The Downside of Downsizing

The organizational battle between efficiency and productivity has been pretty one-sided since the financial crisis. Efficiency, as in downsizing, right-sizing or otherwise firing employees, won hands down.

But as companies start to see sales grow they are having to confront the reality of that approach: dissatisfied customers and experienced employee turnover.

The dispute is an old one. There are passionate adherents on either side. But in an economy increasingly attuned to customers' demands, service failure can make the difference between survival and failure. The retail industry, where turnover in many firms is over 100% annually is beginning to do a more effective job of assessing the costs associated with the loss and replacement of staff. Hiring and training new workers turns out to be more expensive than previously thought, especially when one accounts for losses of efficiency and effectiveness associated with unfamiliarity with products and processes, which can lead to customer frustration, ultimately resulting in lost sales. The loss of tacit knowledge, the term used to describe the benefits of experience, can also now be better evaluated in terms of financial impact.

None of this will come as a surprise to managers who have had to take responsibility for the operational results associated with too much work and too few workers. The economy's financialization over the last decade has reduced even further the value ascribed to human workplace contributions. The tyranny of the shareholder value ethos, which deeply discredited customers and employees bit so deep that companies attempting to recover and meet the needs of a technologically astute economy often struggle to offer satisfactory service levels. As the risks and limits of financial engineering become more evident, the benefits of other success drivers may finally be coming apparent to enterprises dependent on customers insistent on getting what they want, when they want it. With anticipating needs and desires, the next performance threshold, those demands will only increase. JL

Brad Tuttle reports in Time:

In the business world, efficiency is king. The corporate quest to cut salaries and get more out of employees, thereby maximizing profits, is never-ending. At some point, however, increasing the workload on employees backfires.

One national restaurant chain realizes that overburdening its employees hurts sales, as well as the company brand. Will more businesses follow its lead?

The burden becomes too much for workers to bear, and when employees are overwhelmed and can’t keep up with their duties, it’s just plain bad for business.
Last week, Red Lobster basically admitted that it had crossed the line with the introduction of a policy aimed at increasing efficiency and lowering restaurant costs. In July 2012, the restaurant chain, owned by Orlando-based Darden Restaurants, eliminated the busboy position, demoted many waiters to lower-paid status as “service assistants” and forced the remaining full-fledged servers to increase the number of tables they handled from three to four.
At the time, Red Lobster said the changes were being made after testing showed that diners and restaurant employees alike approved of the new policies. An Orlando Sentinel story published at the time of the switch offered some other perspectives:

‘We’re going to be completely worn out,’ said Bob Meehan, a longtime server at Red Lobster in Lake Worth. ‘It’s definitely going to hurt service.’
Chris Muller, dean of Boston University’s hospitality school, said worker morale will likely suffer. ‘If you don’t like the people you’re working with and for … it’s going to show,’ he said.

Lo and behold, it appears as if Red Lobster is now acknowledging that these critics may have been on to something. Less than a year after the four-table policy was launched, the company announced it is reversing the decision, and waitstaff will go back to serving three tables at a time. A Red Lobster spokesperson told the Orlando Sentinel that while some customers liked the four-table policy, once it was introduced around the country, “far more folks told us that in some instances, it really turned out to be a barrier to providing that great guest experience.”
If anything, the new policies only hurt sales, which have been sinking at the old-fashioned sit-down chain for months. It’s unclear how much the chain managed to shave off in employee wages during this experiment in efficiency. But obviously it wasn’t enough to justify the damage it was doing to the customer experience.
Red Lobster is hardly the only national company that could be doing internal damage by asking too much of employees, or by just not hiring enough of them. In recent months, a series of stories in Bloomberg and other outlets has been chronicling Walmart’s problems with empty shelves in stores around the nation. Customers and Walmart employees alike are making the case that store managers keep staffing levels too low to restock shelves while also manning cash registers and tending to other duties. The result is often a backlog of merchandise in the back of stores, empty shelves and long lines — all of which are bad for business.

In early April, workers at fast-food chains such as McDonald’s, Burger King, KFC and Domino’s Pizza held public demonstrations across New York City in protest of poor wages. Not long after that, the Wall Street Journal revealed that in a webcast held for McDonald’s franchise owners, a company executive admitted that “service is broken” at restaurant locations, with an increase in complaints about the speed of service and “rude or unprofessional employees.”
While JCPenney in the Ron Johnson era has faced many self-inflicted problems — most obviously alienating its coupon-loving core customers — many observers have also pointed out that the fading department store has been abandoned by shoppers because there just aren’t enough workers to offer customer assistance. The retailer reportedly laid off more than 40,000 workers in 2012.
The Los Angeles Times recently explored the idea that because of continued high unemployment and the increasingly competitive nature of the business world, employees will be expected to do more and get less (including less security) indefinitely:

‘Wages are stagnant, jobs are less secure, work is more intense — it’s a much tougher world,’ said Paul Osterman, co-director of the MIT Sloan Institute for Work and Employment Research. ‘Employers have become much more aggressive about restructuring work in ways that push for higher levels of productivity.’

One of Osterman’s MIT colleagues, Zeynep Ton in the Sloan School of Management, explained to the Atlantic that many businesses “start with this philosophy of seeing employees as a cost to be minimized.” That, in turn, can lead to understaffing, high employee turnover, poor customer experience and dwindling sales. On the other hand, Ton pointed to stores such as Trader Joe’s, QuickTrip and Costco, which “start with the mentality of seeing employees as assets to be maximized.” They pay employees higher wages and offer better benefits than their competitors, and it appears to be money well spent, with higher sales per square foot of retail space.
Sound like pretty efficient operations.