The current downturn has left many companies scrambling to manage workplace issues — ranging from how to avoid a brain drain to how they can provide better value to customers and clients. Employees, for their part, face the challenges that arise from working in a leaner organization that demands increased productivity with fewer resources. Knowledge at Wharton talked about these issues with Peter Cappelli, Wharton management professor and director of the school’s Center for Human Resources, and Philip Miscimarra, a partner in the labor and employment practice in the Chicago office of law firm Morgan, Lewis & Bockius, co-chair of the Morgan Lewis/Workforce Change practice, and managing director of Wharton’s Center for Human Resources research advisory group. An edited transcript of the conversation follows.
Knowledge at Wharton: Peter and Phil, thanks for joining us.
I’m going to start off with a general question. What lessons can be learned from this recent downturn in terms of which work force management strategies have worked and which haven’t? Peter?
Peter Cappelli: Unfortunately, I would say that in this recent downturn, one of the things we remembered is how important it is to recall the lessons of previous downturns. Many companies discovered this time that they didn’t have anybody inside their organizations who knew how to downsize. As a result, they ended up with lots of troubles, some of which will appear later on in the form of litigation and other sorts of things.
More generally, some firms started to realize that it really would make sense to think analytically about what their choices are — think about the costs and benefits and not just respond in a knee-jerk fashion, which I think we saw a lot of companies do.
Knowledge at Wharton: You mentioned increases in litigation. What are you talking about there?
Phil Miscimarra: I can address that. Historically there have always been increases in litigation after significant declines in economic activity. That has been fairly noticeable and fairly distinct — especially if you look at unemployment levels and track that against the types of lawsuits that get filed. There are many reasons for that. This particular downturn may end up being different in terms of the amount of litigation that arises from the low level economic activity over the past 18 months. And that’s something that we can spend a little more time talking about as well.
Cappelli: As Phil sometimes says, lawyers have to eat, too. So in these downturns, lawsuits go up for all kinds of reasons. One of them is that lawyers are not so busy.
Knowledge at Wharton: Let me ask you to follow that line of thought. What specific types of lawsuits do you think you will see? I’m guessing there will be more age discrimination lawsuits because people are having to work longer. They can’t retire as early as they wanted because of the downturn in the economy. Is that the kind of thing we might see?
Miscimarra: Certainly we can expect to see significant activity in terms of age discrimination lawsuits, but also whenever employers end up making a choice of one employee versus another — which happened a lot in this particular most recent downturn — there are various types of protected employees on different grounds, whether it is sex, disability, religion and, of course, age and race. Employers in general after this downturn are bracing themselves for the possibility of increased litigation across the board. Again, whether that is realized is another question, but it certainly is consistent with what has occurred in the past.
Cappelli: It is probably fair to say, Phil, that this has happened every other time, so there is every reason to think that it will happen again. That is, it spikes up afterwards. Isn’t one of the reasons [because] once somebody is dismissed, they don’t have a job for a long period of time, damages are bigger, plaintiff lawyers like it better, and so forth.
Miscimarra: That’s right. In discrimination cases, in particular, all of the employee plaintiffs have an obligation to try to demonstrate the mitigated damages as far as trying to find work elsewhere. In an economic downturn, especially like the one we have seen over the past 24 months, the absence of other alternatives for employees really makes it relatively easy for them to establish they couldn’t find a job regardless of what they did. That ends up increasing damages. That ends up making potential litigation more attractive to plaintiff’s lawyers, and a number of other cascading consequences that follow from that.
Knowledge at Wharton: In terms of this particular downturn and the upturn that we [see] for some sectors of the economy — not all, and certainly not for employees since they are continuing to be unemployed in record numbers — what do we know about this downturn in terms of employment issues, including layoffs?
Cappelli: We just had a presentation at our Center for Human Resources from Frank Diebold, who is co-director of Wharton’s Financial Institutions Center. Frank does macro-economic issues. He has generated some new data that allows us to look at this downturn. It does appear that it’s worse even than the 1981 downturn; this will probably go on record as the worst downturn since the Great Depression. I think what’s interesting about it is that it seems to be following a pattern on the upside that is very similar to the last two recessions. So far, it will probably play out the same way — that is, this idea of a jobless recovery. The recovery seems to be on track to be quite similar to the previous two recoveries, but it takes a long time for jobs to come back.
One of the reasons for this is that so much of the work is now done in the upturn by temps, independent contractors and leased employees. They don’t necessarily show up on the employment rolls — at least not in the same way. So it could look like you have fewer people working, if you look at the unemployment rates and particularly at the number of people who are employed when you are not counting independent contractors and those sorts of folks. So my guess is it will look similar. It will take a long time before the jobs come back. It may be years before they come back to the level we had before this downturn.
Knowledge at Wharton: When companies say that they are laying people off, are they really laying people off?
Cappelli: Well, in the past there has been a belief that the investment community liked layoffs. If you laid people off, it looked like you were taking action. It looked like you were cutting costs, and the investment community used to reward companies every time they announced that. As a result, there was strong evidence that employers announced more layoffs than they actually executed.
I think more recently, the investment community has begun not to reward companies so much for layoffs anymore, but maybe you would get really punished if you didn’t. It’s a little hard to say. So it may not be quite as bad as it was — that is, the announced layoffs may unfortunately reflect the real layoffs a lot. So my guess is that’s what’s happened.
Miscimarra: One of the things that has been more evident in the past downturn than prior downturns is the notion that it’s actually not easy and it’s not cheap to implement an effective layoff. I think many companies have really struggled with the idea that they are very good in most cases at doing certain things, but few companies are actually in the business of implementing effective layoffs. The risks are quite high both in terms of the quality of the decisions that you make in connection with a reduction in force as well as the possibility that you could lose the people you don’t want to lose. And worse, if you lose people that you don’t want to lose in terms of what constitutes a good business decision, those people more often than not will go to your competitors.
So from a strategic perspective, I think many companies have discovered in this most recent downturn that having an effective layoff — one that actually helps the organization rather than inflicting strategic damage on the organization — is fairly difficult to do.
Cappelli: One of the reasons is that most of the companies we are thinking about, particularly the larger ones, went through maybe a 10-year period of worrying about attraction and retention. So just before this downturn, if you looked at the CEO priority lists, in the top three typically were attracting and retaining talent. And then they went right from that in sort of whiplash fashion into laying people off. I think even inside these companies they realized that this was a little bizarre. Phil’s point about not having the competencies to do this — one of the reasons is because of this sort of great moderation they talk about in the U.S. economy. From the 1990s through to this recession, we had some downturns but they weren’t very severe. And not that many companies laid off employees.
So the last big round of layoffs for a lot of organizations was close to 20 years ago. And inside some of those companies, there isn’t even anybody who was around 20 years ago. So the knowledge about how to do it was something they just didn’t have any more and they end up tripping over a lot of legal issues, among other things.
Knowledge at Wharton: Phil, you mentioned that if companies end up laying off some of their best workers that these workers could go to competitors. But if competitors are laying off employees also, it is going to be tough for these “best workers” to find jobs. Is there a danger that they will start their own companies? Or that they will change their professions, go back to school or whatever, so that their knowledge base is lost to these corporate executives?
Miscimarra: There are two interesting insights in your question. One is the possibility that you really have a brain drain as a result of a downturn. It is something that I think everybody in a particular industry would fear — especially if they are not making good decisions in terms of whom to keep or, if they need to contract, who ends up being reduced as part of a reduction in force.
But the other thing that’s interesting and that we have seen to some degree in this downturn — although this abated somewhat as the downturn increased in its longevity — is that a number of companies regard it as an opportunity to actually pick up talent from other companies, with respect to people who otherwise wouldn’t be available.
Cappelli: You certainly saw a lot of that on Wall Street where there was a lot of discussion, particularly about hiring brokers. I think it is important to recognize that one of the big issues in downsizing is not just the people who leave but also the people who stay. One of the big concerns about doing this in a way that does little damage is what happens to the morale of the folks who stay around.
There are some surveys right now indicating that as many as 60% of the employees in U.S. firms say that, as soon as the economy picks up, they are going to start looking for a job elsewhere. Some of that is because they didn’t like what happened in the downturn…. They didn’t think the downsizing was handled well. They didn’t think they were dealt with well even though they may have kept their jobs. So we spent a lot of time focusing on the issue of the folks who were laid off. But the people who remain are an issue as well.
Just going back to Phil’s point about doing this correctly and considering the brain drain issue — if you think about the costs of turnover in a typical company, the conservative estimates are something like a year’s salary — the cost of replacing somebody. The cost of laying somebody off is even bigger because you have the exposure to liability. You have severance payments and all those other sorts of things. So you are talking about, at a minimum, a year’s salary and in some organizations — in law firms, for example — I just saw a detailed analysis that said it’s like five years salary for a senior lawyer to leave because of the loss of clients and all [those related issues].
If you are thinking about this and you’re saying to yourself — “When do you think business will come back? When will we need to hire these folks back?” — the only way it makes sense to lay people off if you are worried about saving money, even if you’re not thinking about the collateral damage, is if you think you’re not going to need that labor for years, right? But if you think, as some of these companies do, that their business will come back pretty quickly, laying people off is just a nutty idea. And so I think inside the organization, we don’t want to say it never makes sense to lay off, but at the very least you ought to sit down and cost it out. Ask, “What is it going to cost us? What is going to happen when we have to bring these people back? How difficult will it be? What’s the ramp up time? And how long will we need to go without these jobs in order to make it pay?” As far as I can see, not very many companies do that.
Knowledge at Wharton: So they underestimate the hidden costs.
Cappelli: Yes. They are going with their gut. And my quick sense, as I have started to tell our MBA students, is that whenever you are going with your gut, you are doing something wrong, because in most cases you can actually figure it out. You should sit down and do it.
Miscimarra: There is one aspect of the most recent downturn that may differ somewhat from what historically has been the case. Peter alluded to the potential morale problems among the people who are left in connection with a downturn. Those are people who conventional wisdom has it are left really picking up the pieces. One of the things that we have noted in connection with the current downturn in the past 24 months is that increasingly there are a number of employees who have seen the economy go down, and stay down, for such a prolonged period of time that there has actually been a reverse boomerang to a certain degree where employees have more loyalty than perhaps they did before. If they are left and they continue to have employment and have seen employers that have reacted in a helpful and responsible way, the people who are continuing to be with organizations trying to do more with less, in some respects have greater energy and a greater commitment to the organization than they had before.
Knowledge at Wharton: Well this definitely is a sea change. We have been talking for many years about the fact that, because of the mobility around employees these days, there is very little loyalty to the firm. They basically stay maybe three to five years, get all the training they can on the job and then move out. So that may actually shift a little.
Cappelli: I think this is an opportunity for employers to build loyalty. You might think of loyalty as reciprocity. Has the employer done some things to protect employees? We see there are some that have done it. I think it is also an interesting time for employers to actually develop talent. In many of these organizations, they pulled people out, and a lot of the work has remained. It is an opportunity for junior folks to take on more senior tasks. You can just drown people in the context of doing this … just push more work on them. That’s not helpful. But if you did it in a purposeful way and you actually gave people a little coaching and a little help to take on more senior roles, these are sort of stretch assignments. It could actually be good for some of the employees — not that downsizing is good for the ones who stay — to take on more senior tasks and more challenging tasks. One of the things I hear a lot from employers now is their concern that, when the upturn comes about, how they are going to backfill all these positions…. They would like to be able to do it internally, but you are not going to be able to do that unless you have actually prepared your employees in some ways for it.
Miscimarra: The one other thing I might add is there is also a litigation-related boomerang effect that we may see. Typically, as we have already discussed, if you end up having a downturn and significant numbers of layoffs, we have generally seen an increase in a variety of employment or RIF (“reduction in force”) related claims. [In what I refer to] as the ubiquitous fudge factor, there has been such a widespread, broad-based use of severance pay and release agreements that many employees in large, large numbers — when confronted with all of the evidence of a very, very slow and declining economy — have accepted severance pay and signed waivers and releases.
That’s now occurred in such large numbers and it’s become commonplace for companies to work out some type of meaningful separation package. On the one hand, this obviously contributes to the cost of having a reduction in force, which can, in certain respects, defeat the purpose of having a RIF. On the other hand, it ends up operating as a fudge factor covering all kinds of imperfections that may have taken place in the process itself because so many people signed releases…. Although we sometimes see litigation arising from a challenge to waiver and release agreements themselves, the broad-based acceptance of releases may actually prevent litigation from increasing in the current downturn the way it has in the past.
Knowledge at Wharton: Phil, let me direct this question to you. We have all been reading about law firms delaying start times for their first year associates and cutting salaries. My guess is that this is probably going to be happening in some of the other knowledge worker organizations, like consulting firms, etc. And the healthcare bill that is going to be passed in some form is probably going to affect doctors and the amount of money they make. So are you finding — or do you think you are going to find — a different type of student who goes to these professional schools? Are these cutbacks in salary and maybe even prestige changing the incentives for these students to go into these professions?
Miscimarra: It is very, very difficult to answer that question. In part, that depends on how unusual the current business climate proves to be and how long the current downturn lasts. The one thing that I can say is that — surprise, surprise — law firms have discovered that they are also business organizations. I think all law firms across the country — and this is a fairly broad generalization that I think applies to most firms — have the same concern that other employers have had in connection with this most recent downturn, which is how do you respond in a responsible way to the need to contract? How do you do that when your business really focuses on talent and the ability to provide services to people in a way that is different and better than other people in the industry? This is something that, for sure, law firms are trying to focus on as are other businesses in this current economy.
Cappelli: You know, Phil’s firm is one that did some really interesting things in this area…. They [approached] some associates they had promised opportunities to when the market tanked, and they offered them the following arrangement: Take a marginal salary — a half salary or, in the case of some firms, less than that — to go spend the year doing pro bono work or working in some other area, but not in the firm. Do something that would help them learn and would also help the firm’s reputation in some ways. You can think about this as really buying an option on future lawyers, right? So they are basically paying a certain amount of money to just put them on hold for a year so that they are available next year once the business comes back.
This is actually a really clever idea. It is a good thing all the way around. The employees get to do something useful for themselves and for society. They don’t have to sit on their hands for a year and hope to get back into the market, and the firms that struggle to hire the best people have got these folks waiting in the wings next year to bring on board. It is a pretty clever way of trying to balance all the interests of the parties.
Miscimarra: Without trying to avoid being completely cynical about these things, Peter uses the term “clever”. I would prefer…. I do think that my firm, Morgan Lewis & Bockius, has done some things that are innovative in terms of trying to act in a responsible way towards incoming attorneys, to act in a responsible way relative to clients that continue to look to law firms to do more with less. Also, there is intrinsic value in acting in a responsible way with respect to a large array of public and civic causes to which my firm happens to be committed. So I think apart from being clever, there actually is value in doing the right thing sometimes. That’s what we’ve been trying to do.
Knowledge at Wharton: Let me ask you about law firms again. The business model for big law firms is under attack in terms of some people saying more legal work should be done, will be done, by companies in-house to better control and cut down their legal costs. How do big law firms adjust to this?
Miscimarra: That’s something that I think has been cyclical for a long, long time, and it is an issue that companies grapple with — which is, can you save money by keeping more work in-house and having less reliance on outside law firms. Peter can comment. The same thing generally applies to other types of work that is outsourced from time to time. Then the amount of legal work that is done inside companies ends up increasing for different periods of time, and then companies realize they have significant expenses associated with large legal staffs. Then sometimes that cycle repeats itself and then it goes downward.
I think there are two challenges that lawyers and law firms are confronting right now. One is, like everyone else in the world, law firms have to do more with less and find ways to be more efficient and more productive and provide higher levels of service rather than lower levels of service. The second thing is that it is not acceptable to say we are going to do things this way because this is the way they have always been done. I think the better firms are using this as an opportunity — the current economy as an opportunity — to really focus inward and ask, “What is it that we provide that is of value to the people we serve? And how can we do that better even if this requires doing things differently than [we have] in the past?”
Knowledge at Wharton: That gets to my last question, which you answered in part right there. What advice would each of you give to corporate executives and to employees in the economy that we have today? Phil, you would say that they should take this as an opportunity, as you just said, to look at the way they are doing business — the executives — and see if there are changes they can make.
Miscimarra: I agree with that and I would say two other things. One is that it is important for executives, if they are looking at a downturn, to spend a great deal of their time focusing on the people who will remain with the organization. There is a temptation in a reduction in force, in part because of the fear of litigation, to focus predominantly on the people who unfortunately are leaving the organization, when, for many reasons, you can make a case that the opposite should be true. Notwithstanding what you are doing for the people who are leaving, you should do as much as you can to focus on the people who are staying.
The other thing — and this is a bit of a heresy for a lawyer to actually articulate — the quality of the business decisions is actually more important than preparing for litigation. I think that the current economy presents challenges that have such strategic importance for companies. The focus really should be on making good business decisions. In most cases, they will also end up being very consistent with the sorts of things that lawyers focus on in terms of then defending those decisions if you end up getting a variety of legal claims.
Knowledge at Wharton: And what one piece of advice would you offer employees?
Miscimarra: I would say with respect to employees, the most important thing is to stick to your knitting. I think employees, to a certain degree, are a microcosm and have the same challenges that employers have, which is to do everything that they can to try to service their client or organization. The employees who are doing the best in the current economy are the people who have done the most looking internally within themselves to really provide value to the organizations within which they work.
Knowledge at Wharton: Peter?
Cappelli: I would say that for the organizations, the piece of advice is to think about these issues analytically, really think them through in terms of costs and benefits. “We feel we need to lay people off.” I’d ask a lot of “why” questions. “Why are we doing it? Is this the best way to cut if we have to cut costs? And what are the consequences of those costs?” It’s not that you shouldn’t do it. I’m not saying to think about this simply as an ethical issue. But “what are the costs of cutting people? What do we think the benefits are? How long out will it go? And once we do it, what is our plan once business picks up? How long will that take? Will we be able to get people like this back? What are the effects on the people inside?” You ought to be asking a lot of “why” questions.
There was a stunning statistic early in the recession that showed that in two-thirds of companies, the senior human resource people were not involved in the layoff decisions. That is amazing. If you thought your human resource people are not good enough to give you answers to those questions, you should find some who are. But if you are not asking those questions, you are doing something wrong. You might as well just be flipping coins. It’s kind of amazing the extent to which companies are very sophisticated in supply chain analysis and thinking about how they buy parts and how they sell produocts, but when it comes to these people issues, they are just kind of going with their gut most of the time. You don’t need to do that. There are answers to all these questions. You can figure out what really makes sense among an array of options. It is not as simple as, do we layoff or not. There are lots of ways to think about the problem.
I would say for employees, there are some opportunities for people who still have jobs to use this as a moment to move up in the organization for the reasons we said before. There is lots of work that needs to be done inside companies, more now because they have taken out so many people. There is an opportunity to step up to a bigger role by taking on some of those additional responsibilities. One way to do it without killing yourself is to talk to your bosses about things you can drop. Say, “Look, these projects have to be done. But I see these projects that were done by my boss who has now been let go — could I take on some of her tasks there? It means I will have to drop some of these other ones.”
It is an opportunity to negotiate, to upgrade your portfolio of tasks that puts you in a position, once the recession lifts, to get the promotion, or, if you can’t get it there, to leave and go some place else where you can.
Knowledge at Wharton: Peter, Phil, thank you both for joining us.
