Tech Firm Job Cuts: Boon or Bust?

While investor speculation and skyrocketing stock prices dominated during the first half of 2000, falling stock prices and nervous investors long since have become the order of the day, causing many firms to slash their workforce in an effort to steady their financial ships and improve investor confidence.

Although layoffs at online firms hit a 15-month low in September, outplacement firm Challenger, Gray & Christmas (CGC), which tracks industry-wide job cuts, estimates that dot-coms have handed out more than 90,000 pink slips this year. The figure for the nine-month period is more than double the number of cuts announced in all of 2000.

In the first of a two-part series, the E-Commerce Times examines the impact of these job cuts on the companies that have been forced to make them -- and assesses how the loss of employees will likely result in pivotal operational changes down the road.

A spokesperson for Dell Computer (Nasdaq: DELL) -- which in May announced layoffs of between 3,000 and 4,000 workers over two quarters, told the E-Commerce Times that the job cuts have not hindered the company's ability to stay competitive.

On the other hand, according to some industry analysts, the long-term detriments of layoffs in most cases outweigh any fleeting advantages that might be gained by tech businesses who slash the payroll.

Doing Damage

"There's no question, in terms of their ability to do high quality work or broaden the services they hoped to or promised, that the layoffs have been devastating for most of these companies," CGC chief executive officer John A. Challenger recently told the E-Commerce Times. "After layoffs, there is inevitably chaos in an organization."

Moreover, analysts warn that the full brunt of the damage caused by the cuts is not going to be truly felt until at least six to 12 months from now.

"When you cut people you are losing intellectual capital, you're affecting your reputation, you are penalizing future recruitment efforts, and that is not going to be felt in the short-term pursuit of financial gain over the next quarter," Gartner vice president and research director Diane Tunick Morello said. "That's not rocket science."

Desperate Times

While many tech companies have maintained that the termination of workers has not significantly hampered their ability to conduct business from an organizational standpoint, these industry watchers point out that layoffs are usually a last resort for struggling firms looking to appease nervous investors.

"The cutting of costs that the layoffs represent is an imperative for public companies, since they are run for the shareholders," Challenger said. "The companies have no choice in the matter and they are making the job cuts out of desperation. A public company that's doing poorly wants to see the stock price propped up as best it can in the face of the falling revenues, and keep earnings relatively high in the short-term."

However, firms that impose mass job cuts often wind up paying a much higher price in the months following their decision.

"The problem is that by the time the company has managed to get up, shareholders already have taken their money and invested it elsewhere," said Challenger.

Desperate Measures

Analysts say that one of the gravest implications of large-scale job cuts at tech firms involves the possible loss of high-centrality employees. According to Gartner's Tunick Morello, these workers not only possess certain areas of expertise, but also serve as the "connective tissue" of an organization.

Since these individuals play a key role in the interpretation and horizontal communication of ideas throughout a company, she noted, their departure can result in the breakdown of a whole series of business areas that were not even thought to be dependent on their abilities.

"In many companies, particularly those that are driven by a lot of ideas and innovations, a pure cut of employees can often eliminate the people who are hubs within their social and knowledge network of the organization," said Tunick Morello.

"When they leave it's like severing a limb," she added. "An organization may -- or may not -- recover from that."

Getting Lean

Not surprisingly, many tech companies were reluctant to comment on how the loss of employees has affected their operations.

Dell -- which was the only firm, out of 10 leading technology and e-commerce companies that made significant job cuts earlier this year, to respond to requests for an interview -- said its layoffs were one part of an overall strategy to control operating expenses.

Like its competitors, the computing giant has been striving to weather the slumping global PC market.

"Demand fell off much more than we had expected it to, which necessitated those decisions that were very hard for us to make," said Dell spokesperson Deborah McNair. "We're lean, we always have been and we will continue to be so."

To that end, McNair said that Dell's operating expenses as a percentage of revenue were roughly half of those of its competition in the previous quarter.

Decision Time

McNair acknowledged that the issue of employee layoffs is a "hard topic" for firms in the tech industry to discuss, since so many have been affected. She also said that the cuts were the "right decision to make" in Dell's case.

"The reductions were looked at very closely to decide where we could pull back because demand was not rising the way we thought it was going to, but where we could continue to deliver the products and services we need to stay competitive," said McNair. "We are executing the way we need to in the current environment and the reductions haven't hindered that."

In Part 2 of this series, the E-Commerce Times further examines the problems facing tech companies after job cuts are implemented.