Where Intel went wrong with layoffs - analyst opinion

Posted by Rob Enderle, Principal Analyst, Enderle Group

This week Intel announced they were going to layoff over 10,000 workers and, strangely enough, the stock market reacted negatively to this news. This may have been one of the biggest blunders for a company having a great deal of difficulty this year.

Here in the Silicon Valley we recently had one company, HP, demonstrate both the right and the way to do a layoff. Under Carly Fiorina HP languished for a number of reasons not the least was her inability to understand that people are not mindless objects and need to be handled properly. Mark Hurd later came in, did one very crisp layoff and HP is now doing what many thought it would never be able to do and beat Dell on a number of fronts.

In my own experience with corporate turnaround efforts, layoffs with the Mark Hurd HP example being the rare exception, most often happen when a company has not fully analyzed a problem and the executive management is trying to buy time. The result is that the layoffs do more damage than good and the Intel layoff appears at the outset to be no exception to this rule.

In this current instance, the reason Intel is having problems is because they have lacked focus, have been unresponsive to customer needs, and apparently have a number of high ranking executives learning on the job.

Understanding the "why" behind Layoffs

The "why" behind a layoff is generally to address the short term concerns of the financial analyst community with regard to profitability. They are designed to quickly bring costs in line with revenues, but often fail in this primary task.

Financial analysts are focused on quarter to quarter results and anything that makes a company more profitable over the short term they generally like even if, strategically (over the long term) it is bad for the company. This also includes things like stock buy back programs which reduce a companies resources in exchange for increasing the firm's stock price while often holding the overall value of the company constant.

Watching a company do stock buy backs and layoffs should be a huge flag to both long term investors and to employees of the company that things probably won't get better because the company's executive team is simply focused on appearance and not substance. Much like a fresh coat of paint won't fix a badly rusted car; these efforts become more a cover up for deeper problems that should have been addressed instead. This isn't to say that there aren't times when downsizing is appropriate. Markets do decline and the fortunes of a company can change, but there is a right way and a right time to do them.

The right way is as HP's Mark Hurd and IBM's Louis Gerstner demonstrated very fast so that that the company can move on, the right time is almost never and only as a last resort.

The dangers of layoffs

We've known for the better part of a century that the way to take an employee's mind off the job is to threaten their security or income. We've found, through substantial research, that if you put a person's job at risk and give them no way to address that risk they will not focus on the job and their productivity will drop dramatically. We also know that, under conditions where a person's job is at risk, you have a higher potential for inside crimes including capital crimes. For instance, the term "going Postal" has often been connected to someone who didn't agree with their own firing.

The broader problem was recently documented in a report done of Department of Justice prosecutions for cyber crime between the years of 1999-2006. In this report, instance after instance, people who were upset with something the company did to them, they vented their anger by either selling confidential information or by destroying systems. I personally recall an instant where a laid of CIO purposely destroyed his company's systems as a result of receiving a lay off notice.

Finally, layoffs break relationships between companies. These could be vendor relationships or customer relationships. This can range from personal to business. Someone in a large multi-national company may have a relative that is laid off and, as a result of being bitter about the action, may (and often does) take their business elsewhere.

While there always is a risk with termination, in a layoff this risk can become astronomical, and because several lines of management may go at the same time, senior management may not even know it exists until after the damage is irreversible. On the business side, people are often loyal to whoever handles their account well. Whether a sales person or an executive, if the key person ends up at a competitor, there is a good chance that the account will follow.

This typically means that layoffs, particularly if done poorly, can have a much larger negative impact on the firm than a positive impact and that is why may professional management consultants suggest they only be used as an extreme measure or last resort.

Intel's Christmas Present to AMD

So layoffs should only be done as a last resort and, if they are done they should be done once by a CEO and very crisply. In Intel's case they had other options, they have done other layoffs with the current administration, and this recent layoff will occur over a relatively long period of time.

The end result should be a less competitive Intel which is likely why the stock market had the unusual negative reaction to this one. This not only gives AMD some breathing room it provides them with the opportunity of being able to cherry pick Intel employees many of which won't, for some time, know whether they still will have a job with Intel and may be more than willing to change for a more secure future.

Intel's big customers, who were already basing many of their decisions to move to AMD on the fact that AMD was being more responsive to their needs, will see a near term future where Intel may not again be able to execute largely due to a poorly handled layoff and should increasingly favor AMD with design wins as a result. These wins are even coming in the face of what appears to be the most competitive product line Intel has had in this decade.

In the end, this latest Intel decision appears like a champion runner, who, just after regaining the lead, decides to cut off a foot to reduce its racing weight. A bad idea.

Rob Enderle is principal analyst for the Enderle Group. He can be reached at renderle@enderlegroup.com.