Retrenchment doesn’t only affect those directly hit; it sends shockwaves that take a heavy toll on remaining staff. If these hidden costs could be counted, would retrenchment still make economic sense? And, where it is the only option, how can companies adequately prepare staff?

We live in an age where retrenchment has become commonplace. Some years ago, it was unusual to come across someone who had been or was about to be retrenched. These days though, retrenchment is fast becoming a norm and in some cases has become a budget forecast item for company cost cutting.

Companies with great economic power retrench employees to improve their long-term expenses bottom line, while others use it as a desperate measure to yank themselves out of the red. But, in my experience, they seldom factor in the hidden costs.

The toll that the retrenchment process takes on employees (including line management and HR staff) often lasts for years. Granted, the most obvious impact is on those who are laid off. I’ve counselled many retrenched people who are left without a sense of belonging, feeling rejected and abandoned by an environment they have come to think of as ‘home’. There’s also a sense of betrayal, that the promise of lifelong employment – still implicit in the employer/employee relationship – has been unceremoniously broken.

Yet, in many ways, it is not these employees who bear the final brunt of this form of ‘corporate culling’, but the ones who remain. Witnessing the painful and often undignified exit of their colleagues, remaining staff members are hardest pressed to figure out why they were so lucky to ‘escape the chop’. Often, they feel secretly guilty that they have survived, and fearful that they may be next in line. The retrenchment experience is so traumatic that the stress continues for months after, with employees living in a state of fear of putting a foot wrong.

In short, people in a post-retrenchment corporate culture experience an erosion of trust, a devastation of morale and a general feeling of fear and paranoia. Their outside contact with retrenched staff members, many of whom experience a classic mourning period and a time of traumatic readjustment, further deepens their sense of guilt and resentment towards what may be perceived as management ‘brutality’. Ironically, these factors are counter-productive to the very efficiencies which restructuring promises to achieve.

For the managers who are charged with the unpleasant task of implementing retrenchment decisions, the toll is even greater. Most managers and HR practitioners are ill equipped to handle the counselling of employees facing retrenchment. They are expected to remain detached from their colleagues and deliver these ‘death-knells’ without emotion. They undergo severe pain and stress at being the person to bring the tidings of doom and many become depressed as a result of this process. In companies where they have been expected to do this process more than once, they become increasingly traumatised by having to maintain a balanced and dispassionate appearance.

The question, then, is ‘how does one deal with the human costs of retrenchment and the destructive impact on company morale?’

For a start, I believe that retrenchment – like any extreme measure – should be approached with extreme caution. All the costs, both obvious and hidden, need to be taken into account before a decision is made to retrench staff, and less costly alternatives need to be considered. If anything, the willingness of a company to seriously explore alternatives may create a climate of understanding and lessen the negative impact on loyalty when retrenchment is arrived at as the only option.

Intel, for instance, weathered a bloodbath caused by the vicious memory-chip price war in the mid-80s by exploring a host of creative cost-cutting options. While their competitors resorted to immediate staff cutbacks, Intel introduced a ‘125 percent rule’ that asked everyone to work ten extra hours a week for no extra pay. When prices continued to freefall, they were forced to close plants and cut back on staff, but minimised these measures by adopting a ’90 percent plan’ whereby all staff agreed to a 10 percent pay cut while still working the extra hours.

In addition, Intel redeployed resources from its memory-chip business into more promising microprocessor activities. Consequently, Intel emerged with most of its staff (and morale) intact, while many of its competitors were in tatters.

In The Individualised Corporation (Harper Perennial), authors Sumantra Ghoshal and Christopher Bartlett call this approach ‘sweet and sour’ management. It’s about balancing ‘the need for ongoing improvement in operational performance as provided by continuous rationalisation, and the need for growth and expansion as generated by continuous revitalisation.’

Ghoshal and Bartlett describe the ideal company as one that is ‘self-renewing’, where ‘the rationalisation process is seen as a continuous activity, not a one-time cleanup job.’

They argue, I think correctly, that ‘the complementary part of the renewal process is revitalisation – the challenging and changing of the existing rules of the game that usually results in the creation of new competencies and businesses rather than the refinement of old ones.’ This, they explain, is ‘the antidote to a rationalisation-dominated mentality that has measured the success of a corporate transformation program by its impact on profitability and head-count reductions.’

While companies may succeed in moving away from a ‘rationalisation-dominated mentality’, the reality is that retrenchment will continue to be a fact of life in the modern business climate.

According to Ghoshal and Bartlett, the implicit psychological contract whereby employers expect employees to be reliable and controllable and, in return, job security is guaranteed for life, has broken down. ‘Company after company has pursued efficiencies through downsizing and outsourcing strategies that effectively ended the possibility of secure employment. From a stop-gap measure to stem the flow of red ink to the bottom line, such strategies have since become standard procedure, used routinely by even the healthiest companies. The ever-present threat that survivors of one outsourcing program will emerge only to be caught in the undertow of the next wave of head-count cuts has effectively made the traditional contract both non-viable and non-credible for both employers and employees.’

In a dynamic world, they go on to explain, ‘a source of competitive advantage in one period becomes not only irrelevant but also often a source of competitive disadvantage in another. Core competencies become core rigidities. Valuable knowledge and skills become rapidly outdated, often at a rate faster than many people’s learning capacities. Markets shift, technologies change, prices erode and new competitors render obsolete not only profitable products but whole business systems at a stroke. This is the kind of environment that most companies face today. In such conditions, the old contract is not just nonviable; any effort to pretend otherwise is immoral.’

If this is so, and job security is no longer a given, then surely companies need to start redefining the traditional employment contract and offering staff something in its place? Why wait until retrenchment is imminent to prepare staff for the experience? Too often, retrenchment comes as a bolt from the blue for employees, and companies then attempt to prepare staff by offering ‘band-aids’ like retraining and other isolated interventions that do little to soften the real blow or deal with the aftershock.

Look out for Part 2 of this article on Women Inc. next week.

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