Cisco Systems, Inc.'s Layoffs Aren't Good News

Last week, Cisco (NASDAQ: CSCO  ) dropped a financial news bomb. It plans to deliver pink slips to 6,000 employees. Sadly, this news shouldn't surprise anyone who's been watching the market for a while. Like barbecues, pools, and relaxing, lay-around vacations, Cisco's been making layoffs a summer tradition.

Many investors cut companies a break for reductions in workforces, generally assuming they will juice profits. In truth, companies like Cisco are playing a dangerous game. We can't underestimate the risks that layoffs will destroy value instead of add to it.

History repeats at Cisco
Cisco didn't deliver great results when it made its announcement. Last year, its revenue fell on an annual basis for the first time in five years , dropping 3% to $47.1 billon. Although earnings per share dropped 20%, it still generated $1.49 per share. Despite less-than-rocking numbers and the need to contend with an evolving times, the company's not exactly in dire straits.

Here's a rundown of other layoff events at Cisco.

  • Last June, Cisco cut 4,000 jobs. It made that move despite the fact that it was still a profitable company with cash on its balance sheet. That should have raised eyebrows. In other words, things weren't that bad, unless one is worried about short-term profits, stock price, and what Wall Street thinks.
  • In 2012, Cisco reduced its head count by a less dramatic but still considerable 1,300 .
  • In 2011, Cisco sent 6,500 employees packing.

This time around, CEO John Chambers said that this latest layoff isn't about putting a lid on costs, but rather, it's "investing for growth." That seems awfully flip after repeatedly utilizing this tactic and not exactly providing the kinds of results people have been looking for.

Given Cisco's profitability and the $52 billion on its balance sheet , are repeated layoffs really justified? Although many investors probably hope for some strategically smart acquisitions, many companies' acquisitions end up falling flat over years' time. Some people invest in their workers; others throw money around on window dressing that covers confused strategy.

A tech layoff triple play
Of course, despite the economic recovery that's been publicized, Cisco isn't the only tech company that's pushing people back to the unemployment office.

In May, Hewlett-Packard (NYSE: HPQ  ) announced its intention to cut 16,000 jobs. That's a breathtaking number, but it's even more shocking given its previous plan to jettison 34,000 jobs, really putting the "massive" in "mass layoffs ." Maybe these changes will improve the future, but it's still a major risk that shouldn't be ignored.

Microsoft (NASDAQ: MSFT  ) has joined the litany of major tech layoffs. A month ago, it revealed that it will reduce its workforce by 14%, representing 18,000 jobs . About 12,000 of those jobs are connected to its acquisition of Nokia, which it paid $7.2 billion for last September .

More can be lost than won
Restructuring. Right-sizing. Streamlining. Cost cutting. These words describe layoffs, but such terms and numerical descriptions deflect the concept that actual people will lose their jobs.

The problems here aren't limited to sentiment, though. The danger also relates to business strategy. Deteriorating employee morale is bad for any business. That's how managements can kill innovation, not to mention shrink the will to come to work and do a good job at all.

Engaged workers are the best workers. If they're treated well and excited about their work days, feeling appreciated and rewarded, there's far more incentive to shine.

Lost talent is another huge risk. In the case of the tech world, the new guard is well under way -- they're boosting their workforces and looking for many ways to make their employees happy. Companies like Google (NASDAQ: GOOG  ) , Facebook (NASDAQ: FB  ) , and LinkedIn (NYSE: LNKD  ) offer their employees benefits and perks that short-term cost-oriented managements would likely call insane.

There's absolutely nothing crazy about fostering a workforce that doesn't see much reason to leave; feeling appreciated and garnering more than just a paycheck builds loyalty. Why would employees love their jobs, or feel any loyalty at all, if their companies' management teams display scary, short-term strategies, and when they screw up, have axes that are apparently kept well-sharpened and ready, easily in reach.

Last but not least, employee turnover is actually a major cost, not a benefit. It's a lesson that's apparently hard learned for many corporate managers that treat people as a commodity to be used until it doesn't seem useful anymore.

Changing the perception of layoffs
Layoffs are scary; many of us know how painful it is to be shown the door. In the grander scheme of things though, more people, especially investors, should be extremely concerned about the ripple-effect ramifications of mass layoffs, especially in the companies they own. It's time for a perception change: these can be more about managements' failed strategies than anything employees did. Shareholders shouldn't accept them with bullish excitement, or a status quo shrug.

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Check back at for more of Alyce Lomax's columns on environmental, social, and governance issues.

Read/Post Comments (8) | Recommend This Article (31)

Comments from our Foolish Readers

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  • Report this Comment On August 20, 2014, at 3:40 AM, CorporateBurnout wrote:

    Very well written and pretty much right on the nose. There are a number of sites on the internet that are seething with general disgust for the goings on inside Cisco right now.

    Morale is at an all time low, productivity is nearly zero as layoffs are announced, yet nobody knows when, where or who for that matter.

    One can only hope it will improve, but recovering from the damage done over the last 4 years will be a long time coming

  • Report this Comment On August 20, 2014, at 9:16 AM, Mathman6577 wrote:

    While there will be layoffs (and for the people affected it is not good), according to Cisco the net number of employees will be about the same this time next year. Basically the company is shedding staff in some areas and hiring in other areas. I wouldn't worry too much about this issue ---- all companies (even Apple and Google) do this on a regular basis.

    The Microsoft thing is a different issue. Poor management practices (i.e. Ballmer buying Nokia) led directly to the mass layoffs as Nadella focuses on the cloud and away from wireless and mobile.

  • Report this Comment On August 21, 2014, at 6:33 AM, digitalsean wrote:

    Wonder if any fall out over the whole NSA and Cisco connections hurting overseas revenue.

  • Report this Comment On August 22, 2014, at 10:37 AM, IAmBroom wrote:

    I love the byline:

    "Alyce Lomax argues that mass layoffs usually don’t bode well for companies’ futures."

    See also:

    "N. S. Sherlock argues that steep cutbacks in R&D and advertising usually don’t bode well for companies’ futures."

    Layoffs usually occur during stress periods for a company's bottom line. Obviously.

    The actual article has more meat than that, however - supporting that blindingly obvious general trend with supportive data.

  • Report this Comment On August 22, 2014, at 1:22 PM, AmcnFndrs wrote:

    Efficiency leader has become a booming and diluted industry, especially in a downturn/slow recovery where the reward system reinforces the entire scheme - more heads identified to take out, the more that department gets rewarded and keeps their jobs. It becomes an internal war with little focus and accountability on improving processes that delight customers, build loyalty, increase price or margin/employee engagement, or innovation. It's a vicious cycle that if not minded well, spreads across an enterprise as a short cut to easy money and job preservation. Consulting firms also push it as again, easy money, easy to fake a short term justification, and preserves their account/billings, etc. There is little accountability or oversight in looking at these actions over the long term to check for slide back - e.g. headcount that was added back after they left because there was no sustainable improvement - or if they added any real value.

  • Report this Comment On August 26, 2014, at 12:31 AM, DaveinSacramento wrote:

    Anybody else wonder why these articles never tell us WHERE (perhaps what hemisphere) the vast majority of the layoffs are going to occur? Do we even need to ask, in the case of Cisco?

    So much of Cisco has been moved to India and China it's a joke to think of it any longer as a "U.S. company". It would even make sense to start levying tariffs on anything with a Cisco logo coming from abroad. Start looking at the alternatives.

  • Report this Comment On August 26, 2014, at 3:58 PM, SkepikI wrote:

    This is one of the better examples of trenchant and PROSPECTIVE analysis from an MF writer. The other recent examples from John Maxfield are more in line with what I find interesting in MF. For a change you and your editors are to be congratulated....please excuse the "left handed compliment"

    The examples from Cisco's past are particularly telling. SINCE past management moves have been singularly ineffective at changing the company trajectory, it is intelligent and logical to presume that more of the same in greater quantity are just as thoughtless and will be just as ineffective.

    NOW ALYCE, the icing on your deduction will be a one year followup, because that rather than opinion and armwaving will be the capstone of the argument.

    IF Cisco gets it right this time and lays off the correct people, and the trajectory changes for the better, you will have to admit that layoffs are not always bad. IF on the other hand the trajectory continues in the negative direction, you will be vindicated in the sense that inept management laying off people will not correct the ineptness of the managers.

    I will point out that doing NOTHING is neither intelligent nor acceptable to the investors. Of course, doing the WRONG thing, is even worse....

  • Report this Comment On August 26, 2014, at 4:00 PM, SkepikI wrote:

    ^ 6th and final attempt at posting this comment finally works. Gremlins in the servers or my machine....

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Alyce Lomax

Alyce Lomax is a columnist for specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis.

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