Today’s idea comes from some of the recent announcements about how large corporations are using job cuts as an alternative to growth, and in essence keeping their bottom line in shape.  With the economy in a recession, it’s that time again for large corporations to start slashing jobs and trimming the fat, all in the name of profitability.  However, I think we may start finding out that there is not a lot of fat to cut, and through this exercise we could be cutting into the bone, or better yet, their revenue generating muscle.  If you take a look at many of the large corporations, they have been going through a protracted cutting exercise that hasn’t really factored into our employment numbers because of the gradual nature of the layoffs.  Up until the last 12 months, those unemployed workers have been getting somewhat absorbed into the system.  However, over the last year there has been about a 1% uptick in unemployment and that number will most likely continue to rise a bit.  The traditional thinking around downsizing is that the remaining workers will pick up the slack, and because of this, it will make a company more profitable.  However, what happens when a company downsizes to a point of breakage, where the remaining workforce can no longer handle the additional load and they cease to be effective.  In essence, they start running into a standstill and I guess we could call this the “Downsizing’s Negative Returns Theory.”   When compensation plans for executives and senior management are weighted heavily on short term profitability, we could run into a conflict of interest:  downsizing between the corporations long term well being and personal compensation.  I think it’s clear that, bottom-line, profitability is a party that can last only so long without top line growth.

Copyright: Dominic Mazzone Regent Global Funds 2008