Layoffs Often Backfire on Companies
LOU WATERS, CNN ANCHOR: Layoffs are a sadly common weapon on the corporate battlefield these days, but do they help win the war? As we hear now from CNN's Peter Viles, downsizing companies often discover they hired those ex-employees for a reason.</s>PETER VILES, CNN CORRESPONDENT (voice-over): From Dell Computer to DaimlerChrysler, the job cuts just keep coming. Companies announced 777,000 job cuts in the first half of this year. That's more than double the previous record, set two years ago. But as a strategy, what do layoffs really accomplish?</s>JOHN CHALLENGER, CHALLENGER, GRAY & CHRISTMAS: Layoffs are effective at cutting costs, and many of these companies are under the gun from Wall Street, but in terms of long-term value to the company, they're almost always a negative.</s>VILES: The rap on layoffs is they are bad for morale, damage institutional memory and customer service, and not always cost effective. They leave companies stuck with costs of rehiring and retraining workers if conditions improve.</s>DARRELL RIGBY, BAIN & CO.: There are a number of costs with layoffs. In addition to the obvious ones -- the severance costs, the outplacement costs -- there is also a loss of trust in the management team and a loss of innovation as employees grow more risk adverse and are afraid to stick their necks out.</s>VILES: Clearly, though, job cutting has worked for some companies. Jack Welch cut so many jobs at General Electric he was once called Neutron Jack. Larry Bossidy used cost cutting to revive AlliedSignal. Even Alan Greenspan has cited labor market flexibility as a strength of the American economy. But layoffs are not always the answer. Take Eastman Kodak. In 1997, then CEO George Fisher announced plans to cut 10,000 jobs. A month later, Kodak said it would cut 6,000 jobs on top of that. The stock did respond, but eventually slumped, and has lost 27 percent since the first round of cuts was announced. And Kodak is still cutting jobs; it just announced plans to cut up to 3,500 more. A Study by Bain & Co. comparing companies that announced big layoffs during the last recession to those that did not found that, on average, layoffs did not improve stock performance over the next three years. Companies that laid off more that 15 percent of their workers tended to underperform. And those that announced repeated layoffs did even worse. (on camera): The study did show that some kinds of layoffs tend to reap dividends, including layoffs that result from a merger or acquisition, and layoffs resulting from a change of strategic direction, such as when a company decides to close down an entire underperforming unit. Peter Viles, CNN Financial News, New York.