Steve Pruneau and Asher Black discuss the impact of layoffs on the profitability of a firm, its shareholder value, the fiscal cost of lost morale, and resetting when it's time to hire again. Facebook's "Year of Efficiency". Acknowledging the human wavelength and the revenue value of a firm's emotional life are central concepts in the #bossrebellion
Our layoffs. A confession of bad management. I saw that Click bait on Fortune Magazine. Pretty cool article. The gist of it is it's a sign of badge management. When you look at company performance.
So I'm with that point that, eh, it's not really a sign of bad management in terms of ethics, although a lot of society would like to voice that onto companies and still carry through the old 20th century idea that companies should take care of people financially for the long term. But I'm setting that aside because the part that I loved is when it comes to company performance, which is what you're paid to deliver as an executive at a company.
They do not, companies do not do well according to this data, and, and some of the people they spoke to do not do well when they have these layoffs. So it's really a. A sign of failure. If you look at business as a sport, it's like changing the pitcher mid-season or changing your, your quarterback mid-season.
Or if you're in racing, it's like having a tire blowout out on the track instead of replacing your tire at the pit. So if you imagine those kinds of scenarios, what do people say? You stink, man. You're like, you're not running your game, right? You've got something off, or you've got confusion in your team, and it's all about that.
So from my perspective, Are layoffs a confession of bad management? Yes, definitely. When you look at it from the perspective of sports or the whole season of a sport. Yeah. I found two data points in that particular article, really interesting data. Point number one was that a company does not actually create more value for shareholders, does not actually create greater net profits as a result of layoffs.
If you look at a company that's just done a massive layoff you know, under the rubric of adjusting to the market, et cetera, we ramped up and now we've gotta ramp down because the market's changed. Versus a company like Apple that did not follow with massive tech layoffs in the same way you don't actually, you see Apple being extremely profitable retaining momentum, retaining huge cash flow, and you see companies that did massive layoffs.
Not actually creating additional value by that saved labor cost or by putting more shareholder VA share value back in the pockets of investors. The second data point, that seems counterintuitive, right? But the second data point and I, I know you'll have thoughts about why that is. The second data point is that, The recovery time is actually more costly than any value achieved by doing layoffs.
So they looked at companies that did massive tech layoffs that went back into an upswing. And the cost of sort of resetting, trying to get restarted, the, the opportunity cost of low of lost momentum was far greater than they anticipated. And the experience was, was one of probably the worst.
Results of mass layoffs. Yeah. This, this phenomenon of recycling recycled time is a thing across teams everywhere. Whether we're talking about sports, you hear, you hear it in, in experienced military commanders where you can't have that lack of cohesion, you can't have that disruption because it makes you vulnerable.
And sure enough, now we've got. Data, stock price, data and financial performance. That kind of shows that when you have a big disruption in your organization, it starts to reverberate through and it breaks down the effectiveness of, of the organization. You know I was an airline guy for a while and, and when I was first in the company, I asked the question, so during peak periods, When we know there's both holidays, the year end holidays, and the risk of bad weather, what if we priced it so that there's like a 10 or 15% capacity in the airplanes?
You know, you still make the same revenue, but price per person is higher, but you leave capacity in the airplane that way when things go sideways, either due to mechanical. Issues. You gotta take the plane outta service or, or weather. Now you can handle it, you can spread your people across the other, the other flights.
And so the answer came back, Nope. You gotta sell the plane out. You always gotta be, go out a hundred percent full. That's where the, and of course your rate is lower per person on average when you do that. And I was always concerned, and I, I did see it happen frequently. This, this sort of social.
Tendency to go to the max, whether we're talking about short-term profits or airplane loads going out a hundred percent full. And of course, we saw a huge example of that last holiday season with Southwest Airlines, you know, for decades had earned a reputation for disciplined operations. That D word is what I think we're talking about is discipline, holding your emotions in check while you're going through the storm.
And of course, The original founding management team are not there anymore, and I think they may have slipped into the siren song of You gotta go for the maximum right now. And of course what happened is they caught themselves without that reserve capacity and it was a disaster. They shredded their, their reputation.
Now, I can't imagine what it's like to be a Southwest Airlines executive right now because your peers in the other bi, in the other airlines are just laughing like. How did you guys do that? Again, going back to sports is, did you see that you guys totally choked in the playoffs? How do you do this? You know, everyone knows that's not how you run an airline, or in this case, that's not how you run a sports team.
So yeah, it is a confession. You can't deny it of bad management when you have these cycles of layoffs. Well, yeah, I, I imagine it looks better on a short term, from a short term thinking approach on a quarterly report to be selling out all of our planes than Versus thinking about this, taking an aerial view and thinking about this as a, a total organizational net profit approach of what is the cost of the inevitable, inevitable exigencies of running a, an airline?
It's, it's interesting that you mention emotions because I think we sometimes create silos in our mind that there's an emotional side of things and there's a fiscal side of things. And we, we of course acknowledge both, but we still treat them as though they're not synonymous. And I think one of the things this demonstrates for us is that morale is fiscal, because, you know, this article talks a bit about the, the effects on employee morale.
And the difficulty of resetting from investor perception, people dumping shares, the difficult difficulty resetting from customer perception customers squinching off pro contracts and even from a hiring perspective, going back out in the market and trying to reset later by recruiting people.
Well, you're the company that just did massive layoffs. So Morale's fiscal emotions, equal profit, and I, I think the American company in, in many ways, we deal with this a lot across this show, but I think in many ways the American company is still finding it difficult to accept. Or almost like specious, touchy, feely voodoo to accept that emotions correlate to a, a fiscal reality.
That positive emotions momentum, the, the feeling of connectedness among people and people being connected to a company actually translates into profit. And the, the lack of those things, or a break in any of those connections actually translates into lower shareholder value. You, so you are so right.
I love, I love that. And, and you really put a, a, a, you know, a, a light on that describing that there's an emotional component to to it's trust really, because what is, what does good discipline actually translate into? It's more steady, it's more predictable, and we as humans want to. Be able to depend on other businesses or other people.
And so business discipline, in my opinion, translates into that trust, both from a customer perspective and also into an from an employee perspective or everybody who's working there. And that creates sort of that steadiness of, yep, I can, I can bank on this team. They're reliable, they're consistent.
And what do we talk about in sports? Yeah, they're so consistent. I love it. They can deliver instead of do you want to go with the team? That, that's not so predictable. They tend to zigzag. So you, you have two things that are going wrong. When you have the mass hiring and then the mass layoffs. You have the breakdown and trust that we just talked about, but then you also have.
The, the cycle time, the financial cost literally of having to bring people back when your business goes back into the upswing. So yeah, you're killing yourself in, in two ways and, and it reveals, yeah, your management is bad because you're not running the business in a, in a disciplined way. Well, you know, the resort to alternatives to accepting this nexus of, of.
Human wavelength or emotions and fiscal wavelength or, or business is illustrated by Zuckerberg, Facebook's, Zuckerberg of his approach of sort of. Wielding business abstractions. So he starts saying, look, this is, this is the year of efficiency. We're trying to push efficiency. Another business abstraction.
Another, another concept that sort of takes the place of having to deal with that human wavelength of which Facebook is not noted for despite all of their. Their supposed cred for being a, a social platform. Inevitably, they were formed as a stalking platform in a dysfunctional social environment where the human wavelength and the emotions were quite skewed.
And the, the, the tone deafness of some of that leadership is, is consistently apparent as it was in the last election cycle. So, you know, we often find that we think we can say to investors, we think we can say to customers, we think we can say to employers, this is just how business is done, and then appeal to some abstraction like efficiency.
But the, the author of this article goes on to note that Al almost, that this is a selective use. Of concepts in the way. You know, I grew up in sort of a fundamentalist religious environment where I noticed that one day we would selectively use a concept like love, peace, kindness, generosity. And then the other day use a selective concept like vengeance and anger.
And it seemed to be contextual. You know, we, we reach for whichever one is convenient at the time and he's sort of pointing out in a similar way you can. Feel Zuckerberg reaching for efficiency as though he just discovered it yesterday. Like seriously. What does that imply about the last decade was, was that the decade of inefficiency for for Facebook?
And if so, why should we trust anything you're saying? Or why shouldn't we take our investor dollars elsewhere? And so that, that sort of approach leaves out the human side and it makes me wonder. Why as a key concept, we have to have such a dramatic effect when we lay people off. We are not acknowledging the relationship.
And the, the author goes on to talk about a company that, that managed to do this fairly well. They had layoffs. I think they had like 9% layoffs. And they, but the employee. Employees themselves are saying, look, you know, they did it right. It wasn't an email in the middle of the night. It wasn't tone deaf.
We had a conversation and we under, we understood and it was disappointing. It's devastating for anybody because you like the people and you like your job. That emotional thing is real. But even with that company, it made me wonder, look, if we're gonna prioritize relationships, it's not just how nice you are when you fire somebody, but if you're gonna, if you're gonna separate people from the company, Why does that have to mean the end of the relationship?
Why can't there be a permanent, ongoing relationship with people that become then consultants for you, people that you maybe tap occasionally to do some contract work, people who you might wanna bring back later. Why do we immediately think I've gotta dump these people and then he eventually go back out and recruit in the market from scratch?
Because I don't have a body of existing, I don't have a crew I can call. And yet every film we we've seen out there, whether it's Oceans 11 or sneakers or you know, the Sting with Robert Redford or whatever is all be predicated on the premise that, hey, when there's work, you call on your crew of contacts of people you know.
Can do that kind of thing. And you, you reach out and you start bringing those people into the fold. And some of those people work, do a small task for a little while, and some of those people become part of your core crew. But if relationships really do have fiscal value, if that is a priority for us, if we, if we shift that thinking out of the abstract world and into the sort of the human wavelength, why don't we deal with layoffs that way, that they're an opportunity to keep our network larger.
I love that. Yes. And that's the way a lot of films get made in LA too, right? The once, once you stumble on a director, stumbles on both the producers that they like to work with and also every role on set as well as post-production. They start to bring that crew back together when they can. And sometimes the crew is so good they'll hold the shoot until, well, I, I, I can't shoot until I get this director of photography and, and all that kind of stuff.