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Rogers: Do headcount reductions make financial sense?

Published on June 26, 2012 by in 2012, Bell, Rogers, Wireless

Rogers:  Do headcount reductions make financial sense?

Many of our Canadian telecoms and cable companies have all done significant headcount reductions in the past few years.  Does this improve their margins?  Is it indeed better for the businesses?  Is it better for the economy?  Is this the best way to improve productivity?

 

The numbers

We will work on this, but think the numbers will show that there was no improvement in the numbers of any company that has let a lot of employees go.  To be updated.

 

Where does the work go?

Even if we could get the numbers to work, which we will not, when you lay people off where does the work go?  Either the work has to be done by existing employees or it has to be done by someone outside of your organization.   It the job cuts were poorly executed (and we have yet to see well orchestrated job cuts) then managers and executives will look to the remaining employees to pick up the slack.  This can be done by existing employees working more efficiently or longer hours.  Since most front line employees are effectively paid an hourly rate, working longer equates to overtime, which can actually end up costing organizations more.  So can employees suddenly faced with an incremental work load and no new tools suddenly improve their productivity?  Maybe some people.  Some seem to flourish under pressure and get creative, find new ways to tackle age old problems.  But we believe that in survival mode, which is the automatic fight or flight response of employees left behind when some of their colleagues and friends are let go, most employees do not improve their productivity.

So this leaves other companies to do the work that was once done by the employees you let go.  This can be a proactive decision like outsourcing the work, or a negotiation with suppliers or you can download the work to your customers.  In our experience outsourcers generally do not do a better job than any companies own employees.  They can however do it cheaper.  But cheaper often has a downside.  The jobs are moved overseas (not good for the overall country or regional economy), or the outsourced employees are trained less (creates potential customer aggravation) or paid less (paying less can be in the contract length, the hourly rate or in fewer benefits).  Paying less for employees usually means that you are not getting the same quality of employee or you have unhappy employees that have no loyalty and will move at the first possible opportunity.   When a company outsources work, the new employer now has to make a margin on the employee, because this employee has moved from a cost center to a profit center.  To achieve this, the outsource company needs to have some cost advantages.   This makes sense when there are many small companies who have similar needs like an alarm monitoring center, where the outsource provider can offer scale to the many small home security providers, but who has better scale than our telecom and cable companies?  India.  So the only way for an outsourcer to make money is for them to pay domestic employees less, train them less or send the jobs abroad.

The impact on the organizations

We have not seen any situations where job cuts are seen positively by employees.  Neither those who lose their jobs nor those who are left behind benefit.  Moral always gets worse.  Bad news travels fast.  When morale is poor within an organization, the front line feels it immediately.  But these are the employees that are selling, supporting and talking to your customers everyday.  They are the face of the organization.  When they are worried about their jobs and taking on the additional burden of the employees work that you let go, their stress levels increase and probably do not have the time or inclination to treat your customer better.  They do not have the time to get to the route of the problems, the time to design products and services as well, the internal feedback loops to ensure and improve quality.  All organizations have many processes, procedures and learnings that undocumented.  Even the best run organizations have much of the inertia and organizational memory in the employees.   When you let employees go en mass, you lose learnings, processes, understanding and relationships.  Relationships with suppliers, partners and customers not only leave your organization, but will frequently go to competitors.   Having to form new relationships is expensive in terms of time and money.  Friction costs between suppliers and partners increases.  With organizational memory gone, company make the same mistake that they had previously learned from and their overall risk increases.

The impact on the communities

When large organizations let many people go all at once they can impact the local community in many ways.  Firstly if a whole call center were closed, for example, then the local community might lose one of their biggest employers.  Employees have to travel to alternative work, and local businesses suffer from the dual impacts of lower consumer spending and fewer local customers.  Finally this impacts a company’s customers.  When a family’s breadwinner works at Rogers, you can bet that their friends, immediate family and neighbors all have Rogers services.  After being let go, a former employee is unlikely to recommend their former employer, in fact they might even switch all their services to a competitor.  This has seriously negative ramifications for the company, who used to enjoy a small army of advocates, who now at best say nothing and worse if they could have negative experiences to share.   We already know that it takes almost 10 times as many positive recommendations to net out a single negative comment from consumers, so letting 500 people go could lead to 5,000 negative comments, which would take 50,000 positive experiences to net out!

The impact on the economy

Perhaps the biggest unknown is the impact on the economy.  This has already become a big issue in the USA and we believe will impact Canada sooner rather than later.    When large organizations downsize or cut jobs to improve margins (and those margins are already in the high 40% range!) this is actually a transfer in wealth from one group of stakeholders to another.  It is a wealth transfer from employees to executives and shareholders.  At the very least this is immoral, but worse, we think it could become a contributing factor in overall economic decline.  The biggest problem is that the companies are not paying the very customers who would buy their services.  Assuming all these people find new work, but not immediately or at a lower wage, total middle income declines.  Without wage growth in the middle income wage earners overall (both lower employment and lower wages per employee), there is less disposable income to buy the very products and services that these companies produce.  So sales erodes, which causes belt tightening in companies, which in turn means companies spend less, which means they do not hire and so the decline spirals.  In fact for our economy to recover we need the companies to invest more and hire more people.

Getting back to the immoral part, we could probably find many at least one example from each of our telecoms and cable giants where they had laid off workers to improve financial performance.  For fear of retaliation, we would not like to single anyone out, but suspect that the executives leading these companies might have also been paid a bonus in the same time period that the lay-off occurred.  This seems counter intuitive at a human level, but it also fails an economic test.  Let’s say for example that 1,000 workers are let go and the savings are $50m but the executives get paid an extra $20m in bonuses and the shareholders get the benefit of the remaining $20m (assumes all savings go to free cash flow and the is a payout ratio, dividend increase or share buyback returning 2/3 of savings not paid to executives).  The incremental earnings to shareholders are so insignificant that the savings alone will not impact their investment, although the sentiment might change if investors think you are a cost conscious organization.   And what do the executives do with the bonuses?  They save it or invest it, but they do not spend it.  Employees would have spent most of their wages.  A thousand employees will limit their discretionary spending, so water, heating, air conditioning, food, gas and entertainment spending all go down.  Yes the executives might take an extra trip, but this does not make up for the thousand employees who did not spend.  So the economy shrinks.  The public sector economy also shrinks.   A marginal $50m in payroll results in significant income and spending taxes for our federal and provincial governments.  The same dollars in executives and shareholders hands is invested in ‘tax saving’ plans or in lower taxed dividends or in more equity.  No matter what the government coffers are reduced when payroll declines and profits increase.

In terms of the fundamentals of economics of capitalism, yes businesses should be created and run for a profit motive, but mass layoffs from all companies would certainly ensure self-inflected destructions.   Without a large and growing middle income group of earners, there is nobody to buy our products and services.

Time for companies to consider other stakeholders?

We think most shareholders want to invest in companies that will continue to survive, grow and prosper, but do not believe that smart investors are interested in short term cost cutting that will injure the business, the community and economy in the long run.  We believe that despite lagging on productivity in some areas, our Canadian businesses are pretty well run.  We can envision a Canada where other key stakeholders like employees, suppliers, communities and the economy itself are considered.  Good companies should strive to increase their average payroll per employee, raising our country’s disposable income and driving an employment driven recovery.  Employment led in terms of both rates and headcount.  We are not recommending hiring employees for the sake of it, but we should be intolerant of layoffs, especially when they are designed just to cut costs.  We have been closely watching the UK, where there has been significant shareholder activism and new regulation giving shareholders a say on executive pay.  Maybe here in Canada we can say that executives should have no bonuses in a year that even a single employee is let go.  And maybe large telecoms and cable companies that have enjoyed limited global competition and local duopolies should look in turn to commit to high levels of employment and higher than average wages as a responsibility to our country.   If all large employers in Canada committed to this, we could probably lead our country into growth with an improvement in Europe, the oil price or a USA presidential election?

Conclusion

We understand that a declining business needs to reduce costs to remain profitable, but with margins in the 30%-50%, it is not clear that these businesses are about to fail.  We also believe that there are other ways to reduce your costs, without mass layoffs.  Even if you need to reduce employee related costs in a business unit to make it profitable, employees leave, retire and change roles all the time.  This is part of the natural evolution of employment.  We are not suggesting jobs for life or union protection to include management, but mass-layoffs are destructive however we look at this.  There is lots of opportunity to innovate, offer new services, retire old businesses gracefully and move into new growth areas without destructive ill considered layoffs that do not actually create value.  We would like to appeal to the press, investors, analysts and pension funds who are the unwittingly encouraging companies to focus on the short term.   We should not invest more in a company that focuses on employee layoffs to improve already inflated margins, but rather those businesses that contribute to the overall growth of our employment, communities and indeed our economy.

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