Indiscriminately Laying Off Employees Without Notice Is the Refuge of the Incompetent

Every since IBM started laying off thousands of middle managers in the early 1980s, it has become a badge of honor (granted by Wall Street) for U.S. corporate executives to fire large swaths of their employees in the name of “efficiency”, “rightsizing”, and “downsizing”. Firings often come in the form of a fixed percentage of the workforce or perhaps the closure of entire divisions. The logic behind such indiscriminate firings is often a cash grab–leveraging short term gross profits by sharply decreasing long term fixed expenditures. This results in a sort of forced “zero-based budgeting” action, where the remaining terrified employees are required to shoulder more of the workload. Work that really needs to get done gets done, and work that didn’t need to get done doesn’t. Of course long term sales tends to organically contract due to the inability to deliver, but this is often covered up by a reorganization or an acquisition, using–you guessed it–the excess short-term cash and profits that are suddenly available. Acquired businesses and reorganized divisions are then victimized in the same fashion and the layoff cycle starts over again. As long as there are acquisition targets available or sufficient cash available to reorganize, the wholesale layoff tactic can continue indefinitely.

A variation of this tactic has been employed by hedge funds for quite some time. Companies are purchased for debt, and then ruthlessly trimmed down to generate cash redemptions and to pad the income statement for a few years to justify a rosy forecast. The rosy forecast is then used to justify a rosy buyout multiple, which is paid by the corporation in the previous paragraph that needs more meat for the grinder. This variation was employed by Al Dunlap in the 1990s at Scott Paper (purchased by Kimberly Clark), and then unsuccessfully at Sunbeam when he could not find a buyer after massaging the books. But the tactic lives on, if perhaps a little more carefully, among the wingtip set.

Which brings us to Walmart. The retail leviathan that has been run by professional managers since the death of the founder uses none of the aforementioned tactics. Rather it pays its employees the very least amount necessary to minimally staff its stores with a third of the workforce necessary to run them and the distribution centers that underpin the whole enterprise. It bolsters this human resource tactic by paying its vendors the very least amount necessary to minimally stock its stores with a third of the product offerings necessary to effectively compete with its primary retail antagonists. Deficiencies in its product mix are disguised by the high volume of sales the retail chain generates, which endlessly attracts new vendor entrants to replace the disaffected dropouts.

When a company gets as big as Walmart (just short of $500 in annual revenue and $14 billion in annual profits), decisions that affect less than 1% of its stores can get lost in the busy corridors of the Bentonville, AK headquarters. Like, for instance, the closure of 62 of its Sams Clubs locations (out of about 860 total). One day the stores were open, and the next day they were not. At many of the now-closed locations, employees were not informed of the move and arrive to work at locked doors. Some locations had police officers fending of the newly unemployed.

Fortunately someone in public relations showed real Machiavellian imitative, because at the same time employees were arriving to work to find out that their store was closing, Walmart announced publicly a general increase to their minimum wage and a $1000 bonus to be paid to employees with more than 20 years of tenure. By the time the media had cottoned on to what had occurred at Sames Club earlier in the day, pundits had spilled gallons of ink and thousands of hours of video on the new progressiveness of the company. Not to leave any ironic stone unturned, the company later announced that, no worries, the 11,000 employees affected by the closures would be able to apply to new positions in a few e-fufillment centers to which some closed Sams Clubs locations were being converted (1).

The fact that the minimum wage initiative and the bonuses were tied to a tightening labor market and labor competition from Target, Costco, Home Depot, Lowes, and Amazon (to name just five) seemed to get lost in the hype still churning around the Tax Cut and Jobs Act, which lowered the corporate income tax from 35% to 21%. Surely, pundits enthused, there would be a trickle-down effect from lower corporate tax rates to the workforce.

Sorry, folks. Whether you’re Walmart, a hedge fund, or a faceless public corporation, the sudden firing of workers is the refuge of the incompetent. At best it shows inadequate planning, woeful operational skill, zero regard for the true cost of employee turnover, and stilted strategic thinking. It is akin to throwing everything overboard until the ship lifts off the sandbar, rather than reading the charts to effectively navigate the shoals. The captain still gets served steak and pie in his cabin, but the crew is eating wormy biscuits. At worst sudden firings shows criminal indifference to the human condition and a bottomless selfishness to pursue a few extra dollars in annual bonuses. That it should fill all of us with disgust is not a surprise. That it doesn’t among corporate leaders still is.

(1) Employees who could not find new positions in the company would get 60 days severance, according to later press releases. It was not clear whether this meant 8 weeks at 40 hours per week, or 60 days of severance proportional to the former work schedule of the severed employee. 

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