Corporate Revolutions & Bailouts

It has been more than 200 years since we’ve had a political revolution in the United States. But there have been numerous revolutions in other areas; the political kind in many parts of the world, technological revolutions both here and abroad, and social revolutions that have moved much more slowly and are less obvious.

Technological revolutions now occur almost daily (as, in some countries, do political revolutions.)  That makes me wonder about all I will see during the remainder of my life.  My father, born in 1891, began his life by watching people travel by horse and buggy.  His life ended after he saw men walking on the moon.  I was born just before the dawn of the atomic age.  What lies before me is as much conjecture as space travel was to my father.  I’ll have to leave that conjecturing to the science fiction writers.  My interests have always had more to do with people.  Therefore, I will endeavor to use the crystal ball to predict revolutions in our social structures.

When I entered the job market in 1966, the common practice was to join a firm that offered good medical benefits and a solid pension plan.  That was it.  For the next thirty or forty years, you would do whatever the company asked of you and eventually retire and move to Florida.  The company I joined was IBM.  As with most other companies, it was almost a marriage.  Both sides had responsibilities and there was a bond of loyalty.  As long as I did what the company needed me to do, they would take care of me and my family and as long as they took care of me and my family, I would do whatever needed to be done.

In those days, IBM was unbelievable in the way they treated the families of their employees.  When a baby was born, letters of congratulations were sent along with an engraved silver spoon.  When there was a death in the family, flowers were sent along with condolences from the Chairman of the Board.  No detail was ever overlooked.  From the family picnic to the family dinner to the family Christmas party, IBM made you feel that you were part of a much larger and more important family.

But the 1980′s brought some economic revolutions.  Foreign competition and leveraged buyouts caused the bottom line to become more important than the employees and their families.  IBM was no longer the only real game in town.  We could no longer be successful in spite of ourselves.  Since sales did not increase, costs had to be cut.  “Respect for the Individual,” one of IBM’s Basic Beliefs, found itself at death’s door.  To be fair, IBM showed tremendous respect during the early cut backs.  They encouraged people to retire by offering fantastic financial incentives.  But those incentives grew smaller which each successive cut back.  The last few labor force reductions were simply layoffs – a term that was not in the IBM vocabulary prior to 1994.

With most down-sizing, a company loses valued employees as well as the dead wood.  As a result, they don’t have the resources they need to continue to serve their customers.  So what do they do?  They hire the good people back as “contractors.”

More and more companies are turning to contract employees and, from a company’s standpoint, it makes a lot of economic sense.  A contract employee is paid an hourly fee and that is that.  There are no benefits, no retirement fund, no unemployment insurance, no company-paid social security contributions… and no loyalty.  When a job is completed, the contract is terminated. For many companies, this represents at least a 40% savings over the traditional payroll.  IBM now utilizes contractors for everything from the mail room and secretarial pool to product development and marketing.

In fact, IBM has not only changed their structure from the standpoint of employees, they’ve also changed their product line. IBM now sells services. Hardware and software are secondary products. If they must install a competitor’s equipment to win the contract, that’s precisely what they will do. And, through it all, they continue to be successful.

It’s important to note that IBM has never gone to the government and asked for monetary assistance. Their management team recognized the need to change directions and did so.

It’s not beyond the realm of possibilities to see IBM someday sell off their remaining manufacturing facilities – they already sold their computer printer manufacturing business to LEXMARK many years ago.

Once all the hardware and software development facilities are gone, IBM’s workforce would be reduced to a management team and a variable number of contract employees. For that matter, the management team could also be paid as contractors. Then, it would be a company with no employees doing a land office business!

With this in mind, consider the Big Three automakers and their financial woes. From an ignorant outsider’s point of view, it seems there are many things they could do to right the sinking ship – besides begging for taxpayers’ money so they can continue to ignore the winds of change.

The first thing they should do is sell off as many of their dealerships as possible. General Motors’ 7,000 dealerships sell less than five percent more vehicles than Toyota’s 1,500 outlets. Let some of those dealerships sell the KIA or Honda products.

The second, and much more difficult, action they should take is to change the UAW contracts.

Having grown up in Pittsburgh, and having at one time been a member of the Teamsters Union, I realize many will see my thoughts as blasphemy. But I watched the unions destroy some companies in Pittsburgh. First, their demands caused A&P to close their bakery in Pittsburgh; shipping baked goods in from Cleveland was cheaper than meeting the union’s demands. A few years later, A&P left the Western Pennsylvania market completely because of labor demands.

The same thing happened with the steel industry. I often wonder why the steel companies agreed to a contract that gave the workers a thirteen-week paid vacation every ten years. This was in addition to their normal two week annual vacation. When companies are forced to pay workers to not work, someone has to pay for it. Companies are forced to raise their prices, which opens the door to foreign competition.

I’ve been told that when GM ‘lays off’ workers, those workers are required to report to a facility where they spend the day reading, chatting, watching television, or finding other ways to pass the time – and are paid about 95% of what they were earning before they were laid off. If the ‘worker’ gets bored and goes out to find another job, he or she is finally taken off GM’s payroll.

I believe the problems of the U.S. automakers are a combination of poor management – refusing to build the kind and quality of vehicles the American consumer wants – and union contracts that make manufacturing costs ridiculously high.

In my humble opinion, I believe bankruptcy is the best course of action. That would force the union contracts to be renegotiated and force management to pay closer attention to the demands of the market.

The steel industry died in Pittsburgh many years ago, yet the city is more vibrant than ever. Why? Because the steel workers went out and found new jobs, and other industries moved in to fill the void.

Labor unions, in many instances, are absolutely necessary to protect the worker. But, when the demands of the union leaders cause their members to lose their jobs, the leaders have pushed the envelope too far.

IBM never had labor unions to deal with, yet they have always treated their employees and contractors well.

Somewhere there has to be a middle ground, and this taxpayer doesn’t want his money spent so the Big Three and UAW can delay efforts to find it.