according to Circuit City. The press release did not provide information on what competitors paid their employees for employees in similar positions and backgrounds.
Circuit City reasoned, "The separations, which are occurring today focused on Associates who were paid well above the market-based salary range for their role. New Associates will be hired for these positions and compensated at the current market range for the job."
Wharton Professor Daniel Levinthal explains that Circuit City has lost the one edge it had over its competitors with this layoff—experienced sales people. "Circuit City would now be competing against e-commerce because it's become similar to e-commerce and lost its differentiation as a bricks and mortar store," said Levinthal.
Reactions
Investors—and Wall St. analysts—cheer when profits increase.
Retrenchments of workers may cover many problems, including mismanagement, revenue losses, increased competition, and deteriorating market conditions. Only insiders know the real scoop of what is going on when a company goes on a cost cutting binge.
Wharton Professors were appalled when Circuit City laid off trained and experienced sales people, according to a recent report from Knowledge@Wharton (KW).
KW did not question Circuit City's right to cut staff for cost saving reasons, but objected to the way it handled the layoff.
Laying-off people because they had received increases in pay over a period of time and then hire sales people at lower pay was as low as it could get, suggested Wharton Professor Peter Cappelli. Circuit City admitted that they had gone over board in paying their workers and decided to kick them out because they had made a mistake.
Cappelli was appalled and admitted this is the first time he had seen this. "Companies have always done sneaky things like getting rid of higher-wage workers with two-tier wage plans, but this takes the cake."
Layoffs a Way of Life
Unfortunately, pink slips are a way of life in the corporate world.
Layoffs began in the 1990s when large firms, such as IBM, shifted from continuously educating employees due to technological advancements to hiring more qualified people. At the time the buzzwords were "internal restructuring, reengineering and downsizing, according to a 2003 K&W article.
Wharton professors found that the stock market does not always react positively when companies lay off employees. Unless a company gives a reasonable objective for cost cutting, Wall Street will react negatively and stock prices for the respective firm may actually decrease.
"Wall Street does not always welcome job cuts for their own sake," suggested professor Michael Useem.
Feeds