Tech Layoffs and Bad Management

It's official: Sun Microsystems is laying off 15 to 18 percent of its workforce. Such announcements from tech companies offer as little surprise as a single-day multi-hundred-point movement in the Dow. The tactic has become a management truism, with Wall Street often rewarding the "courageous" decision with an uptick in share price. The rationale is that companies will save beaucoup bucks; Sun hopes to see $700 million to $800 million in annual savings. Unfortunately, layoffs are too often proof of bad management by executives in mortal fear for their own hides. At best they generally provide no net benefit and long-term disaster at worst.

A glance at the news shows that Sun is no anomaly. Here's a list of some layoff announcements:

• Mobile content firm Thumbplay has a big layoff, though the actual cuts are "measurably lower" than the 25 percent rumored.
• Six Apart, a blogging company, lays off eight percent.
• Nokia Siemens Networks plans 1,600 layoffs in addition to 6,000 cut so far.
• Nortel will fire 1,300 more people.
• Semiconductor firm Applied Materials will send pink slips to 1,800 workers, or 12 percent of its staff.

To be sure, the current economic climate is not like one that managers have faced before. Some companies, particularly previously well-funded startups, may not have the cash they need to keep operating. But look at the numbers again and they start to read like movement in the stock market. For the big companies, that is what controls the decisions. Do CEOs get to look like heroes to big investors and their boards, thus keeping their jobs?

What companies should examine is whether this is good management. Some common sense and a few studies suggest not.

Notice when layoffs generally come: on the heels of disappointing earnings announcements. Why aren't companies paying closer attention to their economic state and their headcount all along? Maybe they are, but these decisions come late in the cycle and are announced at earnings because management knows it can often count on a stock price bounce as a reaction. Investors think, "This management team knows what it's doing and is cutting staff to maintain profitability."

Of course, that's not what the employees or customers want to hear, because they feel the direct effects of less support (or no job). The language used often indicates that executives are trying to get emotional distance and show that they are in control and making rational choices. Personally, I call it being chicken, because no one really buys the corporate speak. They've heard it all before -- and before.

If the issue was really being rational and transparent, then you'd expect there to be some benefit from layoffs. But according to Bob Sutton, a Stanford professor of management, a review of studies fails to turn up anyshowing that "layoffs improved long-term financial performance." However, there are a number that show long-term harm. For example, Bain & Co. did a story on S&P 500 layoffs in 2000 and 2001.

Bain found that it often takes companies 12 to 18 months before the financial benefits of layoffs kick in, because of severance costs and more effects including the negative effects on "survivor" productivity.

Bain concludes that, especially in knowledge-intensive businesses, "binge and purge" employment practices are rarely a wise way to control labor costs. The HR costs associated with hiring replacements can be high, and there are other effects such as the loss of firm-specific knowledge, reduced ability to recruit the best new employees, and damage to the motivation of survivors. Indeed, there is evidence from other research that the best employees jump ship after layoffs.

Sun stock chart from Google Finance.