A New Paradigm for Corporate Personnel Cuts

We have an interesting situation occurring in the area of employment and cost. It is now assumed that recessionary impacts (whether it is a true recession or not) are happening. US spending is down, jobs are down, and everyone knows about the housing market. But a normal recourse is corporate cost cuts. One of the cuts is personnel.

There are two forms personnel cuts take:

  • General layoffs to slim down the organization (usually resulting in rehires once the market changes)
  • Outsource layoffs where the cut is permanent and the work is performed on a contract basis

The problem I see this time around is that the US is leading the downturn in the economy. Historically (over the last 90 years or so) the US is the strongest economy. Corporations could look elsewhere to get manufacturing (China) or services (India) because they could do it much cheaper, essentially because of the cost of personnel. But now, the rest of the world is raising their standard of living. China is growing their middle class very quickly and India’s wage pressures are up significantly. This is in addition to the dollar being weaker than many foreign currencies making US goods and services cheaper in comparison.

These factors take the second bullet out of consideration. The real cost is no longer assumed to be cheaper over the extended term. So what I see on the horizon is a corporate downsize as described in the first bullet. But uncertainty remains. These cuts tend to be only temporary because production tends to suffer, plus you have the baby boomers potentially getting very large severance packages where they take with them an experience factor.

Maybe a result of all this is a rise in service firms in the US. Right now IBM dominates this field, especially regarding technology. New boutique shops could open and be more productive and cheaper than offshore outsourcing. This is a long shot, but who would have thought India would get too expensive?

Addendum: IBM announced that they beat earnings today. Much of their growth came from global sales. This is even beyond what I write above. But it looks like the US could become the location for successfully growing global entities to send their off shore work to. We’ve already seen Citi get a cash infusion from the Middle East, so who knows.


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