Firms Eyeing Layoffs to Cut Costs Facing Long-term Risks – Deloitte

Michelle Remo, “Big 4″ observer
November 15, 2011 /

Companies that depend on short-term measures to deal with current economic conditions, such as cost-cutting by way of layoffs for a potential increase in return-on-assets, are facing long-term decline, according to Deloitte’s 2011 Shift Index, released by the Center for the Edge.

The Index reveals that corporate economic performance in the United States has been declining over time as even the highest-performing companies struggle to maintain strong ROA rates while increasingly losing market leadership positions.

ROA indicates a management’s efficiency at using assets to generate earnings. It is calculated by dividing a company’s annual earnings by total assets.

Despite labor productivity gains of nearly 250 percent, Deloitte’s study finds that US public companies have experienced a 75 percent drop in ROA over the last 40 years, which is playing out across virtually all industries tracked in the Shift Index, suggesting a long term decline caused by deep structural changes.

If companies remain too focused on the current economic conditions and the implementation of short-term solutions such as layoffs, they can be vulnerable to even greater competitive challenges in the long run, Deloitte warned.

“A profound structural issue weighing on our economy began well before the current economic downturn and likely will continue for the foreseeable future unless business leaders address the underlying challenges,” said John Hagel, director, Deloitte Consulting LLP and co-chairman, Center for the Edge.

“In this recessionary period, companies risk making decisions, such as layoffs, traditionally seen as prudent quick fixes that instead weaken their workforces and disrupt the flow of important knowledge, leaving them highly vulnerable amid intensifying global competition.”

According to the Shift Index, a more effective approach for companies may lie in shifting their view of employees from cost items to be cut as pressure mounts to a powerful form of asset capable of delivering greater and greater value over time. Companies that invest in their workforces under tough economic conditions may be able to drive greater returns during periods of recovery.

Deloitte’s report indicates that super-empowered individuals are driving companies to be more transparent and find new approaches to cultivate brand preference and loyalty among consumers.

The Consumer Power survey (the basis of one of the Shift Index metrics) finds that 49 percent of consumers strongly agreed they have more information about brands and products than ever before with the help of Internet and social media tools. As a result, consumers wield greater power via social networks and sharing information in real-time. The survey also found that consumers trust businesses less often and seek out information via alternate sources rather than “buying in” to traditional advertising, manifesting in greater brand disloyalty.

According to Deloitte, companies have the opportunity to use these same digital tools to draw new consumers to their offerings. Deloitte’s analysis pointed out that social software also can be used within companies to cultivate a passionate workforce and tap into critical knowledge flows at all levels in order to reverse declining performance.

“Super-empowered individuals and passionate workers connect with like-minded people through social media to advance dialogue, learn and collaborate,” said Hagel.

“Organizations should tap into both when seeking champions for a particular cause or product.”

Records from the Bureau of Labor Statistics show that the U.S. labor force is projected to reach 166.9 million by 2018, representing an 8.2 percent increase from 2008, with an increasing proportion of older workers.

Moreover, workers aged 55 years and older are anticipated to leap from 18.1 percent to 23.9 percent of the labor force during the same period.

As the workforce ages, companies should consider how to engage workers of all ages and enable them to tap into diverse knowledge flows to deepen their experience and allow for increased collaboration. The 2011 Shift Index suggests that fostering effective participation among workers of all ages can be a key driver of performance improvement as companies draw upon the deepest set of knowledge and skills.

“The ability to ignite and sustain the passion of older workers is becoming more and more important as the labor force ages. Organizations should explore options to retain retiring employees as advisors within the company,” said Hagel.

“Passionate older workers could be assigned roles where they can focus their energies on taking on performance challenges that have a measurable effect on a company. They often have well developed networks of relationships both within and across companies that can be very helpful in sustaining more robust flows of knowledge, accelerate learning and improve performance.”


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