Democrats Are Falling Into the Austerity Trap

Broadcast August 24, 2001

The butcher metaphors of modern management are back: cutting out the fat, slicing to the bone, getting leaner and meaner. Well, all this butchering may slow the slide of stock prices, but it's not a way to build long-term competitive strengths.

The fact is, the key competitive assets of most companies these days is their people, not their machines or plants or even their patents, but their employees. Their employees' intellectual capital, knowledge about the companies' products, services and technologies. Their employees social capital, relations they built up over the years with clients and customers. And inside the company, relationships among employees who've become a team.

And beyond the intellectual and social capital is what might be called trust capital, the sense among employees that the company will be there for them when times are tough, so that employees are willing to go the extra mile, make that extra commitment because they feel loyal to the company.

All of these critical assets--intellectual, social and trust capital--are being sacrificed on the altar of quarterly earnings.

Now it would be one thing if there really was a lot of corporate fat to be cut, but during the 1990s, most companies already cut the fat. They already became lean and mean. So what they're doing now is cutting perilously close to the heart of their operations. Fine for this quarter or next, but what happens four or five quarters from now when the economy picks up again?

These companies won't have the knowledge base they need, won't have the consumer and client service they require, won't have nearly the same loyalty and teamwork. No wonder, according to a recent analysis by Bain & Company, companies that laid off 15 percent or more of their work forces during the last recession of 1991-1992 performed significantly below average in the three years after the recession.

Investors be warned: Take a look at the real costs of all the cutting and slashing to the long-term competitive strength of a company. And don't bet your money on a company that's throwing out its most important assets.

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