Downsizing and outsourcing create demand for managers able to deal with complexity. By James Dunn
Next time you watch an Aussie rules football game, spare a thought for the tasks the average player must perform. The first is to run around within an oval boundary to take possession of the ball, kick it or punch it to team-mates and eventually kick it between a set of upright posts; all the while keeping it away from opponents, who want to gain possession of it through the expedient of manhandling the person carrying the ball.
The second task is to swap to the opponents role should possession of the ball be lost. While doing all these tasks the player must keep running around the oval, exhibiting an aerobic fitness capacity that is world-class in terms of professional athletes.
Yes, the Australian Football League player has truly become multi-skilled. But he has also been subjected to the other management revolutions of the 1990s downsizing and outsourcing.
Each team has had its total numbers cut from 52 a few years ago to 42. The reserves (the team selected from players not required for a “senior” game) is slated for extinction next year. One entire team has been downsized out of existence.
True, new teams have been added, but to be downsized from one makes it harder to be employed by another. Each team is struggling to lower its cost structure and would rather employ a talented, hungry youngster on an entry-level salary than pay an executive-level salary to a recently downsized player with more experience.
As the job security of the AFL player has plummeted, that of the consultant in the industry has risen. AFL teams used to have a coach, an assistant coach, boot-studder and a few trainers who rubbed the players with liniment before a game. No longer.
Now, any self-respecting AFL team has up to 10 coaches responsible for the players fitness and various technical aspects of the game. There are statisticians employed to keep tabs on every movement of the ball in a two-hour game: who handled it, where and how. There are video technicians to edit tapes for the coach. There is someone to manage the players and sundry operational staff. Just watch when the camera pans to the coach in his aerie during the game: sitting hunched with him will be any number of gum-chewing, intense staff of indeterminate function clad in club livery.
Not to mention the doctor, the physiotherapist, the orthopaedic surgeon, the dietitian, the psychologist and the plethora of trainers who have evolved into para-medics with skills if not body shapes that would not be out of place in the SAS.
Football is a good metaphor for changes in the corporate world, according to Glen Loveday, human resources manager of the South Australian TAB. “The captain used to be the chief, with a layer under him of very experienced and reliable players, then a small proportion of beginners who were expected to learn from working with the others. The captain spoke to the team before the game and that was that.
“Now the AFL clubs have a very young group of players and there is less of a hierarchical structure. It is no coincidence that you now see a lot of shared leadership. There might be three co-captains; or you will see the back line, the forward line and the on-ballers all having their own huddles before the game.
“In management parlance they are all team building and workshopping their common aims because the old hierarchical approach of exhortation from the captain is less relevant.”
It would be strange if football, or any area of employment, remained immune to the changes that have swept the corporate world. Downsizing and its close relative, outsourcing, have been heartily embraced by Australian business and government. Telstra had 78,000 employees in 1993: it now has about 65,000 and expects to end the decade with 52,000. The Commonwealth Bank, from having 42,000 employees in the early 1990s, now has 35,000. It and the other three big banks will cut 10,000 jobs between them in the next 18 months. And these mega-employers are typical of corporate Australia.
Why are they doing it?
Paul Kerin, business strategy lecturer at Melbourne Business School and principal of the management consultancy Mitchell Madison, says the search by corporations to create value for shareholders has led to the strategy of outsourcing, which in turn has driven companies to downsize.
For example, so far, about 20% of the jobs cut at Telstra have been replaced by outsourced services. The Telstra prospectus stated that for every 1000 job cuts above its target for 1997-98, about $17 million would be added to profit.
Kerin says: “Outsourcing and downsizing strategies are valuable when they are driven by the right ideas: to improve the ability of the corporation to function and create value for its owners. The company should be asking, if we outsource some processes, will that create value for our corporation? If the answer is yes, it should outsource, and the natural by-product of that will be downsizing, because it gets rid of unnecessary people.”
Kerin says downsizing and outsourcing have become a corporate fad. “Companies have latched on to them for that reason, particularly downsizing, rather than assessing them on their merits as strategy. It isn’t going to work if people think it is merely a matter of cutting the head count.
“In some organisations you can downsize without changing activities, if you happen to have had a lot of organisational slack or the company has had big productivity improvements because of technological change or change to work practices. Apart from those reasons, it is only going to work if you change the set of activities that you actually do, or outsource some of those activities.
“Sometimes the company mindset is we need to downsize, and people are held accountable for cutting heads. The need to downsize is not a good reason to outsource. If you downsize without changing the activities of the organisation, internal stress will build, the quality of work suffers and the company gets into a vicious circle.”
Professor Craig Littler of Queensland University of Technology says companies often downsize because they don’t know what else to do. In a deflationary climate it is not possible to pass costs on to customers, so companies must have a cost-reduction regime. Labor is their biggest cost, so they cut it.”
Littler believes this leads companies to embark on the strategy for the wrong reasons. “Managers assume that if they cut staff, the organisation will magically become more efficient. Our research backs up United States research that downsizing has nothing to do with efficiency; and if it is the only efficiency tool you have, you will collapse. Nor does downsizing necessarily have anything to do with improving the bottom line, which is another widespread assumption. Labor productivity can often decline because the process was poorly handled.”
Littler headed a study of downsizing while at the University of Southern Queensland. The study looked at all private Australian companies with more than 100 employees (more than 1200 companies) over six years, and was released last year. Littler says it is one of the few longitudinal studies of downsizing (as opposed to cross-sectional).
The study found that downsizing was prevalent: of the companies that Littler tracked between 1990 and 1993, almost four times as many downsized as added staff. Of the former, Littler concluded that the downsizing cycle took about four years.
Downsizing is addictive. Of the firms that downsized, 71% did so at least twice, and 44% did so at least three times. In some cases, downsizing was dangerous. Almost half of the companies that had undergone a full four-year downsizing cycle downsized themselves out of existence or into a merger.
Does downsizing work?
Littler says that after four years 28% of the companies that had been through the full four-year cycle continued to shrink, and only 24% had begun to grow.
“It works, but only for some companies. The evidence suggests that downsizing, unless managed well, tends to promote rather than halt decline. The companies that repeat the process tend to be closing down, are getting taken over or merging. I believe that is a set of serious warning signs.”
Littler says globalisation is also a factor in the decision to downsize. “Companies in this country are faced with a situation of globalised profit margins and expectations which has had the effect of raising the benchmark level. Amcor is a good example. Amcor has been downsizing over the past few years and the process is continuing under the new chief executive. Amcor is profitable in all its divisions, so why is it downsizing? The reason is that it has set itself a benchmark to achieve a 15% increase in profit.
“It is responding to institutional investors which, if they can’t get 15%, will head overseas. Amcor is making 7% in one division and 10% in another, which in a deflationary climate is not too bad. But on a global benchmark it is not enough.”
Jill Rosenberg, manager of Mitchell Madison, says companies are not as careful as they should be when choosing who to downsize. “If people with core competencies are victims of the downsizing, there is no one to manage the relationship with the outsource. So companies find themselves having to re-appoint a manager who actually knows something about that competency. Hence the cliche: middle management going out through the revolving door and coming back in as a consultant on twice the money.”
Littler says most companies that outsource do so on the basis that they will not have to change the management structure. “Once they get into the process they realise it isn’t going to work if they survive, that is. They then have to set up a different kind of management structure to deal with the outsourcing process. That often means that they don’t have the relevant management skills, partly because managing the outsourcing process is different to managing the same tasks within the company, and partly because they’ve gotten rid of a lot of the managers.”
Littler says the basic rule is: never outsource a mess. “But a lot of companies have attempted to do this, and downsized in the problem area as well. These companies find out pretty soon that downsizing is not a management quick-fix because it is a process itself that has to be managed carefully.”
Rosenberg believes that many companies, when conducting the analysis from which they decide to outsource, do not get their baseline figures right. “It is really surprising how many don’t actually know how much it costs them to do the things they intend to outsource. They then don’t have a benchmark to measure against.
“Say the outsource sends them an invoice for the first time,” Rosenberg says. “They cannot go back and measure that against their old cost. The outsourcing companies will always make their money up they often quote cheaply on the tender, because they know they will make it up in the second and the third year. In the best of all worlds, the outsource will have scale and thus efficiencies that the outsourcing organisation cannot achieve by itself. Or the company might choose an outsourcing strategy to gain access to a better technology or specialists in a particular field. That’s ideal: the reality is that outsourcing is done for the wrong reasons.”
The outsourcing obsession has its dangers
Loveday finds the obsession with outsourcing fascinating. “I don’t think enough attention has been paid to the risk of losing core knowledge. The concept of outsourcing came from the belief that sticking to the knitting would save the corporation. But the reality of many companies experience is that they look back at the tasks they outsourced and ask, was that really so hard?
“The good thing is that nothing in this world is irreversible. A company’s strategic direction can change and it can take back the outsourced tasks. It is only then that it might realise it has lost a competency.”
Loveday believes that much downsizing and outsourcing in Australia has been mere fashion: “Like anything, management is fad-driven. If it has been written up in a US business magazine, we have to do it. I remember when we all wore flares and platform shoes. Now of course you wonder how you ever did. Some of the recent management fads may soon be viewed the same way.”
Where have all the managers gone?
Loveday feels that middle managers have survived the wave of downsizing and outsourcing quite well. “Sure, everyone reads how Telstra has culled thousands of them and you have this image of them pouring out on to the streets. But should all of those people have been defined as middle management? How do we define it? Is it the actual layered system or is it the way people think? Those with the least skills have gone; the more savvy ones have stayed. It is hardly a new story. Middle managers may say their ranks have been cut, but so have semi-skilled and unskilled positions.”
Kerin agrees: “If you look at the numbers of middle managers in a large traditional corporate, I think you will find a decline over the past decade. Sure, the wage earners have been squeezed, but middle managers have also been squeezed in terms of numbers. If you have survived this process there are benefits in cutting the numbers of middle managers, average quality has improved. So managers that remain tend to be better paid.”
Littler says that in some specialist areas there is hope for downsized middle managers. “There are reports that the middle managers are back in America, but we are further back in the restructuring cycle than they are. Delayering, the removal of whole layers of management, still goes on in Australia. The market of well-paid positions for middle managers is contracting and will continue to contract in the foreseeable future.
“There is still recruitment of middle managers in certain areas where people realise that they can’t manage outsourcing, for example, information technology. And in the outsources themselves there tends to be expansion of middle management. But that would have to go a long way to resurrect whole layers.”
Loveday says much of the debate over the effectiveness of downsizing and outsourcing should be placed in the context of the changing nature of the workplace. “The traditional foreperson is disappearing and being replaced by a person who does a host of things. It is part of a change in thinking in the workplace: no longer is it taken for granted that the hierarchy has the answers and that you take orders from the next level up.
“Middle managers have had to become encouragers, mentors and growers of people. It is no longer about reprimanding people who are under you: the thinking has to be far more strategic these days. In effect, the middle manager is being reshaped to fit the imperatives of globalisation.
“I think it’s great. Instead of the hierarchy has decided which way we’ll go and I’m here to impart that to you, the approach has shifted to we are all educated, let’s ask the others what they think. The old approach came from a society that had recently been at war: people were used to the officer giving orders.”
Loveday believes that one of the major changes in Australian management is the assumption that people are trustworthy. “There is much more seeking of views. I think it comes from an education system that produces people who want to have a say. The downside is that they can be impatient to the point of impracticality. Younger graduates don’t want to serve apprenticeships, they want responsibility immediately.
“I don’t think we have paid enough attention to this aspect of downsizing and outsourcing: there is a new generation coming along for whom the whole debate sounds like our parents talking about the war.”