Why profitable companies like ING need to lay off people
In the current economic climate it seems hard to swallow why even profitable companies lay off people. Adriaanse argues that they should. However unsocial that may sound.
This morning I read in the news that the Dutch ING Bank are planning to lay off another 2,400 employees in its Dutch and Belgian retail division. Reason being: consumers are increasingly using online and mobile banking services and, more in general, cost savings are needed due to increased post-crisis (solvency) regulations and taxes, as well as efficiency goals (‘bank efficiency ratio’). Laying off people is a great option in such a situation, saving in this case about 270 million euros every year in loan and other overhead costs. That’s an easy profit. Simple as that. And considering the bank’s growth strategy, the fact that even 2,400 employees can be missed proves for sure that they are obsolete. “We can do the same, in fact even more, with less people”, is basically ING’s message. And they are probably right.
Still, why does this short piece of text above feel so uncomfortable to lots of people? I think it is because I talk about people in terms of ‘sources of production’. Comparing them with (more) efficient technology and computers. Talking about humans in terms of costs and then using the total amount (2,400 real-life people) in a calculation leading to a future profit boost for ING (270 million per year). Creating , indeed, additional value for the shareholders. Shareholders who already benefit from current profits. How unfair. Or is it?
Don’t get me wrong. I do feel sympathy for people losing their jobs and I strongly agree that company management should act socially (if possible) with regard to redundancy policies. But entrepreneurship means (as Harvard academics define it): “the pursuit of opportunity, without regard to resources currently controlled”. In other words, in pursuit of future success it is important not to focus on current production plants, current products and services, as well as current jobs and related job profiles. Future success depends on the ability to adapt to new circumstances and to new competition, most often coming “(…) from the new commodity, the new technology, the new source of supply, the new type of organization (…)”, as economist Schumpeter already wrote in 1942, further stating: (…) [it is] competition which commands a decisive cost or quality advantage (…).
Companies need to adjust their strategies constantly. Turning around their assumptions, products, business units and processes every day. Continuously focusing on one simple question: are we still adapted to the current and future environment? Can we do things better in terms of quality, and (specifically in commodity markets) do things more cheaply (‘cost advantage’)? The banking sector is a commodity market under ruthless pressure from (new) competitors and new technologies. This demands new types of organisations and new ways of organising. However difficult it may sound, this has nothing to do with current people employed nor current profits. It’s all about future profits. For the benefit of current and future stakeholders. Indeed, the shareholders. But also the remaining employees.
Yesterday I read something about a new Communist country in Europe. The government over there insists on punishing profitable companies that restructure and lay off employees, even announcing legislation to this effect (‘Florange-law’). Moreover, last year the same government threatened to nationalise the subsidiaries of a foreign company (Arcelor Mittal) which wanted to shut down some of its unprofitable plants in the country (though leaving open its profitable ones). The name of the president of the country…? François Hollande.
In my recent inaugural lecture at the Leiden Law School I also talked about Schumpeter and competitive pressure. If you are interested please click here for the booklet (in Dutch).