When providing closure What should you consider?

Reprint: R0905C

Many managers have never before had to shrink their operations or workforces drastically. Now, as they struggle to weather the storm of recession, they risk making what the author says is a common mistake: assuming that they will have to make the tough initial decision but can leave it to others to carry out.

Long experience at Corning, Quest Diagnostics, Masonite International, and Accellent taught Freeman the benefits of what he calls a “soft hands” approach, which involves ensuring that employees, customers, suppliers, and communities are treated with consideration and compassion. Such behavior is simply good business. He offers four commonsensical—but frequently ignored—principles.

Treat employees with dignity, fairness, and respect. Tell them why they’re losing their jobs, what you will do to help them cope, and what you’ll need from them during the transition. Communicate fully and often, be visible and personal, and honor company commitments.

Treat your customers and suppliers like valued partners. Keep them informed, consider their needs, maintain your focus on quality, and take pains to transfer the business smoothly.

Manage the layoff or closure like a project. Appoint an experienced, full-time project leader and a strong team. Define stages of the process, establish criteria for passing through them, and conduct regular reviews.

Use judgment and, if necessary, fight back. Don’t be pushed by Wall Street or others to move so quickly that the organization ends up suffering.

The shutdown of a Corning plant in Indiana, the merger of Quest with SmithKline Beecham Clinical Labs, and the closure of an Accellent factory in Tennessee illustrate successful outcomes of a soft-hands approach.

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The Idea in Brief

• When you’re closing or shrinking an operation, you’ve got to be a tough guy, right? Making the hard decision and then getting on with it in order to reap the maximum savings is what matters, isn’t it?

• This conventional approach may please Wall Street, but as Kenneth W. Freeman learned from his experiences at Corning, Quest Diagnostics, Masonite International, and Accellent, it can alienate surviving employees, anger customers and suppliers, and destroy shareholder value.

• A better way is to treat these important constituents with consideration and compassion and manage the shutdown like a complex project. When the medical components maker Accellent shut its Memphis plant, in 2008, it gave employees and core customers several months’ notice, assisted customers through the transition, and helped most workers find new jobs. The results were stronger customer relationships, a highly appreciative group of ex-employees, and greater loyalty among remaining workers.

As the recession has intensified its grip on the world, and I’ve watched companies resort to extreme actions to weather the storm, it has struck me that this is a new experience for a whole generation of leaders. Many managers have never had to shrink their operations or workforces drastically, and as a result they are making a common mistake. They assume that they have to be the tough guys who make the decisions and that afterward they can delegate the implementation to others with one marching order: “Go fast!”

This approach makes no sense. It can destroy shareholder value. In my more than 35 years in industry, much of it in turnaround situations, I’ve come to believe that leaders have to use “soft hands” as well as “hard hands” to be successful. Yes, they must be decisive—they can’t shy away from making the call to close or shrink an operation. But they must also be heavily engaged in ensuring that employees, customers, suppliers, and communities are treated with consideration and compassion.

Morality aside, such behavior is good business. All too often the negative impact of a closure on the surviving business is underestimated. If employees who lose their jobs are treated impersonally, unfairly, or without respect, the productivity and loyalty of their remaining colleagues will suffer. Recruiting new talent will be more difficult. And customers and suppliers that feel burned by a shutdown may retaliate against the rest of the company by diverting business to competitors. How leaders can avoid, or at least greatly minimize, these repercussions is the subject of this article.

Unfortunately, I’ve been involved in many cutbacks and closures—at Corning, where I spent most of my career; at Quest Diagnostics, a medical testing business I headed; and most recently at Kohlberg Kravis Roberts, the private equity firm where I’ve been actively involved with Masonite International, a door manufacturer, and Accellent, a supplier of precision components for medical devices. Those experiences taught me the right way to close an operation.

Learning by Doing

Before I tell you the details of my approach, let me give you some background about how I’ve come to feel the way I do.

In 1972 I joined what was then Corning Glass Works as an internal auditor right after graduating from Bucknell. In August 1975 I was on leave, earning an MBA at Harvard Business School and working in the summer at a Corning operation in Medfield, Massachusetts, when the company announced the largest layoff in its nearly 125-year history. Almost 25% of Corning’s managers were victims of the “Guns of August,” as it was dubbed. My wife and I had friends of all ages who were affected.

Corning had been a paternalistic company, and the cuts marked a radical departure. Their very magnitude was shocking; making matters worse, the company provided only a limited explanation and offered affected employees virtually no help in coping with the shock. Because the layoff was so sudden and quickly carried out, it severely damaged the morale of the survivors for quite some time.

After business school I worked as a financial controller for various parts of Corning and had an insider’s view throughout the 1980s of other decisions to close or shrink operations and lay off employees. Each time, friends and neighbors of mine were let go. Again and again, it appeared that for all the agonizing that might have gone into the decision to reduce staff, the decision often ended up being the “easy” part. Usually I felt that insufficient attention had been paid to how it was implemented. After getting to a decision, leaders felt relieved but didn’t seem to be significantly involved in carrying it out.

A major exception was the 1983 shutdown of a unionized Corning plant that made glass for color televisions in Bluffton, Indiana, a small town near Fort Wayne. I was the division controller at the time. We had two U.S. plants that made the product, but because of a drop in demand we needed only one.

The head of the business was a man named Forrest Behm. He had been at Corning forever. As a kid he’d been badly burned in a fire and had lost the use of his legs for a while, but he’d gone on to become an all-American tackle at the University of Nebraska. Forry was a class act. He really set the tone for the Bluffton closure. He emphatically stated, “We’re going to be honest with our employees. We’re going to tell them what’s happening. We’re going to give them advance notice even though we aren’t obligated to do so under the union contract. And we’re going to make sure our customers are served.”

Accordingly, we told the employees of our plans about nine months before we closed the plant. We explained that we needed to build up enough inventory to serve our customers during the transition and that we couldn’t afford to have workers leave or to let productivity and quality decline. And we helped our workers line up new jobs. The result: Rather than leaving their brains in the parking lot, they delivered the highest quality and productivity ever. Customers were so appreciative that they not only stuck with us after the closure but gave us more business. That experience convinced me that there was indeed a better way.

Since the mid-1990s I’ve put the “soft hands” approach to some major tests, and in the process developed the principles described in the following pages. In 1995 Corning sent me to head Corning Clinical Laboratories, which at the time was the biggest business in the company. In a bid to become a major player in and consolidate the fragmented blood-testing industry, Corning had bought more than 100 competitors. My predecessors had not integrated the acquisitions, however.

When I arrived, the business was in free fall. We had far too much capacity and no common systems, processes, company name, or brand. We were being fined by the federal government for alleged Medicare fraud and abuse. Morale and service were horrible, and our customers and employees were leaving us in droves. To build a sustainable business, I had to get out and help improve employee satisfaction and loyalty to the company. It became crystal clear that if my employees were satisfied and loyal, the customers would follow; if the customers followed, the owners would be happy; and if the owners were happy, some of their happiness would circle back to the employees. Although I had learned this lesson from Forry, it became an integral part of my personal leadership approach at the lab business.

At the end of 1996, after I’d been there about a year and a half, Corning spun us off. I then served as chairman and CEO of the new company, Quest Diagnostics. We embarked on a number of measures to regain the loyalty of customers and employees. We launched major initiatives to improve our processes for everything from collecting and transporting specimens to performing diagnostic tests and billing for them. Equally important, we changed the culture by creating and then religiously adhering to a set of values and goals, which resulted in a radical shift in management and employee behavior. We told people the truth about the business. We let them know how they fit in—how they could help the company succeed—and then recognized their accomplishments. And we made the senior leadership visible and accessible. For example, I invited employees to e-mail me personally with any questions or concerns they might have, vowed that either I or a more knowledgeable person would respond within 48 hours, and then kept that promise.

Once we had stabilized the company, we made a bold move to further consolidate the lab industry by buying the slightly larger SmithKline Beecham Clinical Laboratories (SBCL) in 1999. The integration involved reducing the combined workforce by more than 10% and the number of lab centers from 40 to 27. Making such significant cuts added tremendously to the challenge of melding two fierce competitors into one company. We met that challenge. Tellingly, Quest went on to win accolades for its earnings and stock performance, and the results of employee-engagement surveys dramatically improved.

At the end of 2004 I retired from Quest and a short time later accepted an offer to join Kohlberg Kravis Roberts, where I’ve been ever since. My main responsibility has been helping to improve the performance of a number of companies in KKR’s portfolio. In the cases of Masonite and Accellent this has meant stepping in for a time as interim CEO.

KKR bought Masonite, a global manufacturer of residential and commercial doors, in 2005. I was sent in to stabilize the business and upgrade its processes. As our efficiency increased, we closed a handful of operations and trimmed the workforce a bit. Then, in late 2006, the housing market started to collapse. Since then we’ve lost almost 30% of our sales volume and have had to make radical cuts. All told, we’ve reduced the employee base from about 15,000 to 8,500 and the number of facilities from 80 to 57. Given the dismal state of the housing market, I can’t say that we’re finished. Nonetheless, product quality and customer service have improved, the senior leadership has experienced zero attrition, and employee morale has remained remarkably strong. Executives running the business say that the soft-hands approach largely accounts for these results.

Like Quest, Accellent has been a consolidator in its industry, medical components, and has grown through acquisitions. Shortly before my arrival, in January 2007, the company had gone through major layoffs involving about 530 people, or almost 15% of the workforce, because of weak sales. The cuts had been made in a rush. The leadership did not play an active role in implementation. Neither employees nor customers were given adequate information. As a result, their attitudes were off-the-charts negative. Unfortunately, the slow market forced us to trim our workforce even more in 2008 and to close a factory in Memphis, Tennessee. But we used the soft-hands approach this time around, which made all the difference.

Using Soft Hands

Let me describe in detail what using soft hands means. Although many of these principles may seem obvious or just plain commonsensical, I’ve long been amazed by how frequently they’re ignored.

Treat employees with dignity, fairness, and respect—the way you want to be treated.

Reducing a workforce is painful, but you can do it in such a way that people will someday say, “You know, I once worked for Company X. I didn’t like the fact that they shut my plant down, but I still think it’s a good company.” Here’s how:

Address “What does it mean for me?”

Employees have a right to be treated as adults. They should be told why they are losing their jobs (whether it’s because of a drop in demand, changes in technology, or productivity and quality issues), how the closure will affect them (in terms of timing and severance benefits), what you will do to help them land on their feet, and what you will need from them to help customers through the transition.

Communicate until it hurts.

Studies say that people need to hear a message at least six times to internalize it. The shock of the initial announcement will prevent employees from absorbing everything you tell them at that time. After all, their lives are being turned upside down. So follow up with both written and oral communications. Then keep people constantly informed along the way. Counter the rumor mill with frequent town meetings, and tell people the truth in a forthright fashion.

Also be sensitive to any language barriers. Many members of the workforce at Accellent’s Memphis plant were Vietnamese and didn’t speak English. We brought in translators to ensure that everyone understood our communications.

Be visible and personal.

A closure or a downsizing is not an excuse for leaders to go into hiding. To the contrary, it’s an occasion when people need to see their leaders. I’ve known businesses where the CEO or the division manager was visible when there was something good to say and hid in his or her office when layoffs were necessary. Such people ended up with zero respect in their organizations.

A closure or a downsizing is not an excuse for leaders to go into hiding.

If the operation being closed or downsized is large or historically important to the company, the CEO should make at least one visit. Other executives—the division manager or the head of the business unit—should be visible from beginning to end.

Employees’ accomplishments and contributions should be recognized. Someone might say, “Gee, my factories have thousands of people. There are limits to how personal we can be.” That may be true, but it’s extremely important to follow a general announcement with smaller group discussions led by members of your management team, who should also make themselves available for individual conversations.

Don’t assume that your managers all have the necessary communication skills. Work with the HR department to train them in advance. Serve as a model yourself, coach the managers who need help, and ask senior managers who are good communicators to do the same.

Set the tone.

The leader should take personal responsibility for the organization’s behavior. Although the CEO of a major corporation obviously can’t do all the nitty-gritty stuff himself, he must be engaged and stay abreast of the discussion and the implementation process. During the integration of Quest and SBCL, for instance, I told everyone at both companies, “Yes, there are going to be layoffs, but we’re going to treat everybody—I mean everybody—with dignity, fairness, and respect.” I made it clear to the organization, which was not used to a soft-hands approach, that I was taking it really seriously.

Deliver messages that are consistent and positive but grounded in reality.

To ensure that employees don’t let up during and after the closure or layoff, be as positive as possible and give everyone a purpose. By “everyone” I mean those who know they’re going to leave, those who know they’re going to survive, and those who don’t yet know their fate. Explain that the decision is being made for the sake of the overall business, not because the people who are leaving have done a bad job.

An experience in the early 1990s drove home the importance of providing honest and balanced messages. I was heading most of Corning’s corporate administrative staffs when the company launched a major reengineering initiative. The outside consulting firm that helped with the effort focused on how we would reduce costs by $600 million. I pointed out to the CEO that cost reductions don’t motivate people and urged him to promote the initiative instead as a campaign to reduce costs and build capabilities for the future. He listened. The program, called Corning Competes, was extremely successful. If it had been only a cost-reduction program, we couldn’t have engaged the thousand or more people on the various teams we created to help identify how to make the company more effective. Although a lot of people ended up leaving the company in the process, it wasn’t driven by “Let’s cut the head count.” That experience told me that you can keep your people engaged as you do the challenging work needed to carry out a tough decision.

Don’t summarily throw people out into the street.

I cringe whenever I see newspaper photos of newly laid-off employees toting boxes of their personal belongings as they’re being escorted off the premises of some company. Remember that the world’s a small place and people don’t forget.

Concerns about sensitive information are often used as an excuse for such behavior. I don’t buy it. You can protect information and treat people humanely at the same time. You may have to cut their access to sensitive information immediately—which means, of course, that they will no longer be able to perform their jobs. But you can always give them time to say their good-byes and retrieve personal material from their computers. You can explain, “We will work with you to collect whatever you need. But we hope you understand that we have to protect highly proprietary or confidential information, so we can’t give you unfettered use of the machine.”

Honor company commitments.

The company’s severance policies regarding health care, retirement, insurance, and outstanding bonuses should be explained when a person is hired and should be included in the employee handbook. The company should feel obligated to adhere to those policies. If any of them are changed, employees should be informed at the time—not when they are told they are losing their jobs.

Treat everyone equitably.

Who stays and who goes should be decided on an objective basis. When Quest and SBCL joined together and I was assembling the new management team, senior colleagues who had been with me at Quest for three years said, “We won. They lost. We should be in.”

The SmithKline Beecham folks said, “Our company has been in business for more than 100 years. You guys are latecomers. We really should have bought you. We should run this company.”

I said to both groups, “Not so fast,” and then put the top layers—more than 200 people—through an evaluation process. In addition to considering their past performance reviews, I required them to go through an externally conducted assessment of their leadership skills and behaviors. As you might expect, about half of the senior leaders I chose came from Quest and about half from SBCL.

People throughout the organization took notice. They said, “Hey, Ken is taking a very deliberate approach to staffing his senior team, and if he’s doing that, he’s probably expecting us to do something similar.”

Help people find jobs.

If conditions warrant it, consider affected employees for opportunities at other locations in your company or offer them contract work. At the very least, hold job fairs and help them write effective résumés and learn how to leverage their personal networks.

Put yourself in their shoes.

How can you know whether employees are being treated with dignity, fairness, and respect? Attitude surveys throughout the shutdown or layoff process are one obvious way. In addition, regularly ask yourself how you’d react to various actions or inactions. There are times when managers think, “I have an MBA or a PhD. I’m a really smart guy. So what I would need to know is a little different from what the guy on the factory floor needs to know.” Well, the folks on the factory floor know as much as or more than anybody else in the company about your customers and how to make things work. If you’re going to shut their facility down or relieve some coworkers of their jobs, everybody has to have a common platform of understanding. If it’s not provided, you’ll create chaos and lose a lot more than you gain.

Treat your customers and suppliers like valued partners during the shutdown process, and they will stick with you.

If you’re consolidating operations, you might want your customers to agree to transfer their business from the plant being closed to another factory. If a customer conducts business with several units of the same company, it may retaliate against other units if a shutdown leaves it in the lurch. Furthermore, bitter memories linger for years and people move around, taking their resentment with them to new employers.

Here are some ground rules for keeping customers and critical suppliers happy during a shutdown:

Make sure they’re informed and consider their needs.

You don’t want your customers learning in the newspaper or on the internet of your plans to close an operation. Before announcing the closure of Accellent’s Memphis plant, we went to our core customer, Medtronic, and said, “We want to shut our plant as soon as we can, but we want to work out a solution that serves everyone’s interests.” We had a good relationship with Medtronic before the Memphis closure, but it strengthened dramatically because of how we handled the closing.

In some cases such an arrangement might mean keeping an operation open longer than you initially wanted. In others you might learn that you overestimated customers’ needs and can close a facility sooner than you thought.

Of course, you can’t always give customers everything they want. A balanced approach is important. But when you’re calculating the economic impact, be sure to weigh the value of the customer relationship. The higher cost of putting off a closure by a week or even several months may be more than offset by the future business your company gains from an appreciative customer.

After you strike a deal, keep customers informed of progress and any hiccups that occur along the way. Have managers in your organization provide a weekly update.

Don’t reduce the focus on quality.

This is one more reason to treat employees of an operation that’s being phased out with respect; you don’t want disintegrating morale to take a toll on quality. Leaders should regularly remind everyone of the importance of quality and keep measuring and celebrating it. They should also practice what they preach. If the company stops cleaning the restrooms, the odds are that workers won’t clean their work areas or strive to provide superior quality and service.

Use appropriate incentives to retain critical employees.

Who they are isn’t always obvious. For example, you almost always have employees who know how to run a particular machine or database that is crucial for serving customers. It’s important to make sure you don’t lose that knowledge or capability during the transition.

Work with suppliers to ensure that service and product quality are sustained.

If they find out secondhand that you’re closing an operation, they may unilaterally decide how they’re going to cope. Like customers, important suppliers should be treated as partners and be told in advance where you’re heading and why. Then hammer out a joint plan with them.

Like customers, important suppliers should be treated as partners and told in advance where you’re heading.

Take pains to transfer the business smoothly.

If a customer intends to transfer its business to a competitor and you will no longer have the capability to serve the customer yourself, offer to work with the competitor. If you’re moving the business to another operation of yours, don’t assume it will be easy sailing. It can be complex—especially in a heavily regulated industry. The surviving operation may need to be certified or may lack certain equipment or capabilities, which may have to be moved from the facility being closed. This raises the level of complexity another notch. Preventing a disruption in customer service requires disciplined project management, a topic I’ll discuss next.

Manage the closure or layoff like a project.

If you wanted to expand the capacity of a factory, you’d employ project-management techniques. Why is it that the same kind of discipline is so rarely applied to closures? Considering how much money, credibility, and reputation can be at stake, it doesn’t make sense. Here’s some advice:

Appoint an experienced, full-time project leader and a strong team.

Typically, this assignment is bigger than the plant (or department or functional) manager’s role. So although the project manager must work closely with the plant manager, he should report to the CEO or division manager and the plant manager’s boss. The role can be an outstanding developmental opportunity for a high-potential performer and provides managers with a chance to watch people grow, to coach them, and to determine what they are really made of.

The project leader should have sufficient experience, authority, and credibility in the organization to address the interests of all constituents: the company, employees, customers, suppliers, and communities. Masonite and Accellent have leaders who bring the full package. Engineers by background, they are people-oriented and good communicators, and have run substantial parts of the company. They have high credibility with the employee base and customers, and they get results.

The project leader should assemble a team of people with the special expertise that’s required. I don’t mean just technical skills: Product knowledge, customer sensitivity, disciplined focus, and strong people skills are extremely important, too.

Use the techniques of conventional project management.

Define stages from the planning phase through the closure; assign clear responsibilities; establish criteria that must be met to get to the next stage; and conduct regular reviews involving senior leaders.

Use judgment and, if necessary, fight back.

Managing a closure or a workforce reduction like a project does not mean mechanically going through steps and checking off all the items on a list. Considerable judgment is involved. If a customer repeatedly asks you to postpone a closing, you will ultimately have to decide when you’ve gone far enough. Often there’s a fine line between doing the right thing and being abused.

At the same time, resist those who would have you go so fast that the wheels fall off. I still remember how Forry Behm pushed back when some Corning executives pressed him to close Bluffton quickly. After the merger of Quest and SBCL, I had to stand up to Wall Street, which looks only at numbers. Analysts told me, “You’ve got to go very fast, Ken, and get those synergies right away. Just get it done.”

I said, “No, we need to have a business when we’re through. We’ll get the synergies, but it’s not going to happen in three months, because we’re going to proceed in a deliberate manner, making sure that we take care of our customers and our employees.” In the end, the integration took almost three years, and we created much more value than if we’d done it the old-fashioned way.

A version of this article appeared in the May 2009 issue of Harvard Business Review.

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