Saturday, February 9, 2008

Curbing the "Cycle of Failure"

During the last few blogs, I have discussed a number of aspects of customer loyalty. I have shown customer satisfaction does not guarantee loyalty, described both the internal and external processes of developing customer loaylty, discussed the crucial role played by employees, and articulated the importance of have effective tracking systems. Finally, I have described some ways to build long-term relationships and trust with customers.

In the next few blogs I will explore the challenge of keeping employee loyalty high in the face of corporate downsizing and restructuring. This can be expecially critical for service-oriented companies and divisions because low morale and employee indifference can place their loyal customer bases and their business at risk.

Morale and Downsizing
In the wake of the recent rash of downsizing, employee morale has seldom been worse. The conference Board surveys continue to show that a large number of U.S. companies have taken signicant downsizing action in the last five years and indications show no sign of a let-up.

It is significant to note within a year after making downsizing cuts more than half of the companies surveyed had refilled the positions. Degration of employee morale and loyalty tend to be the first unintended consquences of a downsizing strategy. Although these consequnces do not register directly on the balance sheet, high employee morale and loyalty are often a critical corporate asset. Competitors can replicate most aspects of a company's physical assets, but what about the willingness of employees to go the extra mile and invest time and energy discovering creative ways to solve customer problems, meeting customer needs and maintaining on-going trusting realtionships?

The old implicit contract which encouraged employees to link their own futures with the future of the company is gone. Now, the company cannot count on its employees because employees cannot count on the company. Another consequence, equally difficult to quantify, is the forfeited knowledge and experience of employees whose jobs have been eliminated.

It is true that many orgaizations are significantly overstaffed. Too many people drain costs, inhibit speed and curtail innovation. A smaller number of well-trained employees, supplied with state-of-the-art technology and organized in self-managed, cross-disciplined work teams, can operate smarter, more quickly and more collaboratively when they have the authority to get a job done without constraints.

Sadly, many companies have no coherent stragic rationale for layoffs. Employees are regarded as expendable costs of production to be arbitrarily discarded. While this is not always the case, there is some truth to this in almost every downsizing effort.

The worst problem with indiscriminate layoffs is they often reflect a knee-jerk, crisis mentality reaction. More than 75 percent of all downsizing efforts in the U.S. and Europe resulted in little, if any, long-term improvement in profitability or productivity. Instead of invigorating the organization, downsizing created a phenomenon identified by Harvard Business School professors Leonard Schlesinger and James Heskett as the "cycle of failure."

The "cycle of failure"
The cycle involves a chain of consequences beginning with employee dissatisfaction and culminating in organizational inefficieny, poor service quality, high customer turnover and decreased profitability. Employee morale plummets when those surviving cutbacks grow mistrustful of management and fearful of future cuts. Normal attrition slows, cuts fail to remedy the previously existing inefficiencies within the company, and departments already having a bare-bones operation are severely penalized. As morale deteriorates, so does service quality which almost immediately translates into lost revenue.

The most powerful remedy for quickly conteracting the effects of downsizing is to devise, articulate and execute a clear, credible plan for renewed growth. Duncan Davidson and James Trice of Gemini Consulting Inc., in New Jersey, suggest three principles to guide companies successfully through the issues of downsizing.

Principle #1 First, seek a 20 to 50 percent share of narrowly defined, profitable market niches. Mastery of each segment and unrivaled insights into customers' needs and expectations leads to smarter, more effective product design, marketing and service and provides barriers to competitive threats. Employee morale will improve as satisfied customers appreciate the company's dedication to meeting their needs.

Principle #2 Second, know exactly where company money is made (by customer group, by channel, by product, by market). Do not try to achieve profitability by saving and cutting costs; focus on a strong return-on-equity strategy.

Principle #3 Finally, rightsize! Successful rightsizing is a continuous, proactive, collaborative process to synchronize constantly changing customer needs with strategic objects, work processes and organization structures.

The Bottom Line
The key take-away from this discussion is the lack of understanding of the REAL losses (knowledge, commitment and trust between employees and management) that occur during a downsizing.


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