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The Business of Magic
A look at the business of Disney
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Alex Stroup, Editor

Layoffs... discussing the recent Disney downsizing

Back on March 27, The Walt Disney Company announced that it was going to lay off around 4,000 of its 120,000 employees, or roughly 3% of the company's workforce. This was, according to the e-mail Michael Eisner sent to all Disney employees, "to help us achieve our goals for reasonable long-term growth and profitability and to ensure that our businesses retain their industry leadership and creative strength." About 1,400 of those being let go came from Walt Disney World in Florida and another 250 from the Disneyland Resort in California.

Sleeping Beauty Castle at Disneyland
Sleeping Beauty Castle at Disneyland

Actually, I hate to use the word "layoff" for this. Originally, a layoff meant employees would be temporarily out of work but would be hired back when business picked up again. Auto workers, for example, were often temporarily sent home when car sales slowed and would then be brought back when demand increased. But in Disney's case, this is not a layoff - Disney has no intention of hiring these people back. So let's call it what it is: these people were fired.

Given that firing people isn't the most compassionate thing you can do, at least the management at Disneyland and Walt Disney World did it in the best and most sensitive way possible.

The Wrong Way: The wrong way to fire employees is the Pearl Harbor- style sneak attack, where management secretly plots the downsizing, and then surprises the workforce one morning by firing a whole bunch of them without any warning. Obviously, this is lousy for the people being fired, as they have no idea what is coming.

These now ex-employees may have just made a financial commitment (say, a new car or a new house) that they might not have made had there been any warning at all. This method is often very emotionally damaging to the fired employees, because it causes them to feel a lack of control over their lives. A surprise mass firing is also bad for the remaining workers, since the act breaks the trust between them and their managers. The surviving employees, knowing the firings were kept hidden from them, now wonder what else the company is concealing -- perhaps even another round of worker elimination. This mistrust can take years to heal itself.

The Disney / MGM Studios in Walt Disney World
The Disney / MGM Studios in Walt Disney World

The Right Way: The Disney theme parks did it the better way. They started with a Voluntary Separation Plan that gave employees a severance package: a monetary incentive to leave the company. The idea here is to let people leave on their own - to allow employees to leave if they want to.

This method avoids one of the worst outcomes when management fires someone: having that person's replacement, who may have been secretly considering leaving the company anyway, to quit soon after. Instead, by allowing people to leave on their own, the company can retain those employees who want to stay, and use those who do not to help the company meet its goals.

Voluntary separation has other benefits as well: it gives those who leave a sense of control over their lives and careers, it means less people will have to be outright fired, and additionally, it gives the workforce ample notice of what is going on. This allows all employees to plan -- both emotionally and financially -- for either leaving now, or for the potential of being let go in the next stage of the downsizing.

If the company doesn't get enough workers to accept a voluntary severance package, the next stage is non-voluntary firings.

Disney's Parks and Resorts unit had to do this too. While firing employees is never something management wants to do, at least by using this approach most employees are aware of the possibility and can plan for it.

It's not as big a shock, and there isn't the management deception / breach of trust that comes with the "sneak attack" approach. So kudos to Walt Disney Attraction's executive team for taking the best and most humane approach to a bad situation.

Team Disney building Anaheim
Team Disney building Anaheim

But Was It Necessary?

Nevertheless, I'm not convinced that these "layoffs" were needed. Mind you, I don't blame the Parks' management for this.

Since the "headcount reductions" were company- wide, the orders most likely came from the highest levels of Disney corporate management. With the marching orders from above, the Parks' managers did as humane a job as possible.

So why I do I think this step was unnecessary? Because while the end goal of decreasing the payroll is to save money, in the short run it is extremely costly to fire people. There are the easily visible costs such as for the severance packages, as well as costs to the company that aren't obvious on the financial statements. These include the managers' time and effort lost planning the layoffs, the productivity lost to lower employee morale, and the productivity lost in trying to adjust after the layoffs - for example, how to get all the work done with fewer people and who's going to do what. In addition, there is of course the emotional cost to the terminated employees and their families. And finally, there is a cost to the community: the effect on the local economy as fewer people are spending as well as the societal (unemployment insurance, counseling, etc.) that we all end up paying part of.

And finally, there is the issue of what happens when business improves. Firing all these people doesn't decrease the workload. And unless they significantly over-hired in the past year or two, this can become a problem if they need more people in the next year - especially if the economy picks up. They will then have the additional cost of recruiting, hiring and training a bunch of replacement workers. This happens quite often: a one large survey in the early 1990s found that most laid-off positions are refilled within two years.

The point here is that layoffs are a difficult and expensive way to cut costs. Disney needed to cut costs? Fine. But there are better ways to do this, all without firing people.

For that matter, layoffs haven't proven to be all that effective at increasing profitability - a study by the American Management Association after the last recession found that less than half - 43.5 percent - of companies that downsized actually improved their operating profits.

On the other hand, big layoffs, especially when publicized in the press, are a great way to show Wall Street that the company's management is proactively "doing something" when things aren't going well.

Team Disney building in Burbank
Team Disney building in Burbank

When Mass Layoffs Are Justified

There are times when a layoff is the right course of action, despite the many costs incurred. But mass firings are strong medicine with the potential nasty side effects mentioned above. Just as you do not apply a tourniquet for a scratch, you should not fire a boatload of people just to make a little extra profit. For this reason, a company should avoid layoffs except under two circumstances -- when it is:

  • losing money and in danger of going out of business, or
  • reorganizing so severely - for example, dropping entire lines of the business - that certain skills or knowledge is no longer needed.

Allow me to boldly state the obvious: Disney is in neither of those conditions. First, Disney is in no danger of going out of business. While the quarter that just ended isn't going to be pretty, thanks to lower theme park attendance and other problems, the company is still pretty likely to turn a profit - just not as big a profit as they would have liked. Second, I haven't heard of any major reorganization or restructuring - especially in the Parks and Resorts group. It's not as if the company, for example, decided to outsource all maintenance or food services and no longer needs people with that knowledge.

No, the reason for these layoffs was, as the executives touted often to the financial community, to cut costs. Which, of course, means to make more profit. In fact, Disney clearly stated it was going after the highest paid employees, not ones with outdated or unneeded skills.

How to Save Money Without Firing People

However, there are better alternatives to firing people in order to save a little bit of money in bad times. These can save just as much money for the company, but without all the costs of firing: no morale hit, no lack of capacity in the future, no ruining of peoples' lives. Here are three of my favorites, which have been used often in the Silicon Valley - especially in the last few months:

  • "Nine out of 10" : Exactly what the name says. Employees work nine days every two weeks instead of 10 until business improves.

    Although many high- tech firms using this approach simply close the company down every other Friday, this wouldn't work for a theme park that must remain open every day. Disney employees would all have to take different days off to make sure the parks can run smoothly, but it should be pretty easy to coordinate this informally within each department.

    Theoretically, this plan would save exactly 10 percent on employee expenses over the period it is used. But since for a theme park the ride operators and such must still work when the park is open, only management would be on such a plan. This would mean smaller savings of maybe only 4 percent to 5 percent of the total payroll. This, coincidentally, was about the layoff target Disney was shooting for.

  • "Forced Vacation" : Every employee is asked to take one or two weeks off during the quarter. If everyone took two weeks off, that would about a 15% payroll savings during the quarter (or a 4% savings for the year). Generally, this is time off without pay, but employees can use their vacation time for some of it if they wish. Like the nine-out-of-10 plan, Disney could probably only apply this to management and thus get a lower total saving, but still without having to fire a single employee.

    Personally, I've been through such cost-saving measures twice during the last recession in the early 1990s, and they worked very well. They went smoothly and there was very little, if any, morale fallout. An extra benefit for the company is that the amount of accrued vacation is lowered. Accrued vacation is recorded as an asset that shows up on financial statements as soon as employees earn it. This additional asset, in turn, affects a key financial measurement, called "Return on Assets" or ROA.

    Basically, ROA is profits divided by total assets, a measure of how much return the company is getting on the money invested into the business (the assets). For the same amount of profit, lower total assets means a higher ROA. So using up accrued vacation time not only saves the expense of paying employees during a rough time, it can also improve the ROA measure.

    Note that forcing people to take time off - either be using vacation time or without pay - may not be allowed in California without triggering overtime pay regulations. Although the practice been used often in the past, state regulators will be taking another look at this practice in August.

  • Pay Cuts: This isn't as bad it sounds. Would you rather take a 10 percent pay cut for a while, or either get laid off or have to do more work because someone else in your department got laid off? Quite often, employees choose the pay cut. Actually, lower- and mid-level employees usually don't need to take quite that big a pay cut because senior managers typically show leadership by taking a larger pay cut, often 20 percent or more (by the way, that's a hint, Michael).

ABC headquarters in Burbank
ABC headquarters in Burbank

So, in summary, while the managers at Disneyland and Walt Disney World did a good job in the way they handled this set of layoffs, they probably didn't need to get rid of these people to save money. There are other alternatives that Disney could have used to get the same savings without firing people.

The company says the layoffs are done for this time. However, if I were a Disney employee right now, I'd be worried. That's because the American Management Association did another study and found 60 percent of companies that laid off people during the last recession in 1992 laid off additional employees the following year. So the odds are that Disney, too, will be getting rid of more employees over the next year.

Let's just hope they try out some of the alternatives first.


I think that’s all I have time for today.
If you have any Disney- oriented business questions or things you’d like to see me write about, e-mail me at DanS3@aol.com

Layoffs

 

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