Sunday, January 22, 2012

Creative Destruction or Simply Destruction?

Sybille Sachs highlighted in her last post (New path to innovation) some of the questionable business-practices surrounding corporate cost-cutting. I would like to provide here a concrete example I experienced in my years in the corporate world and further consider the short-term and long-term consequences of such company reorganizations and cost-cutting.
In the 1990s I had the pleasure to work for a rapidly growing, privately held start-up company in the medical laser industry. I use the word “pleasure” with deliberation, as the motivation, dedication and team-spirit were wonderful – and that despite working long hours, not having any huge bonuses or enticing stock-options as carrot-sticks dangling in front of our noses. The morale in the company was high because input (in terms of resources, effort and creativity) was readily recognizable in concrete results.

Then the company was purchased by a publicly traded corporation.
Within months a “reorganization” was initiated that resulted in the suspension of research projects, the dissolution of numerous prospering business relationships and the attrition of - in several rounds - employees. All this was undertaken in the name of “business consolidation” and the concomitant cost-cutting. The investors and stock market loved it: the corporation’s share price exuberantly jumped in response.

On the “inside”, however, the result was exactly the opposite: a sharp drop in employee motivation and rising cynicism, erosion of trust and know-how and – eventually – evaporating financial returns by the corporate subsidiary we had become. Indeed, within 18 months employee count had roughly gone down by a third and a company that boasted 35 million dollars in revenues, posted at best half of that number. The share price of the corporation subsequently dropped from (if I correctly recall) about 40 dollars a share to only 4 dollars a share!
Granted, a multitude of factors played into this precipitous drop in share price. But that these “cost-cutting” activities contributed in some form to the financial fallout in the stock market is self-evident. Less evident, however, are the larger implications of such “cost-cutting” strategies.

First, despite any strong personal penchant for valuing people over profits and striving towards not making ends justify means, it must be recognized that on a larger, macro-economic scale, such “destructivity” could indeed be part of Schumpeters’ (in)famous creative destruction. The American “churn” model of hire and fire, while often with terrible personal, social and innovation costs, does (or at least did…) permit considerable labor flexibility, speed of economic rejuvenation and knowledge transfer as employees and resources shuttle from company to company. For me, after having been let go in the second wave of attrition meant that I suddenly had the needed motivation to get out of the corporate world into an environment more suitable to my aptitudes and taste.
Second, however, what may be “creative” at one place (or time or for any one person), may not be thus in another. For a large and fluid labor market as the USA, the churn model may have been a viable option. For a more segmented and embedded labor pool as the EU, it seems less so. And for a very small and very much socially rooted labor pool as Switzerland, the “churn model” would have catastrophic socio-economic and likely also political consequences.

Not surprisingly, this is indeed what one discovers, as was once again poignantly illustrated to me during a recent lunch I had with a scientist at the Massachusetts Institute of Technology, who was involved in a start-up company with a footing in both Switzerland and the USA: he complained about how difficult it was to get start-up funding and start-up employees in Switzerland as compared to the USA. He readily understood, however, that the American model would be unsuitable for Switzerland, as the capacity to sustain “churn” was significantly smaller for tiny Switzerland. Nevertheless, both Switzerland and the US have highly productive and competitive economies, each remarkably well adapted to their particular socio-economic and geographic “biotope”.
Indeed, we know from biological organisms as well as biotopes that change is vital for the survival of an organism or a species. The challenge for all organisms (and biotopes) is to find that “sweet-spot”, sometimes referred to the “edge of chaos”, where change – and thus innovation – is maximized without sliding into chaotic destruction. Much the same may hold for an economy. But while one may well entertain such questions about an entire economy, it is another matter entirely to what extent such “creative destruction” or “churn” is to be a desirable for individual human beings.

If humans are to be ends in themselves, any corporate strategy that facilely treats employees as mere cost centers risks devaluing human life per se. And history is unfortunately replete with examples of where that can lead to…

Manuel Heer Dawson


No comments:

Post a Comment