When Cutting Costs Is Not the Answer

Drucker firmly believed that layoffs are not the only, and often not the best, solution to difficult economic times

By Rick Wartzman

The layoff announcements are mounting by the day: 50,000 at Citigroup (C), 12,000 at AT&T (T), 6,000 at Sun Microsystems (JAVA), 2,500 at DuPont, 1,200 at United Airlines, 850 at Viacom (VIA).

In all, major U.S. companies said in November that they were going to whack 181,671 jobs, the outplacement firm Challenger, Gray & Christmas reported this week. That was the most since January 2002 and brought the total number of reductions planned this year to more than 1 million. On Dec. 5 the Labor Dept. said nonfarm payrolls fell by a larger-than-expected 533,000, while the unemployment rate climbed to 6.7%, its highest point since October 1993.

Given the fragile state of the economy, it's not surprising that employers are more likely to hand their workers a pink slip than a turkey this Christmas. But perhaps bloodletting isn't the only answer. Certainly, it isn't the only one that Peter Drucker would prescribe.

Not that Drucker was blind to the need for keeping a lid on costs. Indeed, he taught that enterprises big and small should always be asking themselves not how to make a particular aspect of the business more efficient but whether it should exist at all. "The question should be: 'Would the roof cave in if we stopped doing this work altogether?'" Drucker explained. "And if the answer is 'probably not,' one eliminates the operation. It is always amazing how many of the things we do will never be missed."

What's important, Drucker said, is to make this a routine exercise—not something that happens only during downturns. "Businesses that actually succeed in cutting costs," he said, "don't wait until they have to cut costs."

Investing in Knowledge Workers

In the same way, Drucker believed in investing in productive assets as a regular, everyday function—and there was no doubt as to where he thought investment should be channeled in this day and age. "The most valuable assets of the 20th century company were its production equipment," he wrote. "The most valuable asset of a 21st century institution…will be its knowledge workers."

One person who has acted on these words—with extraordinary results to show for it—is K.H. Moon, the former chief executive of Korean consumer-products maker Yuhan-Kimberly. (Full disclosure: Moon, who is now a member of national Parliament in Seoul, until recently served on the board of the Drucker Institute, which I run.)

It was during the late 1990s, amid the Asian financial contagion, that Moon looked around and was disgusted by what he saw. "At almost all companies," he recalls, "the management just followed the old wisdom—massive layoffs."

Yet Moon felt that simply to slash employment was irresponsible, and he began to persuade his colleagues that there was a better way to go—not just to survive but to grow and prosper. This "was not the time to lose jobs," he says, "but to build our capability, personally and companywide."

To get there, Moon took several bold steps. One was to accelerate a push to a new staffing system, moving from a three-crew, three-shift arrangement to a four-crew, two-shift model. By spreading out the work this way—Moon has likened it to "job sharing in Western countries"—the company figures it has been able to employ 25% more mill workers than it otherwise would have.

Lifelong Learning

Because of this setup, employees work fewer hours overall. But they're encouraged not to be idle. Yuhan-Kimberly pays for them to attend classes so they can improve their technical acumen as well as increase their general knowledge (through Chinese language instruction, for instance). It's all based on a philosophy of lifelong learning—what Yuhan-Kimberly Chairman D.J. Lee calls the company's "true source of competitiveness and sustainable growth."

"It comes down to what Peter Drucker wrote about again and again—to see people not just as cogs in the wheel," says Edward Gordon, author of The 2010 Meltdown: Solving the Impending Jobs Crisis, which commends Yuhan-Kimberly's "counterintuitive approach."

The upshot is that by providing a healthier work-life balance, by giving the rank-and-file the opportunity to enhance their skills continually, and by taking other steps to create a self-directed team culture, Yuhan-Kimberly has seen job satisfaction among its 1,700 employees soar. So has productivity (along with market share and revenue)—so much so that workers' wages have also risen substantially.

Moon, meanwhile, has helped set up a New Paradigm Center, a government-funded organization that is teaching other Korean companies how to be Yuhan-Kimberly-like.

This formula won't work for everyone; implementing it involves real costs and, thus, real risks. What's more, there's no avoiding the fact that layoffs are inevitable during a recession, no matter what is tried. Even Drucker, who so admired Japanese industry for its commitment to lifetime employment, recognized this ideal was bound to crack amid the unrelenting pressures of globalization.

But what Yuhan-Kimberly reminds us is that shedding thousands of positions doesn't necessarily have to be management's automatic response to a bleak economy. When things seem darkest, it's time to innovate, not just eliminate.

Rick Wartzman is the director of the Drucker Institute at Claremont Graduate University.