Restructuring 101

By Ed Frauenheim

Jan. 10, 2008

Talk to employees. Treat laid-off ones well. Keep investing in training. Try to redeploy your talent. Have top executives share in the sacrifice.

    These are among the key steps companies ought to take when reorganizing their firms, says University of Colorado business professor Wayne Cascio. Companies that do these things typically end up with better long-term financial results as well as a better reputation, says Cascio, who studied corporate overhauls for the U.S. Labor Department and wrote a book titled Responsible Restructuring: Creative and Profitable Alternatives to Layoffs.

    By failing to take employee views into account “you can move a lot faster, but you may lose a lot of creativity in the process,” Cascio says.

    Cascio is part of a broader debate about how companies ought to handle workforce matters when they come to a crossroads, such as financial trouble or heightened competition. Such turning points are becoming commonplace as the pace of business picks up and many firms face volatile swings in their fortunes.

    Among the companies going through a restructuring is computer chip giant Intel. In response to falling revenue and market share, Intel over the past 20 months has revamped operations and shrunk itself. It announced 10,500 job cuts from the 102,500 employees it had in mid-2006. And thanks to attrition and other activities, including the sale of business units, the company expected its headcount to get down to 86,000 by the end of 2007.

    Despite decades of calls for leaders to act “strategically” with respect to the workforce, most companies still lack consistent and logical methods for making the best choices, says John Boudreau, management professor at the University of Southern California.

    In the absence of a “decision science” for optimizing the workforce during a restructuring, technology industry companies ought to be careful not to ignore the long-term effects of job cuts or training reforms, Boudreau says.
“In times of crisis, people tend to revert to their fundamental operating models,” he says. Tech firm leaders in a crunch may “tend to make decisions about their ‘people’ issues through a technology and money lens, but those frameworks can often miss vital considerations.”

    One aspect of Intel’s restructuring that has come under scrutiny is the way it cut 1,000 managers by late July 2006. Intel had too many managers and some of them were blocking ambitious lower-level employees, says a former Intel manager who lost his job in the management cutback. But Intel ended up ousting many managers who were skilled at people development, says the former manager, who spoke on condition of anonymity out of concern that his current tech-industry firm could be harmed by his comments about Intel. One of the criteria used in deciding who to cut, the former manager says, was how well managers had prepared their direct reports to move up in the firm.

    Intel declined to comment on his claim. But an internal Intel document shared with Workforce Management indicates the company realized it was losing quality employees in the 1,000-manager cut. It also indicates Intel did not try to move any of those laid-off managers to non-management roles.

    The memo, intended to help managers speak with their teams about the layoff, includes a series of questions and answers, such as this one: “It seems as if we promote our best ICs [individual contributors] to management positions, and now we’re letting 1,000 of those people go. Why not move them back to being great ICs? Aren’t we losing some of our best talent by doing this?”

    The memo’s response is this: “We know we are losing good people in this move. But we have too many managers, and this manager reduction is necessary to improve our decision-making and communication and to resize the company. In addition, since we need to become a leaner company and are limiting job openings, redeploying their skills, as individual contributors or as managers, is not a reasonable option.”

    Intel declined to comment on the memo.

    Some authors have argued against mass layoffs as a strategy. Louis Uchitelle’s 2006 book The Disposable American makes the case that layoffs often backfire for individual companies and erode the quality and even the mental health of the American workforce. Writing in 2006, MarketWatch columnist Herb Greenberg was skeptical about Intel’s big job cuts. “Maybe, just maybe, large layoffs are a sign of failure, not success,” Greenberg wrote. “… These layoffs signal the end of Intel’s great run. Its monopoly grip is loosening, and its leaders and circumstances behind its early growth are gone.”

    On the other hand, David Wu, equity analyst for investment firm Global Crown Capital, says Intel’s job- and cost-cutting was needed to help prepare it to serve low-income markets such as India. Those rapidly-growing markets are a key to Intel, which launched a “Discover the PC” initiative in 2006 to help make computer technology affordable to “first-time computer users in emerging markets.”

    “I don’t know if they cut the right people,” Wu says, “But the slim-down was overdue.”

    In its restructuring, Intel has taken some steps that are considered smart. Employees who lost jobs in the overhaul say Intel provided generous severance packages, which sends a positive message back to remaining workers. The company also has ramped up spending on training even as it cut overall HR costs by nearly 40 percent.

    But there are other areas where Intel may have run counter to the best restructuring practices. Among the charges from ex-employees critical of the firm is that Intel did not do enough to ask employees about their interests during the overhaul. Intel executives counter that managers routinely check in with subordinates about career goals, and employees had to be reassigned based on the company’s new strategy.

    Total compensation for the five highest-paid Intel executives fell from $43.7 million in 2005 to $34.4 million in 2006, and Intel chief executive Paul Otellini saw his total pay drop from $12.2 million to $9.8 million. To rank-and-file employees, though, giving up a couple of million dollars of a multimillion-dollar package may not seem like much of a sacrifice. Ken Iverson, former CEO of Nucor Steel, took a 60 percent pay cut during a reorganization, Cascio says: “He was saying, ‘We’re all in this together.’ ”

    In the 1990s, Cascio considered Intel among the top corporations when it came to restructuring. He was impressed by Intel’s redeployment program, which gives employees affected by downsizing a chance to find new work at the company. Intel still in many cases offers its redeployment program, in which employees have eight weeks at full pay and benefits to seek a job at Intel or elsewhere.

    Cascio, though, no longer puts Intel in the top strata of restructurers, saying the company over the years has done less to find ways to preserve and redeploy its talent. “The firm has resorted to widespread layoffs,” Cascio says. “Intel seems to have changed its philosophy over the past decade or so.”

    Intel spokeswoman Gail Dundas says the firm doesn’t always have openings for workers in the redeployment program. But, she says, the program amounts to a better deal than what many other companies offer. “It continues,” Dundas says. “The spirit is still there.”

Ed Frauenheim is a former Associate Editorial Director at Human Capital Media and currently works as Senior Director of Content at Great Place to Work. He is a co-author of A Great Place to Work For All.

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