Why are corporations cutting managers?
and why were they hired in the first place?
U.S. public companies have cut their middle-manager head counts by about 6% since the peak of their pandemic hiring sprees, according to a new analysis of more than 20 million white-collar workers by employment-data provider Live Data Technologies. Senior executives, whose ranks have shrunk nearly 5% since the end of 2021, haven’t fared much better.
Some other interesting tidbits in the article:
Meta cut multiple tiers last year as it eliminated thousands of jobs and asked some managers to move to nonsupervisory roles. Citi, which announced its restructuring in September 2023, trimmed its management layers to eight from 13 by March.
Some of the biggest cuts have been in human-resources departments, where head counts are down by more than 6% from 2022, the Live Data Technologies analysis shows.
Garett Jones once pointed out that a large share of a company’s work force does not produce widgets. Instead, they produce organizational capital.
For example, a bank could build an organization that deals with crypto. It could build an organization that tries to serve the needs of the super-wealthy. It could build an organization that tries to compete with “fin tech.”
We can say that a corporation makes cuts horizontally when it winds down some initiatives. The bank might decide to just focus on its core business.
A corporation makes cuts vertically when for the same business functions it cuts out some layers of middle management. It is as if senior executives suddenly notice that the organization has become too bureaucratic.
On the same WSJ front page that the story of management cutbacks appeared, there was also a story about the stock market having risen unusually fast the last two years. Perhaps these stories are connected.
When a company’s revenues are growing, it is tempting for senior executives to try to invest in organizational capital. It is tempting to put off worrying about excess bureaucracy.
I believe that a corporation’s senior management can only focus on a few major efforts at a time. If it has enough on its plate, and if costs are not killing the company, senior executives will not focus on bureaucratic undergrowth. But at some point, the significance of bloated costs rises relative to other issues facing senior management. Restructuring then becomes one of the top two or three initiatives that senior executives undertake in a given year.
Perhaps what happened in recent years is that senior executives could not see how to boost revenues quickly enough to satisfy shareholders. So they looked for ways to cut costs. The thing is, you can only do that so much. At some point, there are no more corporate initiatives to be terminated and no more bureaucratic bloat to be eliminated. There are not likely to be new major cost-cutting efforts every year.
But I have to say that I have more questions than answers about this phenomenon. What is the relationship between Type I errors (cutting too much and regretting it) and Type II errors (letting costs rise too much and regretting it)? How do the incentives for avoiding each type of error play out? Why does a corporation pay more attention to trimming costs at some times than at others? Why would cost-cutting appear to be contagious, rather than randomly distributed across the corporate sector? When some firms are cutting back, does this make talent available for other firms to scoop up? Or are the managers who are let go the equivalent of “lemons” in the used car market?
The article concludes with an anecdote about someone who found an individual contributor track to be more amenable to his talents/interests. My suspicion is that most people funneled into management positions would have much rather continued to be an individual contributor, and only moved into management positions due to the negative perception of not having direct reports. Perhaps this augurs a structural and corporate change in America, though I'm cynical enough to assume that managerial bloat will reassert itself over time in most companies.
Musk promotes the idea of cutting too much to find out which jobs actually matter, then refilling them. So that's his answer to your Type 1/Type 2 question. It's an interesting idea - that you can't tell if a position matters or not without trying to do without it. His plan seems to work at X, where he cut the headcount dramatically and - despite all the dire predictions that the platform would collapse because he let go too many essential people - the technology seems to still function. It would be interesting to try this approach via DOGE at some federal agencies, (although probably not with, say, air traffic controllers.) But civil service rules and budgetary inertia are likely to prevent too much deployment of this strategy. However, in Argentina Milei has announced a rule that to hire 1 new bureaucrat, the agencies must cut 3. That seems like a good approach to finding the fat.