Business Blog: Hoover’s Business Insight Zone

When we were discussing AOL’s layoffs a couple of weeks ago, a commenter named Jay said this:

One of the weird things about regular layoffs is that it creates a perverse incentive: Don’t fire your poor performers.

If you know that, within 12 months, you’re going to be asked to trim 20% of your team no matter how critical their work is, wouldn’t it make sense to keep a few people on your team that you can safely let go?

Exercise for the reader: Does this, in turn, foster the likelihood that the company will *need* to have another layoff?

Today’s news is full of stories on Alcatel-Lucent’s plans to lay off 4,000 employees. Worse than the news is how little surprise it provoked: the company has already announced layoffs of 12,500 people this year, it just reported yet another sizeable loss (and on declining sales — yikes), it’s still restructuring in the wake of last year’s merger, and various indicators suggest that the restructuring effort must become more radical, not less. Oh, and the market is shifting out from under the company, too.

As we’ve discussed before, the separate companies of Alcatel and Lucent needed serious cutting to rationalize operations before they merged. Given the inevitable redundancies in central-office staff, overlapping product groups, and the like, it’s no surprise that so many people have gotten the ax this year. It’s also little surprise to find out that there has been major infighting within the combined company as the French and American sides of it dig in their heels when it comes to deciding which are the redundant parts. (Who on earth could have seen that coming?)

Alcatel-Lucent’s case is and isn’t like AOL’s. The major difference is that the telecom equipment company completed its ill-advised merger in 2006, whereas the Internet company completed its ill-advised merger (into Time Warner, in case you’ve spent this decade on a desert isle) in 2000. What this means is that the bleeding at Alcatel-Lucent is urgent — it comes in obvious spurts. At AOL, the wounds are deeper, somewhat hidden, and they throb silently most of the time. The online company isn’t hemorrhaging, just slipping steadily into decline.

That steady decline underlies AOL’s habit — alluded to in Jay’s comment above — of cutting its staff year after year. Like the telecom equipment market, the space in which AOL plays is evolving, rapidly in some respects, more slowly in others. Like Alcatel-Lucent, AOL has been slow in admitting the severity of the issues it must confront. Possibly AOL’s leadership is just slow in admitting these things to themselves, as Alcatel-Lucent’s CEO Patricia Russo has been slow to admit (or to grasp) the magnitude of the problems that her company faces. The big difference is that Alcatel-Lucent’s dismal results have now forced a more urgent shakeup in how the company is organized and managed; AOL’s slow decline allows it to fall into the bad habit of self-inflicted death by a thousand cuts.

To its credit, Alcatel-Lucent is changing things from the top on down, cutting the size of its executive committee by two-thirds and simplifying its geographical structure. That simplification must accelerate if the company is to compete with the highly capable rivals (Cisco, Ericsson, Nokia Siemens) who have been feasting on its disarray. Likely it will mean more layoffs in the long run. (This story cites a telecom industry analyst who says that the company would have to cut a total of 30,000 workers — as against the 16,500 job cuts already announced — to be as efficient as Ericsson.)

Unlike AOL, Alcatel-Lucent does not seem to be stage-managing its layoffs — and let’s hope they never start to. Rather, they’re responding to pressing needs which, though they probably should have been obvious enough to act upon six months ago, at least are being acknowledged as essential now. With habitual layoffers like AOL, you’re justified in thinking that tending to p.r. has become more important to them than improving operations.

The best companies restructure every day. They build the whole business over, build it better, through every business cycle. Layoffs should happen all the time, too: person by person and team by team as performance and the needs of the company dictate. You only get into Alcatel-Lucent’s predicament through years of deferred decisions about the hard choices facing the business, a habit that is often tied to a company culture of ignoring reality.

Let’s hope that Alcatel-Lucent is finally facing up to reality. Layoffs are hard medicine, but they’re not as bad as collapse, which seems to be the alternative.