Career Transition Case Study
This is an article published in the Harvard Business Review by our Arbora Global Partner in Boston.
Harvard Business Review, HBR Case Study and Commentary
HBR CASE STUDY
by Bronwyn Fryer
If Astrigo Holdings is to remain competitive, 10% of its workforce must be cut. Who goes, and who stays?
"Why aren't layoffs taught as a subject at business school?" Robin Astrigo asked himself. "Boards expect executives to do them well, but nobody knows how."
He leaned his forehead against the cold window and stared out at the building across the street. The wind was whipping tiny, icy flakes sideways through Chicago's alleys of skyscrapers. Robin couldn't see through the dark glass windows of the offices of the big consulting firm opposite him, but he wondered whether the atmosphere in there was freezing too.
The analyst call that morning had been excruciating. Astrigo Holdings had missed its earnings estimate by 20 cents a share. Profits had dropped by double digits, regardless of efforts to slash inventory and expenses. Despite aggressive promotions and price cuts, the Astrigo home-improvement stores were losing sales to cheaper retailers with far worse customer service.
"Brace yourself," the head of investor relations had warned him after the call was over. "The headlines tomorrow are going to be brutal."
Robin thought of his deceased father. "Pop" Astrigo had started out as a hardscrabble Midwestern lumberyard owner. A fiscal conservative, he steadfastly believed that a strong cash position was crucial to the company's health. But he also taught his son that to keep its reputation for great customer service, the company had to treat employees well. Robin had run the firm capably since his father's death in 1996. He always insisted on keeping several million dollars in the bank just in case the company needed to make critical acquisitions. Though the recession was hitting the firm hard, Robin didn't want to risk Astrigo's future health by burning that cash now.
Robin bit the roughened skin around his thumb. He had to rein in costs further, and fast. An aggressive reduction in head count looked like the only course of action. Pop Astrigo had been forced to let people go in past recessions but had loathed taking such an action. A large layoff would be crushing for the families of the affected employees- and for all the towns where Astrigo stores had long been a central fixture.
"Sorry, Pop," Robin thought. He wondered what the board would think. If he didn't do this right, his own job could well be on the line.
He sat down at his desk and pecked out an e-mail to his executive committee: "Mandatory meeting, 4 PM sharp.
First In, First Out, or Rank-and-Yank?
"Did you see this?" Morris Meyers asked Lisa Warren, pulling the morning Tribune from his overcoat pocket and pointing at the headline. "‘More Shrinkage in the Clothing Business.'" He paused, then laughed-a big, bursting Texas laugh. "Who writes this stuff?" he said.
Lisa rolled her eyes as they waited for the elevator. "You're such a sucker for a bad pun, Morris," she said. Inside the cherry-wood-paneled elevator, Lisa pulled off her wool cap and shook out her hair as they zipped up to the 16th-floor lobby of an exclusive dining club. Morris, Astrigo's CFO, had invited her, as the head of legal, to meet him for lunch there. He'd reserved a room where they could talk without being overheard by anyone.
During the meeting the previous afternoon, Robin had asked his executive committee to form teams of two to work through possible layoff scenarios. Lisa and Morris had paired up. With his loud guffaw and weakness for cowboy boots, Morris could be off-putting, but he had a sense of humor and called a spade a spade. Lisa respected him, in no small part because Robin did too: The CEO liked to call Morris "the sharpest pencil in Chicago.
"The elevator doors hissed open to reveal a large room with panoramic views of Lake Michigan, the Chicago River, and the Wrigley clock tower. After checking their coats, Lisa and Morris followed the hostess to their private room.
From their seats, they admired the view of the shining office towers. In the distance was a building, sporting an enormous "Pont Trois Investments" logo, that had recently emptied its corridors in a massive downsizing. Closer by stood a gigantic unfinished building, a motionless construction crane tilting mournfully toward it. The real estate developer erecting the building had gone broke, abandoning the project.
"The construction crane," Morris observed drily, "used to be this town's official bird." Turning back to Lisa, he laid out the financial picture. Based on his analysis, a 10% workforce reduction would generate enough savings to keep profits in line with Wall Street's expectations. "Robin doesn't want to cut back more on store associates, because that affects customer service," he began. "So we need to start with middle management. That's where the low-hanging fruit is. I'd propose a first-in, first-out policy.
"Lisa raised an eyebrow. "You mean offer an early retirement package? Wouldn't that be expensive?"
"Not necessarily," Morris replied. "It wouldn't have to be large. I know guys who practically grew up at Astrigo. They've made pretty good money over the years, what with stock splits and all. They're not too far from retirement age and probably have put away a good stash. They're just counting the hours. Besides," he added, cocking his head, "it's the best way to get rid of the deadwood. We have a lot of it around."
Lisa frowned as the waiter placed a steaming bowl of tomato bisque before her. "You'd need to be really careful. You don't want charges of age discrimination. Remember what happened when Meese Brothers laid off those IT workers? All those gray hairs slapped the company with an $18 million lawsuit." Suddenly, Lisa thought of something else. "Wait, didn't you cut your teeth at Rashank? How about a performance-based layoff like they did, based on December's evaluation cycle? We could eliminate the lowest 10%."
Morris cut into his steak, took a bite, and chewed thoughtfully. In his experience, a "rank-and-yank" system was a mixed bag. "People were competitive and scared all the time. We saw some pretty harsh office politics. And the ranking system required a lot of work," he said. "On the other hand, it was good for the company because we developed a higher-performing workforce overall."
"Well, that's what it's all about, right?" Lisa replied. "March or die."
Last In, First Out, or Lose a Unit?
Bob Slater yawned. It was just before 7:30 in the morning when the executive director of strategy sat down with Marzita Vasquez, the head of HR. He and Marzita had promised each other they'd meet early in the day to hash out their analyses for the committee meeting the next morning.
"OK, so I ran the numbers, and I checked with Morris," Bob said. "I told him that I think we should adopt the simplest layoff policy possible, and that's last in, first out. That way, you don't have to pay people a lot of severance. We haven't got the time to do anything really complex. And it's inherently fair. Everyone understands that you have to work up to seniority."
Marzita was aware that Bob thought HR didn't make much of a tangible business contribution. For her part, she didn't have anything particular against Bob. He was conscientious, but he was basically a left-brain numbers guy. She'd have to talk to him on his own ground.
"Bob, we've been running lean relative to other retail companies our size," Marzita began, "but looking at this issue as a tactical cost-cutting measure is shortsighted. Not only do we throw good people out of work, but layoffs shout to our customers, ‘Look at us. We're in trouble.' They hurt morale, and that hurts customer service and, ultimately, our investors."
"I think the problem can best be solved by looking at our overall strategy," she continued. "We've overreached. I mean, what were we thinking when we acquired Prugh Furniture? We could save the money by selling it or shutting it down. It's time to refocus on our core business. This whole discussion is the wrong one to be having."
Bob narrowed his eyes. She was moving into his territory now. "Marzita, a lot of thought and time and effort go into acquisitions," he said coldly. "We don't make them lightly. I don't think Robin would go for getting rid of any strategic business units. A last-in, first-out policy is simply the easiest, cheapest thing we can do."
"I understand, but this isn't just a financial transaction," Marzita continued. "Think about Yukio, that young woman we hired a few years ago to run new business development. We courted her hard. She's a first-in-class MBA from a top school, and she's full of bright ideas. Two of our competitors were after her, but she decided to come with us in the end because she likes our corporate values. If we do a blanket last-in, first-out plan, people like her would be out of here!"
Marzita's face started to redden as she went on: "We work too hard to recruit great talent to let someone like her go. How do we attract good people in the future if we fire our best new hires?"
"Marzita, let's just focus on what we need to do to cut costs right now," Bob said coolly. "We can worry about tomorrow tomorrow." Marzita stared at the floor. "How can the company's strategy head be so cavalier about the future?" she thought. "Isn't keeping an eye on the long term Bob's job?"
It's All About Morale
"Sorry to interrupt." Julie Cox, a member of Astrigo's PR team who handled internal communications, had tapped on the door of Sushil Bhatia, the young vice president of marketing and strategy. "But can you chat for a second?" Julie didn't look well. She told Sushil, who was one of her close confidants, that her husband had just been marched out of the financial services firm he worked for. "It sounded awful, Sushil," she confessed, nearly in tears. "They just axed his whole department. They called him into a conference room, told him he was being cut, handed him some papers to sign, and escorted him back to his desk. He packed up his stuff, and then they marched him out of the building-in broad daylight, with everyone watching."
Sushil furrowed his brow. "I'm so sorry to hear that, Julie."
"What do you think is going to happen to us?" she asked. "I know things are tight around here. Do you know if there are layoff plans in the offing?"
Sushil looked at her, unsure of what to say. Of course, he'd heard the rumors too, but he felt that a big part of his job was morale management. "You can't get the best out of people if they're anxious about losing their jobs," he told himself.
He invited Julie to sit down in one of the armchairs in his office. Taking the chair next to her, he said, "Look, Julie, I'm not on the executive committee, and I can't tell you what they're thinking right now. I can tell you that this company has been in business since 1962. We're not alone; every retailer goes through layoffs, and historically we've managed to do better than many. I'm sure that if we're forced to resize, people will get good severance packages." He tried to give her a reassuring smile. "The important thing for you is to not let yourself get overanxious. Emotions are contagious, you know."
"I know you're trying to say the right thing, Sushil," she responded bitterly. "But I have a feeling management has already looked at the options. I'm sure they're going to do a slashand- burn. And-assuming I'm not axed too- I'm going to be one of the people who have to deliver the bad news." She frowned. "I've been mulling over euphemisms for ‘layoff.' Best to avoid the L-word. Maybe we should call it ‘cost improvement' or ‘simplification.'
"She stood up and walked toward the door. "Heck, maybe we should call it a ‘fitness plan.'"
The Values Statement
After she'd left, Sushil thought for a moment, then put in a call to Robin. They'd always been able to talk honestly, and he knew Robin trusted his judgment.
"I'd like to offer a little unsolicited advice, if I may," Sushil began.
"Sure, Sushil. Shoot." Robin had taken him under his wing and made it clear that he thought of Sushil as a rising star. Though nothing explicit had been said, Robin had entertained the thought that with some grooming, the young man might possibly be his successor one day.
Without naming names, Sushil informed Robin about the discussion with Julie. "I understand that we need to cut costs, but people are already scared and demoralized," Sushil said.
"You're going to ask me why we have to have a blanket layoff policy in the first place."
"Well, I'm looking at that plaque on my wall-the same one that's on yours. It's like a pledge of allegiance if you read it aloud. Indulge me for a minute." Sushil read: "Astrigo is made up of 12,000 teammates whose highest goal is to ‘Take Care of Our Customer.' We accomplish this by selling the highest-quality goods at the best price, with the best customer service, in the world. Great customer service begins with talented, innovative team members."
"OK, go on," Robin said somewhat impatiently.
"We have a policy of holding a big cash reserve for acquisitions. It's a little hard to justify a big bank account at the same time that we're eliminating jobs. Have you considered taking steps that would let us stay truer to our values?"
"Of course, I'm thinking about what's right for our customers, our shareholders, our associates, everyone. I keep asking myself what my father would do."
"I know it's really painful," Sushil said, "but it seems like we should consider something a bit more imaginative. Just pick a number. How about a 5% across-the-board pay cut, maybe a bigger one for people making six figures? We're not a union shop. We have the flexibility to do it. If we get pushback, that's OK."
"I appreciate your input, Sushil," Robin said. After a long pause, he added, "The executive team is running the numbers. I'm not sure what all our options are yet; we're going to discuss them at a meeting tomorrow morning. But I tell you what. I'd like you to come to the meeting tomorrow. It would be a good development experience for you."
A Tough Call
The next morning, Robin listened impassively as his team walked him through all the various options and angles. When the hour was up, his assistant tapped on the door.
"Robin, the chairman is on the line."
Robin looked gratefully around at the group. "It's really important to me that you're all here to see us through such a tough time," he said. "We will do the best we can-but there's no good way out, and we will never be thanked for our choice."
What's the best strategy for Astrigo?
Four See below, Case Study commentators offer expert advice.
The Layoff, HBR Case Commentary by Laurence J. Stybel and Maryanne Peabody
What's the best strategy for Astrigo?
The company's board is the unseen-but key-actor in this drama. If Robin Astrigo considers Astrigo's situation from the directors' governance perspective, the road ahead will begin to get a little more navigable.
Boards of public companies expect CEOs to make reasonable business decisions on behalf of shareholders. Anticipating that the board will prod him to make staff cuts to preserve Astrigo's cash position, Robin undoubtedly feels that he has no choice. Yet he also knows that layoffs take an enormous toll on morale and productivity. How does he get out of this box?
We believe Astrigo should borrow a page from the McDonald's playbook. In its annual report McDonald's clearly states that its business will focus on the interests of longterm shareholders. When a company explicitly seeks out such shareholders, its board has reason to assume investors will be more patient with the vicissitudes of the market. Moreover, once the economy strengthens, we think an increasing number of institutional investors will take a long-term view. In the United States the explosion in baby-boomer retirees will create a huge pool of investors who desire a safe train ride up and down gently rolling slopes. They'll give up the thrills and agony of high risks and high returns.
With its unique size, strategy, cash position, and culture, Astrigo would be well suited to the interests of long-term shareholders. If the board issued a McDonald's-like statement, it would establish a clearer framework for Robin's tactical decisions, and he could make them with more precision and flexibility.
On a practical level, the company has enough money in the bank to buy a little time to study alternatives. Sushil Bhatia sounds like a smart fellow, and Robin should listen to him. As a development exercise, Robin could instruct Sushil to aggressively review the contributions of strategic business units first, not those of people or even stores. At the same time, Robin should take a closer look at Sushil's recommendation for an across-the board pay cut. Given that the company is already running lean, spreading the pain over the entire employee population might be more consistent with the Astrigo culture, help customer retention, and even generate employee support.
If the company decides it has no choice but to conduct layoffs, we recommend the last-in, first-out option. The termination costs will be lower for less-tenured employees. Moreover, they are often younger and will have an easier time changing careers; the company will also hold on to its store of institutional knowledge, which will help it grow when the business cycle finally turns.
The case doesn't get into an important detail: What type of severance program does Astrigo wish to offer employees? Severance is usually a onetime financial hit to the company, but the way it's handled can have a long-term impact on the morale of the remaining employees. Typically, the various functions see severance through their own narrow lenses. Finance wants to control cost. Legal wants to minimize risk. HR hopes for ease of administration. And the CEO must be concerned with values, as Sushil correctly points out.
Too often the severance package is decided by the head of HR under pressure from the chief financial officer. Robin needs to decide whether it should be minimal, average for the retail industry, or in the top percentile relative to other retail companies of similar size. A reputation for offering generous severance might help attract and retain competent employees at companies Astrigo acquires in the future.
Laurence J. Stybel () and Maryanne Peabody () are cofounders of Stybel Peabody Lincolnshire, an executive career management and board advisory firm based in Boston. Stybel is also an executive in residence at the Sawyer Business School at Suffolk University in Boston.
The Layoff, HBR Case Commentary by Jürgen Dormann
What's the best strategy for Astrigo?
Astrigo has more than a cost problem. The company also appears to have strategy, management, and cultural problems. Its governance is a cipher. Marketing doesn't seem to be working. And nowhere is it evident that the poor employees who will be so drastically affected by a layoff will have any opportunity to offer their input. While rumors fly and morale sinks, two of the top managers are off having an expensive lunch in a private dining club, discussing the fates of thousands of people and their families. This is no way to run a company.
Certainly, I understand the severity of the situation Robin faces. In 2002, I took over as CEO at ABB, a maker of equipment for power utilities, which had 180,000 employees. A proud company with a long history, ABB was in severe distress. It had overexpanded, acquiring more than 150 companies in six years. Poor management, litigation over asbestos-exposure claims, a downturn in the economy, and spiraling costs-including disproportionately high salaries for previous CEOs-had all loaded the company with billions of dollars' worth of debt. ABB was within a hair's breadth of bankruptcy, though no one in the company seemed prepared to believe it.
It's not clear what kind of relationship Robin has with his board, but the chairman may be too remote and Robin too powerless for either one to be effective separately. Assuming Astrigo's board has faith in Robin, it should name him chairman. Though I believe in the division of the chairman's and the CEO's roles in normal business situations, it's best to consolidate leadership in a crisis.
Second, Robin should shake up the executive committee. He's not getting the information or help he needs from anyone but Sushil. In my case, I replaced eight of the 11 people on my team, adding two fresh faces from another company to take over finance and HR. That injection of new blood helped us reconsider and refocus the strategy.
Though this is a cliché, communication is critical. In my situation at ABB, I felt a heavy responsibility to reach out personally to half a million people around the globe (including the families of employees). I wrote to every worker and related the out-and-out truth: that if we did not turn the ship around together, we'd all be out of jobs. I said I'd keep them posted. I made it clear that layoffs were the last, worst option, but that if we were to save ourselves, every single one of us would have to come up with ideas for cutting costs. The recommendations that I received in response helped save $600 million during the turnaround's first year. But that still wasn't enough, so I asked employees and their families for more ideas. After two years we'd saved $1 billion-and had saved the company too.
While bottom-up communication is crucial, Robin must also work on changing the organization from the top down, by demonstrating the kind of behavior he expects from his managers. No one should be going to private dining rooms; executives should eat in the cafeteria with everyone else-and fly coach. (I recall the surprised look on the faces of my team when, while boarding a plane, I walked past them in business class and took my place in the rear.) As the protector of Astrigo's cultural health, Robin must model humility at every possible turn.
If he does all those things, Astrigo may very well survive the threats facing it and go on to succeed in the future.
Jürgen Dormann is the chairman of Metall Zug, in Zug, Switzerland. He has served as the chairman of Adecco, a staffing and HR services firm; the chairman and CEO of ABB and Aventis; and the CEO of Hoechst.
The Layoff, HBR Case Commentary by Robert I. Sutton
What's the best strategy for Astrigo?
Unfortunately, too many executives blindly assume that layoffs are the best way to cut costs. With the exception of a lower-level vice president, none of the managers in this case seriously challenges the notion that 10% of the employees must go. The top executives don't discuss alternatives such as pay cuts, reduced benefits, unpaid vacations or days off, or incentives for voluntary departure.
Nor do they consider how long it will take for the savings from the head-count reduction to kick in. A Bain & Company study of layoffs at S&P 500 firms during the 2001 downturn showed that it took them six to 18 months to realize savings from job cuts. And, when calculating savings, most executives fail to account for the cost of recruiting, hiring, and training new people who will be needed when good times return-let alone consider the damage to morale and productivity. Those costs are often much higher than people imagine, which helps explain why the study also found that firms that made layoffs their last resort and cut the fewest employees performed better than their competitors did. If Astrigo executives decide they must do layoffs, picking the best route is difficult, given all the trade-offs mentioned in the case. While none of the options discussed is terrific, cutting the bottom 10% based on performance evaluations is the worst. Most companies do performance evaluations badly; ratings often vary wildly depending on the effort put into the process, whether the evaluator likes or dislikes the person evaluated, and whether the manager is tough or lenient. Additionally, if Astrigo lets go of the bottom 10% of each team or business unit, then the most leanly staffed unit would suffer the most.
If layoffs are inevitable, Astrigo must avoid stretching out the process over weeks and months. The longer the uncertainty drags on, the more morale will suffer. People will polish their résumés, and those with the most desirable skills will find new jobs quickly. Astrigo should condense the layoffs into a short period. Once they're completed, Robin has to communicate clearly that no further job cuts will take place unless things get a lot worse. A single big layoff is tough on everyone but does a lot less damage than seemingly endless rounds of unpredictable cuts.
Finally, both the employees who are fired and those who remain will suffer less-and hold the company in higher esteem-if they are treated with compassion and respect. That means that Astrigo executives ought to look people in the eye, answer their questions, listen to their concerns, and warmly thank both those who stay and those who go for their service. Managers especially need to resist the temptation to bad-mouth the people that they fire-doing so enrages the retained employees and demeans those who are let go. I know, all this sounds absurdly obvious.Yet I keep running into seemingly sensible executives who bungle layoffs anyway. Because they feel embarrassed and defensive about the ugliness of it all, many leaders have trouble doing or saying the right thing. One way Astrigo's executives can overcome their knowing-doing gap is to frame their predicament in a more objective, detached way.
Robin can ask his team, "What advice would you give to someone else in this exact situation?" Then the team members can force themselves to follow their own advice rather than fall prey to their worst instincts.
Robert I. Sutton () is a professor of management science and engineering at Stanford University in Palo Alto, California. He is the author of The No Asshole Rule (Business Plus, 2007) and is writing a new book, Boss: How to Be a Great One and Survive One That Isn't.