When laying off is hard to do

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They also have time to consider various theories about how far the banks are likely to cut staff if the economic downturn continues, and how they would go about doing it.

The global strategy firm Bain argues that for the first six months of a downturn, there is a natural tendency for banks to be in denial about what is happening. Staff are hoarded for the recovery which the banks believe is just around the corner.

Vicky Bindra, a manager at Bain in New York, says: 'The big axes fall only when a preliminary period of six to nine months has passed. That watershed is now approaching.'

If that is correct, the lay-offs announced last week by Dresdner Bank - 1,500 in corporate and investment banking - could be a taste of things to come.

But Chris Ellerton, global banks strategist at UBS Warburg, says that forecasting is difficult. One reason is that conditions are very different from 1998, the last time that banks made substantial cuts.

Ellerton says: 'Unlike 1998, the current situation is not the result of a market crash, but a very marked slowdown. For the last two to three months it has been very hard for anyone to get an accurate fix on underlying revenue levels.

'After a run of record years, knowledge of normal revenue levels has been lost. Banks are taking the softly-softly approach until the situation is clarified.'

There is also an element of 'Mexican stand-off', he adds. Banks fear their reputation will suffer if they cut more than their rivals. The result has been that job culls so far have been lighter than many people had predicted.

Stephen Brooks, an investment banking expert at PA Consulting, says that banks move as a herd: once one makes big cuts, the others are more likely to do the same.

As with real herds, such moves are often seasonal. Brooks, who helped to organise redundancies at Morgan Grenfell in 1988, says that early autumn is a prime season for job losses as banks contemplate the bonus pool and future spending plans.

Analysts, associates and support staff are the most vulnerable, he believes senior revenue generators may be safer, while many operations staff may be safest of all.

'Even when you close a business, you still need operations staff to run it down. When Morgan Grenfell pulled out of equities in 1988, it was five years before the last operations person left,' Brooks says.

If more job losses are on the way, banks will have to decide whether to implement them in one fell swoop, or slowly over weeks and months.

Darrell Rigby, head of management-tools research at Bain in Boston, says that companies are better off biting the bullet and making all the necessary cuts at once.

His conclusions are drawn from a study of the effect of lay-offs on the performance of Fortune 500 companies following widespread culling in the early 1990s.

Rigby found that a single staff cut was as likely to be positive as negative in its effects on company performance, while multiple lay-offs tipped the balance in favour of a negative outcome.

Two factors contribute to the failure of multiple lay-offs, Rigby believes: loss of management credibility and a fall in the productivity of workers who are left behind.

In the first case, he says that managers often try to restore morale after a lay-off by insisting that all is fine, only to lose credibility when more people are laid off later.

In the second case, remaining workers can suffer from 'survivors' guilt', or from risk aversion.

Rigby accepts that survivors' guilt is probably rare in as cut-throat an industry as investment banking. Risk aversion, however, is a possibility: 'Employees become preoccupied with the fear that when the music stops they will not have a chair.'

The smartest companies not only shed staff in one go, but at the same time abolish the tasks with which they were associated, Rigby believes.

'There is a tendency to eliminate staff without eliminating the activities that they perform. Remaining employees suffer, costs eventually return en masse, and a valuable opportunity to restructure is squandered,' he says.

An executive at an outplacement firm says, however, that many banks in London have been shedding staff this year in small batches. 'They're letting them go 30 or 50 at a time,' the executive says. He adds that this might be the best policy, as a sudden large lay-off can cause panic.

Rigby offers some consolation to banks that may feel they are clinging on to unneeded staff. 'If employees see the employer doing everything it can to cut costs without reducing headcount, loyalty will increase,' he says.

He adds that the average US recession has lasted only 11 months, something banks should bear in mind if they are planning more lay-offs.

Merrill Lynch axed thousands of staff in 1998, almost all in bonds and emerging markets, only to go on a hiring spree again a few months later when the markets picked up.

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