Cenek Report

A major piece missing from the recent coverage of the layoffs at Circuit City is that this is not the first time that they have completed a “wage management initiative” – an interesting choice of doublespeak directly taken from their March 28, 2007 press release.

In fact, the electronics retailer unveiled and implemented a similar cost cutting move at least once before, as reported in the February 6, 2003 edition of The Wall Street Journal. The firm announced then that 3,900 commissioned sales staff were being retro-recruited and replaced with less expensive newbies. Lackluster financial performance – and a need for a revamped sales strategy – were provided as official explanations.

A great pop psychology-free web-letter, Knowledge at Wharton, recently covered the complexities and potentially unintended consequences of the firm’s latest decision in a well-balanced article entitled Short Circuited: Cutting Jobs as Corporate Strategy. In the article, Peter Cappelli, management professor and director of the Center for Human Resources at Wharton, believes the decision to excise folks and replace them with lower paid individuals is akin to saying: “"We made a mistake in compensation by paying them more than they were worth for their performance, so we're going to get rid of them."

Circuit City’s most recent staffing lobotomy signals the presence of more systemic and chronic performance issues that layoffs alone will not cure. The firm’s press release underscores their need to reduce SG&A expenses, and to eliminate non-value added work, laudatory goals, but it has seemingly “made the same mistake twice,” and may be caught in a downward, inescapable vortex.

Other bloggers, and the popular press, including the New York Times, have thoroughly detailed the employee relations fall-out that can be expected, which are certainly obvious and need no further chronicling. What has not received enough attention however, is the long trail of research, such as that undertaken by Kim Cameron of the University of Michigan, and Wayne Cascio of the University of Colorado, that convincingly calls into question the long term effectiveness of workforce management strategies that rely heavily or exclusively on labor cost reduction as a transformational strategy. The odds for improved business performance increase significantly only when cost reduction and improvement touch all elements of the business, not just the workforce. Maybe Circuit City will employ that thinking going forward.