Handling Downsizings Right

Downsizing offers a quick fix, but has long-term costs—and can even damage the bottom line. Whether you’re on the giving or receiving end, the right approach is critical.

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By Eric Good, Director of Project Management, Centocor Biologics

“Emergency staff meeting,” read my Outlook calendar on December 15, 2003. The words still make my blood run cold. I and my colleagues on Wyeth BioPharma’s senior leadership team were to meet at 8 a.m. sharp. By 8:05 the bomb had been dropped: Our plant in St Louis would be closing its doors. Over 400 employees would lose their jobs.

There would be three rounds of cuts over the next four months, after which a skeleton crew of 17 workers would “keep the plant warm” until a potential suitor arrived. Eventually a white knight did appear when J&J purchased the plant and made it part of Centocor. Most workers, including me, stayed on. But the damage had been done. Valued employees lost their jobs, and the rest of us weren’t quite sure what to think. Some felt lucky, but even more felt a “survivor’s guilt” and a sense that they could never experience true job security again.

Over the past five years, in response to expiring patents, product failures, recalls, consent decrees and increased regulatory scrutiny, pharmaceutical manufacturing companies have eliminated over 60,000 jobs [1], many of them in manufacturing. A growing number of drug manufacturing professionals are uncertain about their futures. Pharmaceutical Manufacturing’s 2005 job and salary survey (March 2005, p. 26), for example, noted that 44% of respondents were concerned about job security.

For those readers that don’t believe it can happen to them, consider the following:
  • Abbott Laboratories downsized 700 manufacturing jobs in Lake County, Ill., to save $200 million a year.

  • Purdue Pharma halved its staff last year, in response to decreased sales.

  • Cardinal Health has closed its parenteral plant in Puerto Rico, as part of a $300-$350 million restructuring plan.

  • Pfizer has reduced its overall number of manufacturing plants from 93 to 73, and plans additional cuts this year.

  • Merck has made a number of job cuts, nearly half of them in manufacturing.
Companies cut jobs to fix short-term cash-flow issues and reorganize long-term financial priorities. This was the case at our St. Louis site, where the decision was driven by decreased sales and the need to conserve cash.

But research is conflicted as to whether the short-term benefits of paring down or shutting down really pay in the long term, or whether they are outweighed by damage to morale and productivity. This article will take a look at both sides of the issue, providing some basic data for people in any plant threatened with downsizing.

Justifying layoffs

Statistics show that companies do have financial justifications for downsizing. In one study, 75% of downsized organizations reported increased profitability, and 37%, increased share value, within two years of their cuts. In another, 77% of managers believed that downsizing led to increased productivity [1, 2].

However, new research contradicts those findings, showing that corporate gains from downsizing may not be fully realized throughout the organization. In a study taken over an 18-year period, there was consistent and significant evidence that downsizings do not necessarily lead to better financial performance as measured by return on assets (ROA). The researchers point out that “employment downsizing may not generate the benefits sought by management” [3].

Additionally, research has shown that firms that dismissed more than 10% of their employees underperformed on several financial indices, not only in the year they downsized but for the following two years [4]. Studies on the profitability and stock market performance of Standard & Poor’s 500 Index companies indicates that in the three years following downsizings, the targeted firms showed a decline in return on assets (ROA). Stock performance of downsized companies was not better than other companies [5]. The bottom line: Downsizing does not clearly improve financial performance [8].

There may be reasons for these findings. Organizations that downsize tend to have myriad problems; so laying off employees may not lead to the intended results [6]. The effects of downsizing, in fact, may be counter to what is expected — such as significant losses of intellectual capital, leadership and communication [7].

Wyeth St. Louis’ experience

Pharmaceutical leaders must realize that many employees see downsizing as top management’s failure to control costs and hiring in the first place. “I didn’t know what categories management was using to justify our downsizing in the first place,” says a colleague, a quality specialist. “It was very upsetting. I took it personally and thought it was something I had done.”

Downsizing is also hard on workers who remain, leading to a dilemma: what appears to be good for the company is bad for its employees, individually and collectively.

John Challenger, CEO of Challenger, Gray & Christmas, an international outplacement consulting firm that tracks job losses and gains in the pharmaceutical industry, notes that downsizing not only depletes an organization’s talent pool and exposes it to legal action, but also:
  • Damages the culture;
  • Decreases morale;
  • Strains working relationships between employees;
  • Damages the emotional and behavioral commitment of continuing employees.
Employees who stay on may have difficulty focusing on long-term projects. This was evident during Wyeth BioPharma’s St. Louis layoffs. “Some felt that they were dragging themselves to a job every day,” says Tammy Stone, an HR specialist who counseled employees during the layoffs. “They were depressed and felt like the axe was going to fall at any time.”
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