ANALYSIS: Sugaring the pill when mass layoffs are inevitable
This article was originally published in Scrip
Professor of management Wayne Cascio of the University of Colorado, Denver, has studied downsizing for some 20 years and is one of the US's most respected authorities on the subject. His investigations have led him to conclude that laying off staff only makes sense for companies when the downturn they are experiencing is permanent: when a firm merely faces a trough in the business cycle, measures such as temporary hiring freezes, cutting the training budget or putting staff on furlough leaves that firm in a better place to recover when conditions improve.
For many big pharma companies, however, finding ways of avoiding staff cuts altogether is just not realistic. "The structural changes in the industry are huge and they don't seem to be temporary. I've rarely seen an industry rocked as much as this. There are pressures from governments to reduce the cost of drugs, there's the patent cliff and there's M&A," Professor Cascio observed. "What can they do? Cutting costs and growing revenues are really the only two ways to make profits. In many ways they're in a box and will have to ruthlessly trim expenses to bring them into line with revenue projections."
The relatively good news that in 2012 mass layoffs in the pharma industry were nowhere near as hefty as in previous years should be seen in the light of the significant axe damage that has already been inflicted across business functions over the past few years.
And despite the decline, there have still been more than 15,000 job cuts documented for the US and Europe so far, and the real figure is likely to be somewhat higher, as reporting of layoffs can be patchy and incomplete.
According to research by the US outplacement company, Challenger, Gray & Christmas, jobs cut in the US pharmaceutical industry in the first 10 months of 2012 were 11,586, compared with 20,079 in January-October 2011. Meanwhile, announced hiring plans in the sector totaled 2,325 (adding to 4,043 announced in 2011).
In 2011, the pharmaceutical sector was the seventh biggest cutter of jobs, at 21,580 over the full year. This was already a marked improvement over 2010, when the company was the second biggest firer with 53,636 cuts. This year it has fallen to 17th place.
Meanwhile, in Europe, the European Monitoring Centre on Change, which keeps a database of large-scale restructuring events reported in national media of EU member states, highlights a number of important adjustments amounting to some 4,500 or more job cuts for the sector.
For Professor Cascio, the fact that different firms have had "dramatically different responses" to the problem is "fascinating". He noted that while some have focused on reducing administration and scaling down manufacturing (Merck & Co), others have slashed their R&D budget (Pfizer), cut sales forces (AstraZeneca's US reps were cut by 24%) or shifted jobs to emerging markets (Roche).
"There is no 'one size fits all' response. It depends on where they see growth in the business," he comments. While some of the shift in labour to emerging markets is about outsourcing and labour arbitrage, this is not the sole reason: "They need to stay close to consumers. With the rise of the middle class in India and China, there'll be growing demand and they're reacting to that in moving operations," he pointed out.
With cuts impacting potentially severely not only on the individuals laid off but also their surviving colleagues and business, as well as other stakeholders including contract workers, supply companies, local and regional communities, it is worth considering what might constitute best practice in these circumstances, and how to avoid common pitfalls.
Watch out for the survivors
So what is Professor Cascio's advice to firms that are about to embark on a round of cuts? "The greatest concern is with people who stay behind ('survivors'). The first casualty of downsizing is employee morale. People become risk averse, narrow-minded and self-absorbed. That's exactly what you don't want with your survivors because the only way to outrun the competition is through innovation. You don't want people keeping their heads down and just playing political games to keep their jobs."
How do employers avoid this pitfall? "Survivors have to be able to see that the company will be better off. They will be asking: 'were the departers treated fairly and with dignity and respect?'; 'Why should I stay (is there a future here?)'; and 'is there a new business strategy?'."
Engage the workforce early on
Transparency is the key here, and communication with staff should ideally begin way before a final decision is taken. "Frequently a small number of executives sit in a room for a few weeks and come up with a downsizing strategy. And they don't involve the workforce. Yet people become incredibly creative when they know their own jobs are on the line," says Professor Cascio.
For example, employees at Novartis's OTC facility in Nyon, Switzerland, were able to convince the firm to backtrack on plans to shutter the plant with the loss of 330 posts. Instead, they agreed to work longer hours and take a reduced pay increase, while the company will also enjoy reduced regional taxes for a period. Novartis even agreed to invest CHF40 million in modernising the site.
Staff suggestions may help reduce the size of a layoff, and they may also help executives figure out how best to carry it out. When large scale redundancies are unavoidable, "employers need to put in place effective systems to support staff both practically and emotionally," notes Ciaran Wrynne, who works in the career transition services team at recruitment firm Hays. "HR teams will play a critical role in doing this".
Meanwhile, beyond the company itself, the impact on the local economy around a site affected by a major layoff can be significant. Kent County Council and others in the UK scrambled in February 2011 to react to Pfizer's decision to exit Sandwich, as the local economy was dominated by the firm, with local businesses and suppliers, schools and pubs all representing potential collateral damage.
There has been some limited success to date in repopulating the site with new firms, but many former workers have moved on, whether that be through retraining (for example as solicitors or teachers), relocating to Europe or the US (many find that their experience at Pfizer has enabled them to find posts with greater responsibility in smaller organizations, or research institutes) or just embracing a new lifestyle and taking their biomedicine skills out of the local economy.
Tim Ingleton, head of inward investment at Dover District Council, said that while much had been achieved through the establishment of a Pfizer task force and various development initiatives, "earlier confidential dialogue [with Pfizer] would have assisted all parties". He believes that continuing uncertainty over the future uses of the site have led to potential loss of scientific resource in the area, and says "more could have been done to retain resource locally sooner through an open dialogue".
Paul Carter, head of the Pfizer task force and Leader of Kent County Council, also calls for early notice. "Let us know any decisions in advance, and as early as possible. We'll retain your confidence but give us the time to prepare and we'll line up central, local government and others in planning and providing support whenever we can in a whole number of ways."
Company withdrawals don't have to spell doom for business at a site. Over time, conversion to multi-occupancy business campuses, often with a focus on biosciences, can lead to a thriving local infrastructure. Pfizer's task force singled out The Heath in Runcorn, Cheshire, which was once an R&D facility of ICI. Ten years on, the business and technology park as it is now employs 2,000 people in some 160 businesses, more than ICI did before it exited. The Task Force also noted the example of Pfizer's R&D facility in Ann Arbor, Michigan, which now hosts the Michigan Life Science and Innovation Center, employing 1,300 people.
"We needed to act to keep the Pfizer skills in Sandwich," said Carter. "Through the site head, we found that some of the best scientists were quietly being lured away to big jobs elsewhere. We quickly identified short-term cash was a problem to those looking to be brave and go alone in starting their own businesses and we needed to encourage them.
"If someone wanted to start up a spin-out business, family pressure to take a salary and its accompanying long term certainty could soon become too great. To help them, we immediately offered "accelerator" grants of up to £20k to the most promising spin-outs, helping them to travel to secure contracts and paying their short-term costs. All of these start-ups have since gone from strength to strength."
Sandra Sucher, Professor of Management Practice at Harvard Business School, believes that moral disengagement (with decision makers overlooking the impact of a layoff and their responsibility for it) may emerge in mass layoff scenarios. Executives employ a series of mechanisms – such as diffusion of responsibility (a collective process enables the individuals involved to distance themselves from the negative effects of their decision); displacement of responsibility ("it's not what I want to do: the market makes me"); or mimicry ("people take their cues from what others in the industry are doing: it gets established that it's an acceptable thing to do").
The problem is that such evasion of responsibility may result in a firm overlooking its ability to mitigate the impact of its withdrawal on the wider community.
A responsible company should work closely with local and where appropriate national authorities to ensure a sustainable strategy can be established, again engaging in dialogue as early as possible when cost-cutting is foreseen. Planning and taking proactive steps to preserve a biomedical presence in the local economy is good corporate responsibility practice, but it could also prove to be in the company's interests.
Big pharma needs innovative start-ups and outsourcing providers more than ever to feed into its innovation engine. Leaving behind a viable microclimate for such enterprises to thrive makes good long-term business sense.
- Novartis planning 2,000 cuts in the US;
- Roche closing its R&D site in Nutley, New Jersey with the loss of 1,000 jobs and shifting its focus to Genentech's base in California, a new center in Manhattan and further growth in China;
- AstraZeneca revealing a 7,300 cuts programme worldwide;
- Abbott slashing 700 manufacturing jobs across divisions but mainly in the US and Puerto Rico in January, and then in October announcing another 550 immediate cuts with several hundred more to come in 2013;
- Takeda's January announcement that it would cut 2,800 jobs in the US and Europe as it integrates Nycomed;
- Merck KGaA's decision to close Merck Serono's Geneva headquarters where 1,250 were employed along with smaller site closures in Switzerland and other countries and plans to reduce its workforce in its home country, Germany, by 1,100;
- Sanofi's decision to cut 900 jobs in France with additionally the future of a major site in Toulouse still hanging in the balance;
- Lundbeck carrying out European workforce restructuring affecting 600 positions.
*in some cases cuts may take a few years to complete
? first ask for cost-cutting suggestions from the whole workforce
? in the event of a mass layoff, be very open about the criteria you're using
? be consistent: use a formula for severance pay and make it known
? don't do across the board layoffs: identify departments and functions that are strategically critical to preserve value
? don't approach staff cuts little by little – staff will wonder where the axe will fall next and that damages morale, productivity and innovation
? give people a sense of personal control (eg by giving them a window of a few months when they leave)
? be generous: continue health insurance and other benefits for a few months after people leave, offer generous severance pay
? treat people with respect and dignity: don't march them out of the building, send text messages or block security cards without warning
? use outplacement experts with good contacts within the pharma industry and have them in place from the day the layoffs are announced
? plan counselling, coaching and team-building exercises for remaining staff, including managers who have to lay people off.
Until February 2011, Mike Yeadon was vice-president and CSO, in charge of allergy and respiratory research at Pfizer in Sandwich, UK. He was 50, had been at Pfizer for 16 years and spent his whole career in big pharma.
Dr Yeadon was happy, productive and comfortable "in the furlined rut of a big pharma job", but after some years of R&D layoffs in the industry, he knew it was "foolish to assume that this was never going to happen to me", and had been preparing for that eventuality.
Unwilling to "hop around the world every 18 months, getting fired sequentially", he decided to "extend [him]self into new opportunities and get good at another set of adjacent and transferrable skills".
In practice, this meant speaking to "probably several hundred people over the previous 2-3 years, just asking them open questions about what they were doing and how they got there". In considering what he could do, he came up with three possibilities: consulting, starting his own life sciences business and setting up a hobby-based business.
In practice, he has done all three, most recently announcing the $27 million funding of his start-up Ziarco, which is based on assets he worked on at Pfizer and subsequently licensed.
For Dr Yeadon, the Sandwich closure announcement was disappointing but not surprising. "I had probably 12 hours of shock then I was up and running doing my plan," he says. This is not a man who wanted to leave his job, and he admits he missed the "friends, colleagues, access to resources – it's nice to have a warm place to work instead of working from your house, a certain rhythm and comfortable predictability of the work cycle". He also loved running the project and portfolio he had at Pfizer ("it was almost my life"). "But if you asked, 'would I put Humpty Dumpty back on the wall?' I'd say not a chance! I love this 10 times more than what I was doing in 2010."
He is glad to be free of the long chains of approval that slow processes up in a large organisation ("It's not a Pfizer thing, it's a big company thing," he observes. "I had grown to the point in my life when I was just impatient with that.").
He was also surprised while consulting and fundraising to find that he didn't miss his salary. By relying on the financial cushion he'd been able to build over his career, and with his redundancy pay-out and consulting work, as well as cutting some of his costs, he and his wife, the parents of two teenagers, found that "no one was suffering, the lights weren't off and everyone was being fed".
Perhaps his resilience stems from his prior decision to "future-proof" himself. In his view: "It's not a sign of disloyalty or lack of commitment to prepare yourself for the future. It signals taking adult responsibility for yourself to at least toy with what might be the unpalatable and turn it into something fantastic."
For others facing similar situations, he advises "having at least a second strand to your life that gives you a degree of resilience in the event of a decision made by others". By preparing the ground in advance, maintaining good relations with Pfizer (it's an investor in his new company) and ensuring that he was making the most of the network he continued to build to synergistically build both his consulting work and seek financing for his new company, Dr Yeadon has created and exploited opportunities that have enabled him to make the most of a potentially catastrophic upheaval and move forward in his career in biomedicine despite the great uncertainties in the sector.
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