Bad for business

A tale of two layoffs

Facing a Layoff When You Have Bipolar DisorderMicrosoft announces "massive" layoffs and the media essentially yawns.

In 1996, AT&T announced layoffs of the same relative size -- about 14% for Microsoft and 13% for AT&T. But AT&T and its CEO at the time were pilloried as "corporate killers."  

The circumstances appear very similar:

  • Both companies were eliminating jobs as part of organizational restructuring -- Microsoft because it was absorbing the acquisition of Nokia; AT&T because it was splitting itself into three companies.
  • Both companies were financially healthy when they announced the layoffs -- Microsoft even more so with profits of $22.5 billion versus AT&T's $5.5 billion (excluding restructuring charges).
  • Both companies made their announcements in a time of economic uncertainty -- Microsoft even more so. The unemployment rate in January 1996 was 5.8% versus the current 6.1%.

Here are the differences:

  • AT&T's number was bigger -- 40,000 versus 18,000. In fact, AT&T's CFO at the time sent the PR department off to see if it would be the biggest number of jobs ever eliminated in hopes it would really impress Wall Street. He was bummed out when we told him IBM, GM, and Sears had all beaten us to the record. Still, the media likes big numbers.
  • AT&T's announcement was vague on which jobs would be eliminated. In fact, the majority were in the manufacturing business being spun off and even those jobs were in divisions to be sold. Microsoft has been forthright in explaining most of the jobs eliminated will be in its Nokia division. And it promised that division heads would be able to explain the impact within their organizations almost immediately. AT&T's division heads didn't have that information for weeks.
  • But the biggest difference grew out of AT&T's focus on Wall Street rather than Main Street. The company set out to produce the biggest restructuring charge possible. At the highest levels, executives saw it as a singular opportunity to launch all three companies with clean balance sheets and the lowest possible costs. At lower levels, managers saw it as an opportunity to create reserves that could be reversed later to produce reportable income. That's not financially kosher, and the SEC tries to police it, but it happens every time a company takes a restructuring charge. 

Ironically, these differences were magnified by a decision few of us realized would be so significant at the time.

Just before the original restructuring announcement was made in September 1995, the company's CFO met with a group of analysts who covered the company to give them a heads up under non-disclosure. They asked him when the companies to be spun off would actually leave the nest and he told them it would take at least a year -- meaning most of 1996 -- just to unravel the financials and sort out assets like patent licenses and shared real estate.

"Why so long?" was their reaction. "If you could get it done before the end of the 1995," they said, "you could put all the restructuring charges in the last year of the integrated company, when no one really cares." That made sense to the company's CFO, so at lunch, just before the announcement of the restructuring, he said, "We're going announce that all this happen by the end of the year. Pass the pickles."  

As a result, AT&T announced the job eliminations and associated restructuring charges on one of the slowest news days of the year -- the first business day of 1996. In addition to guarnteeing headlines in every major newspaper, it also made the construction of the restructuring charges pretty sloppy. At announcement, we had one number -- 40,000 jobs, which was quicly translated into "40,000 layoffs." We couldn't break it down much further.

Worse, all of those jobs were characterized as "AT&T" jobs because the manufacturing division didn't have a name yet. We were calling it EquipCo internally. If the announcement had been made just six months later, it would have been issued by two companies, AT&T (18,000 jobs) and Lucent Technologies (23,000 jobs).

Announcing on the first business day of January also put it in the middle of the presidential primaries in New Hampshire. Pat Buchanan who was lagging in the race saw it as the perfect opportunity to stir up the electorate, railing against greedy CEOs. And when Buchanan unexpectedly won in New Hampshire, the media connected the dots. From then on, AT&T was on the defensive. 

AT&T had focused entirely on impressing Wall Street and lost Main Street. The final irony: Main Street became so sour on AT&T even Wall Street lost confidence in the company. And its long slide to disintegration began. 

Three of the biggest things we learned in this whole fiasco:

  • Events outside a company can shape -- even distort -- how a company's actions are perceived. Who could have predicted Pat Buchanan of all people would play such a big role in AT&T's travails?
  • Once the media have a stake in a story, its premise can't be dislodged. No matter what you do. "Downsizing" and "corporate greed" became memes in 1996 and AT&T became their trope. 
  • A crisis doesn't end until there's blood in the water. AT&T's annus horibilis didn't end until the company's CEO was forced out. (The new CEO had a honeymoon of about a year before his anni horribiles began, but that's another story better told here.)

Forward this blog to your friends at Microsoft.







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