Companies are quick to slice their workforce
A growing number of jittery companies are slashing jobs not because business has slowed, but because they are afraid it will, a trend some economists warn could intensify the downturn.
Philips Healthcare had welcome news for investors last month when it posted its third-quarter financial report: Sales were up 5 percent, and profit 4.8 percent. So employees were taken by surprise last week when the Andover company, which makes defibrillators, electrocardiogram monitors, and other medical gear, disclosed it was slicing 5 percent of its global workforce, cutting 1,600 jobs worldwide, including fewer than 100 in Massachusetts.
"Companies in all industries are under pressure in the current economy, and healthcare is not excluded," said Philips Healthcare spokesman Ian Race, who suggested the move reflects concern that hospitals may be reining in their spending on medical equipment. "Capital purchases in some cases are on hold because of all the credit problems."
The rollback at Philips, along with recent job cuts at Massachusetts companies such as Internet support company Akamai Technologies Inc. and software firm Egenera Inc., highlight an ominous trend emerging at a time when government leaders are scrambling to shore up a wobbly economy.
"Business in general, especially US business, has become more preemptive in terms of responding to downturns," said economic historian Andrew H. Bartels, analyst for technology consulting firm Forrester Research of Cambridge. "They want to get ahead of bad news. If you've been expecting growth and suddenly you see this cliff ahead of you, you think, 'Uh-oh, we better put on the brakes.' "
While companies have always tightened their belts and spent more cautiously during economic downturns, they have typically waited until their sales were already falling and their profit margins eroding before reducing their workforces. The new cutbacks, in response to darkening economic clouds, run the risk of intensifying the recession executives fear and delaying the recovery they seek.
"Each company is looking at its own interest," said economist Alan Clayton-Matthews, associate professor at the University of Massachusetts at Boston. "But this could make things worse because you'll have less personal income and less spending in the economy. If all employers did this, it would be like shooting themselves in the foot."
A new model for using staff cutbacks as a cushion against slumping demand, and as a tool for managing Wall Street expectations, may be the approach taken by computer maker Dell Inc. The company, based in Round Rock, Texas, reported lower sales in the three months ending Sept. 30, but still turned a profit and topped analysts' estimates, largely by paring about 2,200 jobs. The message: Protect profit at all costs.
For many companies that rely on business investment - the second-largest engine of the economy, after consumer spending - the timing can be tricky. Some detect signs of trouble when they see fewer orders coming in for the next quarter or year, even before a decline turns up on their balance sheets. That is particularly true for businesses tied to retail, housing, or other industry sectors ravaged by the downturn.
Akamai, a Cambridge company that helps businesses deliver e-commerce and other content over the Internet, last week said it was eliminating 110 jobs globally as an anticipatory move. As with Philips Healthcare, third-quarter earnings and sales were up at Akamai, with profit climbing 37 percent on a 22 percent gain in revenue. But chief executive Paul Sagan said his company moved to reduce costs early to prepare for an expected downturn in its business.
The story was much the same at Egenera, a privately held maker of business software that notified employees on Nov. 3 it will be cutting 87 jobs, including 30 to 35 at its Marlborough headquarters. Egenera makes virtualization software, which boosts productivity for corporate data centers, a field considered by analysts to be growing. Yet the company said it was trimming its sales force by about 40 percent by shifting its business model to rely on hardware vendors like Dell to market its software instead of selling it directly to enterprise customers. "We're prepared for a fairly dramatic economic slowdown," said Egenera president Mike Thompson.
Similar preparations are underway outside the technology business. Chicago-based aircraft builder Boeing Co., which is sitting on a backlog of more than 3,500 passenger jet orders, last week said it was planning for an unspecified number of layoffs next year on fear of cancellations or order delays by financially strapped airlines, along with potential spending cuts by the Pentagon and foreign militaries.
Like Akamai and Philips Healthcare, a division of the Dutch conglomerate Royal Philips Electronics, Boeing raised the possibility of hiring workers in faster-growing parts of its business while implementing layoffs in slower growing areas to help weather the downturn. Boeing makes military jets and other equipment as well as commercial aircraft.
While all businesses are grappling with murky forecasts, the uncertainty is being felt most keenly by global companies. In addition to anticipating a drop in sales, they also face declines in offshore revenue as a result of the strengthening dollar - the reverse of the situation a year ago, when the dollar was losing value.
That may be one of the factors putting employers on edge and making them more prone to early layoffs than in past recessions.
"Companies are looking at a double whammy," warned Forrester's Bartels. "They're in a situation where everyone wants to be ready. They want to cut back before things get worse."
Robert Weisman can be reached at weisman@globe.com. 