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
