Episode Transcript
[00:00:00] Good morning, everyone. I hope you enjoyed Patricia Frost podcast. She is really an exceptional leader and has many, many lessons to consider. And if you look at the history of Seagate, the company that she works for, they have been through a lot for the last six or seven years, and you can see the exceptional growth of that company. And I think she has a lot to do with it. Okay, another topic for the weekend that just occurred to me that I want to sort of discuss, because it keeps coming up and it's going to come up more, and that is downsizing, layoffs, restructuring. There's a pretty good chance from all of the data that's coming out in the various economists and the data that I see from the companies that I talk to that we're entering an economic slowdown. I don't think the United States federal government is going to admit it, maybe never. But all of you can feel it. And you can probably feel it if you're looking for a job, because everybody I know that's looking for a job is having a very hard time finding it. And the other symptom of this is no one's changed jobs. So people are afraid to look around. And it makes perfect sense because we've invested a trillion dollars or so in AI this year. Very high expectations on productivity. Stories starting to come out about lots of improvements. And so CEOs and CFOs are essentially saying, stop the hiring. Let's optimize the people we have, or reduce the headcount. So then you think about that process. And it's really interesting that in the travels I've been through, and I've been doing a lot of traveling, the last I went to Tokyo, I went to Hong Kong, I went to Singapore, I went to Las Vegas, which is like a whole country, and I'm going to Europe again in a couple of weeks, in another week, and also to the Middle East. There's a very different culture of corporate restructuring in different locations in Japan, as most of you know, and I think I discussed this, it's very hard to let people go because the culture is that you stay with the same company for life. There's a low immigration in Japan. Almost everybody only speaks Japanese. So you take a lot of risk at letting people go. And people are not culturally interested or prepared to change jobs and change companies very often. That's a big problem for them. But it also has a lot of positive implications, too, because people will do what they're asked. You can reassign somebody to a new job and they will take it without complaining or quitting. And that's good for a company that's changing. Then you go to a place like China, where the job market, at least in Hong Kong, which is a little bit different from mainland China, of course, where everybody's creating something all the time, lots of startups, lots of change. Then you go to a place like Singapore, where the business community is extremely dynamic. The country is so small that I think everybody knows everybody else. And so you know, you're likely to change jobs and go see your friends at a new job job, sort of like it feels in San Francisco. And then you go to Europe where we have unions and labor groups that prevent you. And it's completely different there. So we've got this almost philosophical experiment going on where the culture of different countries teaches us the impact of different forms of labor relations. In the United States, of course, for the most part, unless you're in a union, you're completely at will. So you can be laid off by email, you can come into work at 8:00am and get laid off at 8:05 and be out of the office at 8:10 with a box of your goods, and that's that whether you like it or not, except if you're in a union. So the reason I bring this up is that there was a really interesting report done by the Economist this week, one of my favorite magazines. I really recommend those of you that are business fans to read the Economist, and I want to read it to you. There are two ways for western companies to sack lots of people. The American one involves the boss inviting hundreds of unsuspecting employees on a zoom call, offering them a few months wages as severance, insincerely wishing them luck in their future endeavors and to have their desks cleared by lunchtime. The European method is more circuitous. Companies wanting to exact mass layoffs typically start with consultations with unions, representatives of which sit on companies boards. In Germany, planned social is drafted, strikes ensue, politicians get involved and badger the employer into firing fewer people than it had originally planned or pay for its soon to be ex staff to be retrained. The full cost of downsizing is only known once labor courts are called to rule on the matter years later. Meanwhile, the company in question often cannot hire more employees, lest it be made to hire those who are just let go. Okay, so the impact of this is that if you look at countries in Europe, and this is the Economist, there are no companies in Europe, all of Europe. Europe is a big geography. It's similar in size to the United States in terms of population, there are no companies in the top 25 market cap companies in the world. From Europe, zero. And Europe is an old area. There's a lot of history here. There's a lot of very historic companies. Why are there none that have reached the size of those in the United States? I think it has to do with this issue of can you restructure, redeploy, reorganize your company effect.
[00:05:20] And this is the huge issue we all face with AI. The number one issue with AI is not the technology and how speedy it is or what the features are, it's the people issues. How do we use it? How do we redeploy our resources? How do we reorganize or redesign our business processes and our workflows? How quickly will employees learn how to use it? How effectively will we prevent it from messing things up, et cetera? In every company I've ever worked in, I've worked for about 10 companies in my career. The operational issues all had to do with people. They never had to do with technology. Because if technology was messed up, we could fix it. It's not that hard to fix a system that doesn't work, but it is really hard to fix management or culture or an organization that doesn't work. I mean, really hard. And as Patricia talked about in her podcast, and we're going to talk about in the Super Manager research coming out next week, it's all about management.
[00:06:19] And I mean, not just senior management, I mean line management. Because the way it works, as you all know, is senior management might have a lot of good ideas, great experiences, motivations, communication skills, brain power, et cetera. But if that is not replicated and magnified and aligned across the company, it doesn't matter. So when these CEOs push broad initiatives into the organization, they're often not adopted or they're passively resisted. And that, of course, results in a dysfunctional organization, whether it be a growing company, a shrinking company, a company going through stress, company going through redesign, et cetera. And I would argue that every single company is going through redesign around AI, some part of the company, or all of it. And this is a very unique situation because we're not redesigning from point A to point B, we're redesigning from point A to point B to point C to point D. And we're not even sure where point E is, because AI itself is evolving so fast. And this is going to be the theme of my predictions for next year, by the way, that we don't even know where it's going. So we have to redesign. To redesign. We're getting into the redesign business of constantly redesigning, which sounds so odd, but that's really the way the world is working now. Software companies are a little more familiar with this because they're used to being disrupted, but everybody else is feeling it. And the linchpin gating factor is management and leadership and managers and how we deploy people have a lot to do with it. So what have we learned? We have a very extensive body of research on this. A lot of it is encompassed in the dynamic organization research, which you can read about if you're a member or browse through and have an assessment and really dive into it. Galileo. But there's more. You know, I think there's some philosophical issues too. When you lay people off, it has a lot of benefits. I've been laid off. I've been in companies that have done layoffs. I've been in some massive layoffs. The benefit is things get clear error. There's less noise, there's less distraction. There are fewer people involved in decisions. All of a sudden you feel like you know what you need to do. But the downside of it is people are paralyzed. They're worried, they're afraid, they're no longer do they trust the organization. I mean, I remember my early days at IBM. A lot of, you know, I worked there. There have never really had been layoffs at IBM until Lou Gerstner came along and did a massive one. And that was in the 80s. And as a result of that activity, no one, at least where I worked, ever trusted the company again. And it changed the culture a lot to the degree that for the next 40 years, IBM really didn't perform that well. I'm not saying that one layoff caused all the problems, but that idea that we don't value you the way we used to and we're going to let you go because you're kind of expendable. Never existed in the good days at IBM. And that change affected who would come work there, how committed people were and the quality of the team. You know, layoffs can be good, layoffs can be bad. Studies have been done by not a lot of academics. I've read most of them, that in many layoff situations, major ones, there's usually one layoff and then another layoff. Because the fact of laying off the first group is such a shock, the company doesn't realize that there's a second group that also has to be laid off. And that, of course, creates more paralysis in the company. And many times, as the research shows, the company never recovers. So even though it may feel sort of trendy to let a bunch of people go like Elon Musk likes to do, or just about everybody else, it's a very difficult process to manage. Which leads me to my second point in reorganization is maybe you shouldn't be hiring so many people in the first place. I've had this debate with hundreds of chros and heads of talent acquisition, but we have in a sense a very old fashioned model of hiring. The way we hire in most companies is the CFO plots a budget. We have a certain amount of growth in the budget based on the market, based on the customer demand, and delegates headcount to various parts of the business, functional areas to accommodate the business plan. That headcount gets delegated down to managers. Managers go back to HR and hire or recs, open recs. And then we in HR scramble around trying to find people. Now in some businesses this is very, very continuous because they have high turnover employees anyway. So if you're a retail organization or a restaurant chain or maybe a hospitality company, that's going to be regular business. But you know, normally it's more episodic. And then the hiring process continues and each manager working with HR makes decisions. And we have this kind of commoditization of the hiring process where lots of individual decisions are made on the quality and skills and alignment of the people. And what happens when you hire a lot of people is that also slows things down because you've got onboarding new people who don't know how the company works, people that may not fit the culture, interruptions to the current team. And even though it should create growth, the rate of growth per person usually goes down when you hire more people, especially if you do it quickly. So not only do layoffs have a negative impact impact on productivity, but in some sense hiring does too. The gross amount of output goes up, of course, because you have more headcount. But the output per person goes down until that team is optimized. Where does that burden fall on the managers, not on hr. Our job is to get them in the door and make sure they're well skilled and all that. The managers have to keep them, get them trained and up to speed and aligned. And so we're now dealing with issues of org design, job role tools, skills support, training, etc. So in both cases growth and downsizing, we have negative implications on the future of the company. So it turns out during times of transformation, the companies that are Good at transformation, outperform. Now I think an example of a company that's really good at this is Amazon. You've seen Amazon's success. They're redeploying people, changing the org structure, opening new businesses, buying new businesses constantly. Google actually does the same thing. Microsoft does the same thing. L' Oreal does the same thing. A lot of the CPG companies do this regularly. This is a skill. This is a muscle being dynamic. The dynamic organization is a muscle that companies have to develop. It isn't something you do once or twice. In this AI experience we're all going through, it's very, very critical that we think this through. Going back to the sort of beginning thesis here and then I'll wrap up. If you look at the culture of the United States versus the culture of Europe or Japan as an example, and you look at the size of the companies in the United States, what the Economist data essentially shows is that when you can operate dynamically, you grow to a larger, more high value state. Because what happens when you can't go through these organizational changes very effectively is you reach sort of a stable size. And this is what you see in a lot of well run, medium sized companies. They've oftentimes are founder led, they have great businesses, they're very well known, but they haven't been through a lot of change and they stabilize. And that's fine, that's fine. But if you're in a company or you want to be a company that reaches spectacular size for some particular reason, you're going to have to get good at this. The final point I'll make is if you look at many large companies that reach sort of a massive scale, you know, there's geographic growth, multi country growth, product growth, market growth, et cetera. The reason they slow down is because they've kind of hit their natural limit and they can't grow any further. Examples of this are Cisco, IBM, you know, many large companies where for some reason they've reached a stage, they can't seem to get into the next market. And usually what happens is some market change took place and the thing that they're good at isn't as value as it used to be and so somebody else gets better at the replacement thing, whatever the replacement thing is. Those companies are also a very unique situation. You look at Ericsson or Siemens or even ge, those are situations where the senior leadership team oftentimes need to break the company up and start over, sell the parts of the company off and restructure, really rethink the business. And that as well is dependent on being a dynamic organization. So. So I'm really here to prepare you for the coming week or two when we start talking about management again. There's a dozen factors in supermanagement and being dynamic. Many of these you probably know. But we're going to reinforce them and bring a new context to them around the world of AI And I hope you enjoy it. Have a great weekend, everybody. Talk to you next week.
