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Downsizing to Death is not an Alternative to Growth

Everyone needs to consider their investments in corporations that have been using job cuts as an alternative to growth, and in essence keeping their bottom line in shape. With the economy in a recession, it's that time again for large corporations to start slashing jobs and trimming the fat, all in the name of profitability. However, I think we may start finding out that there is not a lot of fat to cut, and through this exercise we could be cutting into the bone, or better yet, their revenue generating muscle.

If you take a look at many of the large corporations, they have been going through a protracted cutting exercise that hasn't really factored into our employment numbers because of the gradual nature of the layoffs. Up until the last 12-18 months, those unemployed workers have been getting somewhat absorbed into the system. However, over the last year there has been about a 1% uptick in unemployment and that number will most likely continue to rise a bit. The traditional thinking around downsizing is that the remaining workers will pick up the slack, and because of this, it will make a company more profitable. However, what happens when a company downsizes to a point of breakage, where the remaining workforce can no longer handle the additional load and they cease to be effective. In essence, they start running into a standstill and I guess we could call this the "Downsizings Negative Returns Theory."

When compensation plans for executives and senior management are weighted heavily on short term profitability, we could run into a conflict of interest between the corporations long term well being and personal compensation. When CEO's started adopting Jack Welch's philosophy of cutting the 10% lowest performers, they missed a very important component of this plan. You actually need to backfill those positions. You can't remove the bottom 10%, give their work to the remaining employees, and expect them to continue to perform at a high level. It is like removing a flat tire and expecting a car to run better on the remaining three tires; absolute madness that has no basis for short-term or long-term performance. I think it's clear that bottom-line profitability is a party that can last only so long without top line growth, and the loot bags are already starting to get passed out because the party is over.

Copyright Dominic Mazzone, Regent Global Funds 2008

This article was written by Dominic Mazzone, Managing Partner and Fund Manager of Regent Global Funds.

This article and other like it can be viewed at http://www.investingsymposium.com which is part of the Regent Global Funds Network.

Regent Global Funds, http://www.rgfunds.com, is an alternative investment fund that offers its participating investors and asset backed investment through asset based lending.

The Fund Managers of Regent Global Funds have an expertise in commercial real estate lending and have created a successful alternative investment vehicle that is diversified through this structure.

They separate themselves from other fund mangers by personally investing their own money side-by-side with their investors in the fund, creating an absolute structure of accountability. Dominic Mazzone has written about the need for this type of accountability in an article titled "Fund Managers Need to be Accessible and Personally Invested."


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