EMPLOYEE ``CHURN'' AS COMPETITIVENESS TOOL
By Nicole C. Wong
Mercury News
What's 150,000 minus 45,000? In Hewlett-Packard's world, the answer is still roughly 150,000.
Since 2002, HP has laid off 30 percent of its employees worldwide to cut costs and improve operations. But sending all those employees away with pink slips or early retirement packages hasn't caused a plunge in HP's global head count -- because the company continuously hired new workers while it escorted others out the door.
Hiring people while laying off others is called churn. And HP isn't the only aging Silicon Valley vanguard that's using churn to survive the onslaught from technological innovation and global competition. But the legendary computer company's use of churn to help fuel its financial turnaround illustrates how the strategy has shattered the implicit employment contract that once bound America's companies with their workers.
The technology industry titan that was started by two Stanford University graduates in a Palo Alto garage in 1939 had averted layoffs for nearly 60 years. When times were lean, HP coped by spreading the financial hardships among all employees and by training workers so they would possess the new skills that the evolving market demanded.
HP's decision to embrace workforce churn puts it on the same path that many global companies have walked in recent years. On Wall Street, HP's strategy is seen as a smart way to adapt to the changing market demands.
``It's a natural thing to do,'' said Brent Bracelin, a financial research analyst at Pacific Crest Securities.
Steven Cochrane, a senior economist who follows Silicon Valley's labor market for Economy.com, said, ``This is what you would expect in a dynamic industry or a dynamic economy. Understanding the churn is important to understand whether the industry is truly shrinking or whether it's trying to change shape so it's more competitive in the future.''
Churn is used commonly to mean all kinds of departures from companies, including voluntary resignations and those fired as well as those laid off. Looking at the intentional churn created solely by layoffs gives insight into how much companies are controlling how their workforce changes.
To some management experts, HP's intentional churn represents a dramatic cultural change for one of Silicon Valley's signature companies, whose workplace practices were once regarded as a model worldwide.
``HP was one of the holdouts of an older-style commitment firm,'' said Diane Burton, an associate professor at MIT Sloan School of Management who has taught a popular Harvard Business School case study on HP's pre-churn workforce practices. ``Now they're treating their people as disposable workers.''
Chief Executive Mark Hurd has explained the latest layoff plan as an ambitious agenda to cut back on jobs that have been putting HP at a competitive disadvantage. The company has been loaded down with too many workers in information technology, human resources and finance positions -- and not enough in revenue-generating jobs, such as sales.
``We are trying to get our cost structure right,'' Hurd told HP business partners in September 2005. ``And the places that the cost is coming out of are not the places where we're adding cost.''
That's true not only for the types of jobs, but also for where they're located.
The global layoffs recently helped HP chisel away at an expensive workforce in the United States and Western Europe, and funnel work to lower-paid employees in Asia, Eastern Europe and Latin America, according to several HP executives in Europe.
``Some jobs are disappearing on-shore because the skills and the quality exist elsewhere at a much cheaper cost,'' said Eric Grall, HP Services' vice president of global delivery for Europe, the Middle East and Africa.
A spokesman from HP's headquarters in Palo Alto declined to comment on this. But chief financial officer Bob Wayman told Wall Street in March that of the 15,300 employees being laid off through Jan. 31, 2007, ``some of those employees will be replaced by other employees, in many cases in different, lower-cost geographies... We're moving back-office functions to India, Costa Rica, Eastern Europe, etc.''
U.S. companies are rarely required to disclose how many employees they have -- or have laid off -- in a particular geographic location, and HP has declined to do so. However, HP did reveal in July 2005, when it announced the most recent layoff plan, that its 151,000 employees worldwide included 58,000 in the United States and 9,000 in the Bay Area.
The global head count and regional breakdowns fluctuate throughout the year depending on whether hiring is outpacing layoffs at the time.
Hurd said HP would reduce its worldwide head count of 151,000 employees at that time by 10 percent over the next six quarters, ending Jan. 31, 2007. And that should save HP $2.1 billion annually beginning this fiscal year, which started Nov. 1.
By April, HP had already laid off 8,100 of the slated 15,300 employees. But due to non-stop hiring, the worldwide head count had dipped only 0.6 percent -- to 150,000.
HP later said eliminating positions doesn't mean the company stops hiring.
HP spokesman Ryan Donovan declined to comment on whether the company is cutting costs by hiring cheaper workers.
However, Donovan said the company has been hiring ``nearly continuously'' throughout the years of layoffs as it worked ``diligently'' to match its workforce's abilities with the market's changing needs.
``This means deploying people in roles that will help the business grow in areas of promise while shifting them away from areas offering less potential or where functions may have become redundant,'' Donovan said. ``This is why we are hiring aggressively in certain areas while working to eliminate positions in others.''
Paul Oyer, an associate professor of economics at the Stanford's Graduate School of Business, said IBM adopted this churn strategy in the 1980s. ``They were downsizing the company dramatically, but they were always hiring into new types of businesses,'' Oyer said. ``They closed manufacturing units but at the same time were increasing their software and consulting businesses.''
Experts say that over the past six years, more high-tech companies have churned their workforces as they bowed to market pressures to produce bigger profits amid intensifying global competition and accelerating technological innovation. But hiring continuously amid layoffs hasn't been limited to the fast-paced tech sector.
Although workforce churn isn't new, its prevalence has not been widely known.
Clair Brown, co-author of a book published in October called ``Economic Turbulence: The Impact on Workers and Businesses,'' examined workforce churn in the semiconductor, software, financial services, retail food and trucking sectors from 1992 to 2003. She said the amount of hiring amid layoffs was ``staggering.''
``We saw no matter what, companies had constant employment,'' said Brown, an economics professor at the University of California at Berkeley. ``I saw a real sea-change in these companies' willingness to take care of their workers in the '80s and '90s.''
HP was one of the last notable companies to cast aside what had amounted to a lifetime-employment legacy. It has implemented eight layoff plans since 2002, when its mega-merger with Compaq Computer made HP's workforce of approximately 86,200 employees swell overnight to nearly 150,000.
Under layoff plans announced that year and the next, the combined company sent 26,000 workers away with severance packages to reduce redundant operations and realign activities with the cooling business climate. In 2005, HP initiated layoff plans three times -- getting rid of 1,450 employees, then 3,000 more, and finally another 15,300.
HP said it would not provide details about how the churning has changed its workforce because of competitive and confidentiality concerns.
But HP has said about half of the 15,300 latest job cuts are whittling down back-office support. And Hurd, who started his career 26 years ago as a field salesman at Ohio-based NCR, has repeatedly mentioned during speeches and press conferences over the past 15 months that he wants HP to beef up the size of its sales staff.
These kinds of workforce shifts have helped HP boost its revenue this year by 6 percent. Its stock price shot up more than 60 percent by mid-December since the last major job cut was announced July 19, 2005. The revenue growth has given HP the title of the world's largest technology company, a claim that IBM held until November.
While HP's future looks brighter, some employees are still dismayed about the company's departure from its past workplace practices.
But Wally Russell, HP's director of employee relations for Europe, the Middle East and Africa, said moving work to lower cost areas will benefit the remaining employees in the long run.
``If we're not competitive,'' Russell said, ``we will lose more jobs than we are losing.''
