Mixed messages from banks that downsize

After several years in which the knife has been liberally wielded, thousands of staff made redundant and entire divisions lopped, it would seem reasonable to think that investment banks have got the hang of "downsizing".

In fact, this may not be the case. Downsizing is a delicate business. Pervasive uncertainty regarding job security and the fact that some employees have been informed of their fate by car park attendants or locked computer systems, suggest banks still have a lot to learn. It is a problem, because redundancy, if ineptly undertaken, can do more harm than good to the company.

Peter Baynham, a European partner at William M Mercer, the HR consultancy, says a round of redundancies has the potential to deeply unsettle an organisation. "All the good people decide immediately to make the first move and leave of their own accord. People suspect it is the start of death by a thousand cuts."

If insensitively handled, redundancy can lead not only to an exodus of top talent, but to shattered morale among those left behind. These apparently lucky individuals may be gripped by a sense of inadequacy and "survivors' guilt", a syndrome also found among people who have escaped calamitous plane crashes.

Encouraging people to move on of their own accord can help avoid such an outcome. Maury Peirperl, a professor of organisational change at the London Business School, says the best redundancy programmes are comprised entirely of voluntary redundancies and early retirements. Programmes of this type reduce the need to prise away individuals who are content to remain where they are, and minimise organisational wounds.

This is all very well, but the cuts required by investment banks have often been too deep for voluntary redundancies to suffice. Merrill Lynch, for example, undertook an ambitious programme of voluntary redundancies in 2001. All 66,000 employees were invited to walk away with 12 to 54 weeks' pay, plus a guaranteed 40% of the previous year's bonus. Although 9,000 took the firm up on the offer, Merrill made several thousand more staff redundant in 2002.

Peirperl says the most inept redundancy programmes are those which mismanage expectations. "When employers say, 'We are going to take one big hit, get rid of everyone we need to at once in order to have stability later', but they go on to make further redundancies, it can be extremely damaging."

Certainty is essential, says Peirperl. People do not like surprises, but do like to know exactly what is going to happen. Companies must communicate with their staff. Once individuals know the level of risk involved in a situation, they will find it much easier to cope.

Investment banks have certainly been busy sending ominous messages about the implications of market conditions. There has been some clear talking, with JP Morgan's Geoff Boisi, for example, saying: "The bottom line is we have too many people working on too many similar tasks."

However, by Peirperl's standards, there have also been mistakes. Months after declaring itself fully committed to European equities, Bank of America, for example, closed its European cash equities division in March, with the loss of around 70 jobs. Hank Paulson, chairman and chief executive of Goldman Sachs, implied the potential for widespread job cuts when he said in January that 15% to 20% of Goldman employees added 80% of the value. He later apologised for "glib and insensitive" remarks.

In their book, The Knowing-Doing Gap, Jeffrey Pfeffer and Robert Sutton, professors at Stanford University, say successful redundancy programmes espouse predictability, understanding, and compassion, while giving people as much control as possible over their fate.

To achieve this, Pfeffer and Sutton say individuals selected for redundancy need to be informed as soon as possible. They remark on the unfortunate example set by Citibank, the retail banking arm of Citigroup, which announced 10% redundancies in 1997, but was not compassionate and did not make it clear who was going. The bank was apparently beset by fear and uncertainty as a result.

Linda Jackson at Penna Meridian, a City of London outplacement specialist, says investment banks need to strike a balance between individual needs and organisational needs. In opaque market conditions, Jackson says it may appear to suit the bank to delay making precise decisions about redundancy for as long as possible. However, individuals will be unable to relax until the process is over.

Friends on the inside can help confirm or allay individual's fears. One former banker describes how she learned she was being made redundant from a colleague days before she was officially informed: "It was certainly nice to have the opportunity to surreptitiously clear one's desk and prepare one's reaction in advance."

In order to reduce the likelihood of highly emotional or aggressive reactions, there are many informal rules about how to inform redundant individuals about their fate. Bruce Lagden, of outplacement consultants Right Coutts, says unless a whole division is being made redundant (in which case everyone can be told at once), the bad news should be imparted during individual meetings with line managers. Lagden advises they should then be given the option to meet an outplacement adviser, and if necessary to leave immediately.

"Often people who have been upset will not want to go back to their desk. They might prefer to go somewhere else and have their stuff brought to them," Lagden says.

Employers are also advised to depersonalise the reasons for redundancy. "You need to make it clear that it is a business, not a personal issue," says Jackson. Lagden agrees: "It is the jobs, not the people that are going."

Finally, as well as using euphemistic terms such as "downsizing" and "rightsizing" to refer to redundancies, firms should wait a while before recruiting.

Research by Bain, the strategy consultancy, indicates that after severance packages, temporary declines in productivity, and costs related to rehiring and retraining are taken into account, positions must remain unfilled for as long as 18 months if there are to be any real savings. With many banking redundancies dating back to 2001, it may soon be time for banks to start hiring again.