Downsizing has become an extremely popular strategy in todayâ€™s business environment. Companies began downsizing in the late 1970â€™s to cut costs and improve the bottom line (Mishra et al., 1998). The term â€œdownsizingâ€ was coined to describe the action of dismissing a large portion of a companyâ€™s workforce in a very short period of time. According to online encyclopedia http://en.wikipedia.org downsizing refers to â€œlayoffs initiated by a company in order to cut labor costs by reducing the size of the company.â€ Downsizing became a familiar management mantra in the late 1980â€™s and early 1990â€™s. In fact, three million jobs were lost between 1989 and 1998 (Mishra et al., 1998). More than 350,000 jobs were lost in 2001 (DeSouza & Donaldson, 2002). Downsizing has become almost a way of life for U.S. companies. Typically, the first round of job cuts are followed by a second round of cuts a short time later. Not everyone agrees with the reasoning behind downsizing. According to an article in the Journal of Banking and Financial Services, downsizing is merely â€œa short-sighted business strategy motivated by arrogant CEOâ€™s eager to appease shareholders (Unkles, 2001). Others feel downsizing is a necessary tool to ensure business survival in the face of a changing economy. Regardless, the costs of downsizing are high, and the payoffs of downsizing are mixed at best. This paper doesnâ€™t serve as an approach to downsizing, rather, it explores the many aspects of downsizing, from when itâ€™s time to downsize to what steps that can be taken to avoid the process altogether.
Corporate Downsizing: An Overview
There are many reasons why a company downsizes. Layoffs began as a way for companies to offset a decline in earnings, but quickly became a popular practice even in companies that were doing well financially. A 1994 survey by the American Management Association found that two-thirds of all workers who were laid off were college-educated, salaried employees (Downs, 1995). Today, the term downsizing is used to refer to a narrow effort to reduce the workforce and also to broaden efforts to improve work systems or redesign the total organization. Companies may downsize to increase capital, as a result of a merge with another company (where additional staff are not needed), poor cash flow (which results in payroll issues), changes in technology, and lastly due to a change in organizational structure (Krepps, 1997).
Companies often â€œdownsizeâ€ using the following techniques:
a. Reorganization/Restructuring. Reorganization involves changing the distribution of responsibility. It also has technical, political, economic and social aspects. Restructuring involves moving, adding, or the elimination of departments which arenâ€™t needed. Restructuring also helps by focusing on the strengths of the company (Hoskisson & Hitt, 1994).
b. Workforce reduction. Downsizing or workforce reduction is a strategy to streamline, tighten and shrink the company structure with respect to the number of people the company employs.
c. Reengineering. This involves changing the way work processes are carried out (to better serve the client or customer). This method is also used to redefine and reduce the business practices of an organization.
d. Rightsizing. Rightsizing can involve reducing the workforce as well as eliminating functions, reducing expenses, and redesigning systems and policies.
e. De-layering. De-layering involves removing one or more levels of management (those deemed least necessary).
The Upside of downsizing
Even in an ideal economy, downsizing can occur. Although downsizing is typically thought in a negative respect, there are some benefits to downsizing. Such benefits include:
a. Harder working employees. Remaining employees may see this as a wake-up call, thus improving their performance.
b. Having fewer employees forces managers to carefully control work flow. In some cases, these layoffs may result in making a company more efficient.
c. Displaced workers often find better or higher paying jobs.
d. Companies often develop newer or cheaper products.
e. Entrepreneurs pursue opportunities.
Many displaced workers move to new jobs in areas that need labor in order to expand. However, the positive effects of downsizing are far exceeded by the troubles caused by downsizing
The Dark Side of Downsizing
Downsizing, even if used with the best intentions, still has a dark side. The involuntary job loss experienced by terminated employees has a number of psychological, social, and financial effects on employees as well as their families. Some of the effects of downsizing include:
a. Most laid-off employees receive a severance check that includes one weekâ€™s pay for every year of service, their accrued vacation and sick pay, supplemental unemployment benefits, and outplacement benefits that can be as much as fifteen percent of their salary.
b. Loss of skilled employees (those most likely to get the job done through the downsizing process).
c. Some companies lay off too many workers (which results in rehiring laid-off employees as consultants, thus taking a bite out of the bottom line).
d. Poor morale of â€œsurvivorsâ€-Surveys have shown that 31% of survivors of downsizing say that still donâ€™t trust their employer.
e. Poor physical and mental health of the terminated employee.
f. Increased employee resistance to change.
g. Reduced morale of those managers implementing the layoffs (Mishra et al., 1998).
Downsizing in Action
No matter how successful a company might become, thereâ€™s always room for resizing in a workplace that grows very quickly (AskMen.com, 2004). The list of companies that have downsized is long and varied. In the early 1990â€™s, layoff announcements created a very small dent, less than 1 percent, in relative stock price performance (Zimmerman, 2001). During that time, companies that laid off fifteen percent or more of their workforce performed significantly below average in the following three years.
According to a 1993 report by Fortune magazine, many CEOâ€™s from the Forbeâ€™s 500 top companies earned 157 times what an average worker received in pay. In fact, when we correlate the number of employees to be laid off with the total CEO compensation, a statistically significant relationship emerges (correlation = .31). This simply means that those CEOâ€™s who lay off more employees seem to earn more money than those who donâ€™t. This same report found no relationship between the total compensation of the CEOâ€™s and the return on investment to shareholders for the 100 companies for which data was reported (statistical correlation was .07, indicating no notable link between the two factors (Downs, 1995).
In almost every industry facing layoffs, areas such as recruiting, employee relations, relocations and training are vulnerable (most of these areas are within the Human Resources department). Other areas that companies hurt themselves is by deeply cutting into lower and middle management. These are the very people who have the biggest share of organizational memory (and are most valuable to the company). Therefore, often times employers must rehire or retrain employees in these areas.
There are no set guidelines for what companies will downsize. In 2001, Cisco Corporation laid off 6000 regular employees and 2500 temporary workers. What is unique about this layoff is that Cisco offered employees who were cut two months notice and four months of severance pay, for a total of six months pay, while they searched for other work. Likewise, rather than cutting a certain percentage of the workforce, Cisco looked at each department and determined where future growth was likely to occur and allowed each department to make their own recommendations (Zimmerman, 2001).
On the opposite end of the spectrum, companies with no plans of laying off employees are often hit the hardest. Take for example, Continental Airlines. Despite having earned a profit in 2001, felt it was necessary to lay off 12,000 employees. Much of this was due to the terrorist attacks of 9/11 (which caused a 50% decrease in demand in the airline industry). For Continental, this was a twenty percent decrease in the workforce, but felt it was necessary for the survival of the company.
Research (as well as common sense) tells us that downsizing isnâ€™t always the answer. Take for example, Intel Corporation. Intel has taken a strategic approach by investing in the â€human capitalâ€ of their company. Intel has established a redeployment program which allows employees who might otherwise be laid off to find other jobs (at Intel or elsewhere) while still receiving their full salary and benefits for up to 4 months. Because this program allows for a continual â€œtrimmingâ€ of the workforce, the need to downsizing is eliminated (Zimmerman, 2001).
The Road Less Traveled
Rather than downsize, companies will find that there are several alternatives available. The most obvious alternative is to implement a hiring freeze. With this approach, no new positions are added and employees who quit or retire are not replaced. However, for this approach to work effectively, certain limitations must exist. Such conditions would include hiring for a position that was vacated due to poor performance of the terminated employee. This approach has the least amount of negative effects (Downs, 1995).
Another alternative is that of reducing the number of hours employees work. Hewlett-Packard implemented a program (called a fortnight schedule) where employees took 1 day off (unpaid unless vacation time was used) of a 2 week work schedule. Likewise, non-sales offices were closed during Thanksgiving and Christmas holidays. This approach resulted in a 10% reduction in wages.
Employers may also use a reduction in pay to offset the likelihood of downsizing. However, this approach usually requires all employees to accept a cut in pay and seems to be the least beneficial to companies. Other alternatives include voluntary severance and early retirement packages. Both of these alternatives rely on voluntary participation. Each of these methods are effective in bringing immediate savings to the organization (Downs, 1995).
There are many reasons why a company might need to downsize. In todayâ€™s corporate America, it is a plain fact that far fewer employees are necessary to maintain a successful operation. The downsizing of a company can affect employees before, during and after it occurs. Employees usually know of a possible downsizing (care of the almighty grapevine) months before it is supposed to happen. Thus, employees may become paranoid and self-absorbed, and their top priority is their own career rather than the bottom line of their employer. The downsizing process is a fact of life. It affects all people from management, production staff, hourly employees and their families as well as those who remain with the company. It is something that will continue to occur with no end in sight. Downsizing isnâ€™t always a â€œnegativeâ€ process, and even as a last resort, the downsizing process can be made a lot easier with a lot of preparation and consideration for those who the process may directly and indirectly affect. As long as our world market continues to grow, so too will the concept of downsizing.
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Unkles, j. (2001). The downside of downsizing: after almost a decade of surging economic growth and booming share markets, many corporate and financial managers are getting their first look at a downturn in the business cycle. Journal of Banking and Financial Services, 115(6), 2. Retrieved April 22, 2004, from Baker College Web Site: http://web2.infotrac.galegroup.com
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