The Recession's Painful Reality

All good leaders hate letting people go, but it's perilous to stand pat today.

Why are CEOs all getting on the layoff bandwagon? If a company is still making money, why can't it ride out the storm without letting people go? —Anonymous, New York

We can guarantee you that there's not a CEO who likes being on "the bandwagon" you describe. Letting people go is by far the most dreaded and painful part of any leader's job. You only do it when you absolutely have to—like right now.

Look, companies and industries are dynamic in the best of times. New technologies routinely alter the landscape. New companies in emerging countries regularly upend the status quo with low-cost products or services. And businesses are always coming up with ideas that turn markets upside down.

When Every Little Flaw Is ExposedBut these aren't the best of times, and the dynamism of the business environment is now on steroids. Some 64,000 companies filed for bankruptcy in 2008, and that number could increase by 50% in '09. The reason: A credit crisis-induced recession is far more precipitous than the typical economic-cycle recession. Competitors you considered formidable on the first of the month can go under on the last. Customers you counted on can stop taking your calls. Suppliers who fought over your business—with ever-lower pricing—can merge. Banks that once doled out loans without a moment's pause can delay the process for weeks on end, then walk away.

In such times, every little flaw in every last business is exposed. And those companies that don't take extreme precautionary actions to shore up their competitive position can find that minor problems become life-threatening.

Now, obviously, different businesses will need to take different kinds of precautionary actions. The recession is disrupting the financial-services and luxury-goods industries to a greater extent than, say, Wal-Mart ( WMT), with its focus on low prices. Certain industries, like autos, are in free fall. Similarly, many newspapers and magazines, which have seen ad pages steadily dwindle, are now closing altogether or switching to Web-based business models. The recession has also spurred the use of video communications, which has done serious damage to the pillars of the business-travel industry: airlines, hotels, and rental-car companies.

New Realities Will ComeThe point is that no company, even a profitable one, should assume that it will come out of this period looking as it did when it went in. The marketplace of the "revitalized" future, whether it emerges in 2009, 2010, or beyond, will have a new set of realities. Customers, competitors, and suppliers will have different expectations and behaviors.

Companies must be ready for them by being different, too.

And so, unfortunately, some layoffs are inevitable. You simply cannot reinvent your company while keeping its people—and what they do—constant.

By sad example, take Circuit City. For many years, it was a healthy No. 2 to Best Buy in the crowded electronics-retailing industry. But as the economy started to soften, Circuit City tried to "ride out the storm," to use your phrase. A dismal 2008 holiday season delivered the final blow. The company will close its 567 stores—and let go of 34,000 employees—by the end of March.

If only Circuit City had tried to get in step with these "dynamic" times, letting go of employees in its weak lines and redeploying its best people to more profitable ventures. We're not saying it would be flying high today, but it might still be alive, providing some jobs.

No Choice in This EnvironmentThe months ahead—perhaps years—will take business into uncharted waters. None of us knows what TARP (and sons of TARP) will bring. Nor can any of us predict the outcome of the government's involvement in running the companies it has invested in. And no one can tell how soon President Obama's stimulus package will take effect or to what degree. We can be sure only that change will come swiftly, and survival will require a great deal more agility and flexibility.

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No good leader ever wants to let people go. But in today's dynamic environment, leaders have no choice. They must face up to the dire, unintended consequences of standing pat and hoping a recovery will save them.


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