Facts About AOL's Layoffs

In recent months and years America Online (AOL), which has a number of its offices in Southern California, has had to utilize cooperate restructuring and downsizing as a principle means to improve the financial status of the organization. While many laymen believe that the layoffs that have occurred in the organization have been due to internal problems in the organization a review of what has been written about layoffs in the organization suggest that the problems promulgating the massive layoffs are due to both internal organizational issues as well as larger external macroeconomic issues. In an effort to better understand the problems it is helpful to consider what scholars have noted about the layoffs at the organization.

Looking at the layoff history of the organization, it is evident that AOL has instituted a host of layoffs in the last five years. One reporter notes that as far back as 2001, the organization was instituting layoffs as a central means to meet its projected earnings. In August of 2001, it was reported that "" (Layoffs loom..., 2001, p. 8). Although the layoffs were to come from all of the organization's offices throughout Southern California, a majority were slated to occur at both the Mountain View and Irvine jobsites. Further research on the organization shows that in 2003, another round of about 400 employees were laid off from the same locations. Again, the need to cut and manage costs was noted as the principle reason for the layoffs (Festa, 2003).

Finally, in a recent announcement by AOL, the organization noted that it plans to lay off more than 5,000 employees worldwide (Jesdanun, 2006). The cuts are noted as a necessary component to ensure the financial viability of the organization. According to Jesdanun, "AOL will shed as much as a quarter of its global work force within six months as the company seeks more than $1 billion in savings to offset its decision to give more services away for free" (AOL plans...). In addition, this author notes that "The changes are coming not only because AOL plans to stop aggressively marketing its dial-up service, but also because it will end its practice of charging high-speed Internet users for access to its content and services" (AOL plans...). Thus, as the market becomes more competitive, AOL must cut its workforce in order to ensure that it can remain competitive.

Although information on the layoffs that are taking place at AOL indicate that the organization has chosen to restructure as a result of industry competition and the need to manage costs in the organization, scholars examining the macroeconomic conditions in Southern California note that problems in this region have made it difficult for many organizations to keep business operations afloat. A recent report released by Wells Fargo Economics (2005) found that businesses in Southern California faced a number of notable challenges when it came to maintaining overall profitability. The organization, which surveyed more than 400 organizations in Southern California, noted that higher than average labor costs in the region coupled with increasing interest rates and energy prices will make it more difficult for businesses operating in the region to remain profitable. Even though the organization does note that the economy in Southern California is one of the largest in the United States, macroeconomic pressure is poised to have an impact on most organizations.

When larger macroeconomic conditions are coupled with the cost containment issues faced by AOL it is not surprising to find that the organization has had to resort to layoffs. At a time when Internet service provision is becoming less profitable, AOL is attempting to run its operations in one of the most expensive areas of the country-i.e. in terms of labor and energy costs. Thus, the need for layoffs at AOL appears to be a necessary move in order to keep the organization profitable.

Facts

With the basic background about layoffs at the AOL organization elucidated, it is now possible to consider some data regarding the layoffs that have occurred at AOL. In addition to looking at how the impacts have impacted AOL operations in Southern California, a review of how layoffs in the organization have shaped the organization in terms of its national and international growth will also be addressed. Overall, it is evident that the current layoffs that have taken place at AOL have notably changed operations in the organization in both a national and international context.

Looking first at the layoffs that occurred at AOL in 2001, researchers note that in an effort to make the organization more profitable overall, AOL chose to utilize mergers in order to improve organizational efficiency. During the first round of layoffs at the organization, back-office personnel from the organization's news division were let go when AOL merged with Time Werner. Although the merger sought to incorporate employees from both organizations, in the end 725 people from the AOL parent company were laid off. Thus, even though AOL was able to expand and diversify its operations, the end result of the process was the elimination of more than 700 jobs from the AOL payroll (Layoffs loom..., 2001).

In the second round of layoffs which occurred in 2003, not as many individuals in the organization were impacted. Only about 450 individuals working in Southern California were impacted by the layoffs. Although no merger took place, the organization made the decision to reduce the overall size of is operations. This move led to the layoff of more 450 software developers and IT (information technology) professionals. Of 450 individuals laid off, 100 were offered management positions at AOL headquarters in Virginia (Festa, 2003). As such, those seeking to retain their position with the organization had to make the choice between remaining in Southern California to find another job or relocating to Virginia in order to secure their employment.

The final layoffs that are currently taking place in the AOL organization impact all of the organizations operations both domestically and abroad. Graham (2006) provides the following data about the current layoffs at AOL:

" (p. 01b).

- More than 17.6 million subscribers receive service from AOL. This number is projected to drop to 10 million in coming months.

- More than 25 percent of AOL's workforce will be cut as a result of the current round of layoffs.

Although the cuts being made by the organization are quite significant overall, the reality is that if the organization does not take steps to streamline its operations and cut costs, it will not be able to compete with other Internet service providers (ISPs).

In addition to being unable to compete in the ISP industry, the organization has not been able to keep pace with online advertising through search engines. Companies such as Google and Yahoo are expected to draw a considerable share of their revenues from online advertising in the near future. According to Graham, "The red-hot online advertising market is expected to generate revenue of $17.4billion this year and grow to $26.4 billion by 2010" (p. 01b). AOL has remained consistently behind its competitors when it comes to online advertising. Thus, AOL faces significant challenges when it comes to remaining profitable in both the short and long-term.

Recommendations

Based on the current situation facing AOL and the proposed alternatives that have been provided, the following recommendations appear to have the most salience for improving outcomes in the organization:

- Employee Becomes Contractor - The macroeconomic conditions in Southern California are such that they are not conducive for the organization to maintain operations over the long-term. Even though Southern California is currently a viable area for economic growth, the reality is that there are a host of variables that are having a negative impact on the ability of organizations to remain profitable. In order to reduce the increasing costs of labor in the region, the organization should consider allowing employees to become independent contractors. This will allow the organization to save money in terms of benefits packages for employees.

- Flex Place - In addition to utilizing employees as contractors in the organization, AOL should also consider allowing contractors to work from home. This option will enable the organization to reduce overhead costs and reduce the fixed costs associated with running a business. Flex place also provides employees working for the organization with the flexibility to better manage both their home and work lives. For these reasons, it is recommended that AOL consider this option as one that will reduce costs in the organization and increase overall employee productivity.

- Offer Shared Ownership - Finally, the organization should implement a program of shared ownership in which employees are given stock incentives to improve the organization. Shared ownership plans will serve as the basis to motivate employees. Further, because these options are contingent upon the overall success of the organization, AOL will not face considerable losses if the organization is not able to achieve a high level of profitability.

Implementation Plan

If AOL is to successfully develop a plan that will enable the organization to implement the above recommendations, some consideration of how this process will take place needs to be addressed. At the present time, AOL maintains operations in Southern California that include both software development and news agencies. Current software employees at the organization could be provided with information about becoming freelance contractors with the organization. AOL should survey employees to determine how may would be willing to work in this capacity for the organization. Once the AOL organization has been able to effectively assess its labor needs, it will be able to hire new employees to fill vacancies left by those not wishing to work as freelance contractors for the organization.

In an effort to make the new program look more attractive to employees, AOL should support the project as one that is integral to meeting the needs of employees in the organization. By working as freelance contractors, software developers and IT professionals will be able to work from the comfort of their own homes. In addition, contractors will be given comparable salaries, but will not have to incur the costs of commuting to work each day. Finally, AOL could use the shared ownership plan not only to enhance the productivity of employees in the organization but also as a means to keep qualified personnel from leaving the organization. While many employees in the organization may resist the change to becoming a freelance contractor, the organization will be able to offer employees a "new" incentive that may provide employees with the motivation that they need to make this change.

With respect to those individuals working in the news industry, it is evident that cutting costs in this industry is much more difficult. While the organization should be able to reassign much of its staff as freelance contractors, working from home may not be a viable solution for this part of the organization. Thus, AOL will have to balance the perks that it offers to employees with the specific environment of the economic situation. For instance, the organization may choose to limit its shared ownership plan in places where it must maintain a physical presence. By limiting the benefits that are paid to individual employees, the organization will be able to reduce its long-term financial responsibilities. In this context, it is evident that the organization must balance short-term cost management strategies with the long-term financial viability of the company.

Here again, resistance to change may make it difficult for AOL to effectively implement its strategy. However, if the organization balances change with incentive and positive reinforcement, it should be able to persuade employees in the organization to accept the changes and continue employment with the organization. In this situation, the needs of employees must be carefully balanced. While it is estimated that the organization will lose some of its workforce in making this transition, AOL must carefully consider the importance of retaining most of its employees through change. While employing individuals as freelance contractors will reduce labor costs, the organization must consider the costs associated with recruiting and training new employees. Thus, if the organization witnesses as mass exodus of many of its veteran employees, it will face notable challenges when it comes to recruiting and retaining new staff members.

When placed in this context, it becomes evident that the challenges currently facing the AOL organization are quite significant. Although the recommendations made in this case appear to be the most viable means of improving the current economic situation of the organization, these recommendations come with some drawbacks. For this reason, the AOL organization not only needs to consider what changes will make the organization more profitable but also what changes will enable the organization to retain the status quo. Only by promoting the new programs as beneficial to the employee will the organization be able to effectively reduce costs while retaining qualified talented individuals.

References

Festa, P. (2003). AOL lays off 450 California employees. CNET. Accessed August 9, 2006 at: http://news.com.com/AOL+lays+off+450+California+employees/2100-1038_3-5117897.html.

Graham, J. (2006, August 4). AOL heads toward cutting 5,000 jobs. USA Today, Money, 01b.

Jesdanun, A. (2006). AOL plans to trim payroll by 25 percent. The Press Enterprise. Accessed August 9, 2006 at: http://www.pe.com/business/local/stories/PE_Biz_D_aolworkers04.1a2976d.html.

Layoffs loom for AOL Time Warner, (2001). Electronic Information Report, 22(31), 8.

Wells Fargo Economics. (2005). Southern California Business Survey. Wells Fargo. Accessed August 9, 2006 at: https://a248.e.akamai.net/7/248/1856/3d6225d5cfac12/www.wellsfargo.com/downloads/pdf/com/research/surveyanalysis.pdf.