When a Successful Company Shrinks its Workforce

When a Successful Company Shrinks its Workforce


by Andrew McAfee – hbr.org

I completely support the right of companies to stop paying people they don’t need any more, but the latest round of recent and planned layoffs from United Technologies is troubling me. Because UTC is doing great; its stock is at an all-time high, and sales have grown by more than 35% since 2005, to $57.7 billion.

This growth was accomplished, however, without expanding its workforce much at all, and now UT believes it can continue to grow as it wants to while actually shrinking its employee base. It’s planning to lay off 3000 workers this year, after shedding 4000 last year.

Now, is this really anything new? After all, output has been going up and employment simultaneously going down in manufacturing around the world for several years now, and UTC is a big manufacturer. But two things strike me as potentially novel here. First, the company does a lot more than just make things in factories. As its website says, “United Technologies… is a diversified company that provides a broad range of high-technology products and services to the global aerospace and building systems industries.” Servicing elevators, security systems, and so on, in other words, is a big part of what UTC does, and services have historically been very labor-intensive. That could be changing.

Second, it feels new to me that a successful company would shrink its workforce as it grows its sales, profits, and stock price. To make that concrete, imagine that in the ‘old world’ of manufacturing there are three companies, each with 1000 employees. Two of them are bloated and poorly run, and one is lean, mean, and highly technologically sophisticated. Over the course of five years, it puts the other two out of business while adding 500 employees to its workforce in order to cope with all the new demand. At the end of that time, total employment in the sector has shrunk from 3000 to 1500. This is not great news for the laid-off workers, but at least we could have some hope that they’d eventually be hired by the successful company as it continued to grow.

Now imagine the same scenario, except that the winner in this case is so lean and mean that it actually lays off 500 people as it’s growing and putting the others out of business. Total employment in this scenario drops from 3000 to 500.

Both scenarios fit the observed pattern of increased output and decreased employment. But in the second one, there’s no new place for any laid off worker to go, because even the successful company is never hiring. That feels like a different world to me; is it the one we’re heading into?

I don’t want to use this post to discuss the morality of UTC laying off people while the company is thriving and the nation’s workers are hurting. I simply want to point out that if this example is part of any larger trend, then we cannot rely on economic growth to fix our current problems of unemployment or underemployment. Because even for individual companies, economic growth has become so decoupled from employment growth that the former goes up while the latter goes down.

If that’s the world we’re heading into, then we had better start rethinking a lot of our assumptions, policies, and prescriptions. And fast.

Andrew McAfeeAndrew McAfee

Andrew McAfee is principal research scientist at the Center for Digital Business in the MIT Sloan School of Management. He is the author of Enterprise 2.0 and the co-author, with Erik Brynjolfsson, of Race Against The Machine.

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