Downsizing

Downsizing, layoffs, and rightsizing are forms of organizational restructuring. Organizational restructuring refers to planned changes in organizational structure that affect the use of people. Organizational restructuring often results in workforce reductions that may be accomplished through mechanisms such as attrition, early retirements, voluntary severance agreements, or layoffs. The term layoffs is used sometimes as if it were synonymous with downsizing, but downsizing is a broad term that can include any number of combinations of reductions in a firm’s use of assets—financial (stock or cash), physical (plants and other infrastructure), human, or informational (databases). Layoffs are the same as employment downsizing.

Employment downsizing, in turn, is not the same thing as organizational decline. Downsizing is an intentional, proactive management strategy, whereas decline is an environmental or organizational phenomenon that occurs involuntarily and results in erosion of an organization’s resource base. As an example, the advent of digital photography, disposable cameras, and other imaging products signaled a steep decline in the demand for the kind of instant photographic cameras and films that Polaroid had pioneered in the 1940s. On October 12, 2001, Polaroid was forced to declare bankruptcy.

Organizational rightsizing refers to the broad process of aligning a company’s staffing levels to the needs of the business, whether it is expanding or contracting. At W. L. Gore and Associates, a contributions-based model is used to ensure that the organization is the right size for its business conditions. Gore employees (called associates) work in teams. Team members rank each other using a peer-to-peer contribution-ranking system. The system is based on associates knowing what their coworkers are working on (their commitments), how important this work is to the success of the business (impact of commitments), and what results are being achieved (effectiveness at completing commitments).

Associates who are ranked higher than their counterparts are perceived to be contributing more to the company’s success than those ranked lower. All associates are ranked by their teammates and leaders at least once a year, and the resulting lists place everyone in rank order based on contribution from highest to lowest. The ultimate goal is to develop a contribution-based, rank-order list that is accurate and fair to all parties.

The primary purpose of the contributions-based model is to set pay levels each year. However, it also is used for staffing purposes on an ongoing basis to rightsize the organization. Gore believes that the overall health of the organization will be maintained and improved as associates with high contribution potential are added and those with unacceptably low contribution potential are removed. The process may accelerate in times of major business growth or decline.

The term resizing is closely related to the term rightsizing. Resizing is the repositioning of an organization’s employee ranks to achieve a company’s strategic objectives. It does not necessarily suggest massive job cuts. It is primarily strategic in nature, and it is part of an ongoing organizational transformation (as opposed to a one-time-only event). Resizing contributes to executives’ intentions to cut costs, focus resources, and implement strategic shifts to capitalize on the ever-changing global marketplace. It typically involves layoffs, divestitures of underperforming assets, and closings of certain operations. Examples include the elimination of jobs at CNN following its merger with AOL Time Warner, United Airlines’ closing of money-losing stations, and Vivendi’s divestiture of a liquor business that was outside its area of managerial expertise.

An extensive body of research has shown that downsizings, closures, and divestitures often fail to achieve their financial and strategic objectives and that they often produce unintended consequences, such as overwork and stress for those who remain, increases in health care costs for victims and survivors, increases in accidents and workers’ compensation claims, and uncertain effects on productivity and profitability. To put this issue into perspective, the next section reviews the extent of downsizing in the 1980s, the 1990s, and the early 21st century.

Extent of Downsizing

An analysis performed for the U.S. Department of Labor examined financial and operating data on 7,194 companies that were listed on the New York or NASDAQ stock exchanges at some point in the 15-year period from 1980 to 1994. Almost a third of the companies downsized 15% or more of their employees at least once during the period of the study. The average magnitude of a downsizing in any given year was about 10%. Manufacturing firms accounted for the largest number of downsizers, service firms were second, and retailers third.

Very large companies, those with more than 10,000 employees, were most likely to downsize employees. This is because they are usually the ones that can take advantage of economies of scale or technological innovation to eliminate redundant workers. In general, employment downsizing is a large-company phenomenon. It occurs commonly among low- and medium-profitability firms. Firms shed workers throughout the 1990s and through 2000 at a rate of roughly 1.5 million per year.

In 2001, however, companies in the United States announced layoffs of almost 2 million workers (1.96 million), with firms such as American Express, Lucent, Hewlett-Packard, and Dell conducting multiple rounds in the same year. Corporations announced 999,000 job cuts between September 11, 2001, and February 1, 2002, alone. In 2003, according to the U.S. Department of Labor’s Bureau of Labor Statistics, the United States shed more than 1.2 million jobs, and in 2004, that number declined to just under 1 million. In short, downsizing has become etched into the corporate cultures of many companies, and it is not limited to periods of economic decline.

The phenomenon of layoffs is not limited to the United States. Layoffs occur often in Asia, Australia, and Europe, as well. In western Europe, the incidence of layoffs varies among countries. Labor laws in countries such as Italy, France, Germany, and Spain make it difficult and expensive to dismiss workers. In Germany, for example, all “redundancies” must by law be negotiated in detail by a workers’ council, which is a compulsory part of any big German company and often has a say in which workers can be fired. Moreover, setting the terms of severance is uncertain, because the law is vague and German courts often award compensation if workers claim they received inadequate settlements. In France, layoffs are rare. Even if companies offer generous severance settlements to French workers, as both Michelin and Marks & Spencer did, the very announcement of layoffs triggers a political firestorm.

Rationale for Downsizing

Many firms have downsized and restructured successfully to improve their productivity. They have done so by using employment downsizing as part of a broader business plan. Extensive research has shown that employment downsizing is not a quick fix that will necessarily lead to productivity improvements and improved financial performance. Employment downsizing alone will not repair a business strategy that is fundamentally flawed.

There are at least two circumstances in which employment downsizing may be justified. The first occurs in companies that find themselves saddled with nonperforming assets or consistently unprofitable subsidiaries. They should consider selling them to buyers who can make better use of those assets. Employees associated with those assets or subsidiaries often go with them to the new buyers. The second instance occurs when jobs rely on old technology that is no longer commercially viable. This was the case in the newspaper industry following the advent of computer-based typesetting. There simply was no longer a need for compositors, a trade that had been handed down from generation to generation. However, indiscriminate slash-and-burn tactics, such as across-the-board downsizing of employees, seldom lead to long-term gains in productivity, profits, or stock prices.

The Psychological and Financial Toll

Downsizing is a traumatic event, and it often takes a disturbing toll on workers, their families, and their communities. Lives are turned upside down, people become bitter and angry, and the added emotional and financial pressure can create family problems. Survivors, or workers who remain, can be left without loyalty or motivation. Their workplaces are more stressful and political after downsizing. Local economies and services become strained under the impact to the community.

When combined with heavy debt loads, employment downsizings often lead to personal bankruptcies, which hit families hard and ratchet up stress levels. At the same time, employee assistance counselors often report increases in crisis calls involving problems such as online affairs, addictions in adolescents, and spousal abuse.

For those who still have jobs, their incomes, hours, and bonuses are often cut. Money woes also lead to medical problems, lower productivity, and increased absenteeism and accidents. As for the managers who do the firing, their health suffers, too. A study conducted at 45 American hospitals found that executives ran twice as much risk of a heart attack in the week after firing someone.

Guidelines for Implementation

If an organization decides that it must downsize, the following principles, based on a considerable body of research and practical lessons born of experience, may prove helpful:

1. Carefully consider the rationale behind restructuring. Invest in analysis and consider the impact on those who stay, those who leave, and the ability of the organization to serve its customers.
2. Consider the virtues of stability. In many cases, companies can maintain their special efficiencies only if they can give their workers a unique set of skills and a feeling that they belong together. Stability is crucial in knowledge-based and relationship-based businesses.
3. Seek input from employees. Before making any final decisions about restructuring, executives should make their concerns known to employees and seek their input. Make special efforts to secure the input of star employees or opinion leaders, for they can help communicate the rationale and strategy of restructuring to their fellow employees and also help to promote trust in the restructuring effort.
4. Use downsizing or rightsizing as an opportunity to address long-term problems. Unless severe over-staffing is part of a long-term problem, consider alternatives to layoffs first, and ensure that managers at all levels share the pain and participate in any sacrifices employees are asked to bear.
5. Be mindful of fairness and consistency. If layoffs are necessary, be sure that employees perceive the process of selecting excess positions as fair and make decisions in a consistent manner. Make special efforts to retain the best performers, and provide maximum advance notice to terminated employees. Provide as much personal choice to affected employees as possible.
6. Communicate regularly and in a variety of ways in order to keep everyone abreast of new developments and information. Executives should be visible, active participants in this process, and lower-level managers should be trained to address the concerns of victims as well as survivors.
7. Give survivors a reason to stay and prospective new hires a reason to join. Be able to explain how business processes will change and why the organization will be better able to compete and to serve its customers after downsizing. Alternatively, a stable, predictable employment relationship is a powerful attraction to join and to stay at an organization.
8. Train employees and their managers in the new ways of operating. Evidence indicates that firms whose training budgets increase following a restructuring are more likely to realize improved productivity, profits, and quality.
9. Examine carefully all management systems in light of the change of strategy or environment facing the firm. These include workforce planning, recruitment and selection, performance management, compensation, and labor relations.

References:

1. Cascio, W. F. (1993). Downsizing: What do we know? What have we learned? Academy of Management Executive, 7(1), 95-104.
2. Cascio, W. F. (2002). Responsible restructuring: Creative and profitable alternatives to layoffs. (2002). San Francisco: Berrett-Koehler and the Society for Human Resource Management.
3. Cascio, W. F., Young, C. E., & Morris, J. R. (1997). Financial consequences of employment-change decisions in major U.S. corporations. Academy of Management Journal, 40(5), 1175-1189.
4. De Meuse, K. P., & Marks, M. L. (Eds.). (2003). Resizing the organization: Managing layoffs, divestitures, and closings. San Francisco: Jossey-Bass.
5. Fisher, S. R., & White, M. A. (2000). Downsizing in a learning organization: Are there hidden costs? Academy of Management Review, 25(1), 244-251.
6. Leana, C. R., Feldman, D. C., & Tan, G. Y. (1998). Predictors of coping behavior after a lay-off. Journal of Organizational Behavior, 19(1), 85-97.
7. S. Department of Labor. (1995). Guide to responsible restructuring. Washington, DC: Government Printing Office.
8. Wagar, T. H. (2001). Consequences of work force reduction: Some employer and union evidence. Journal of Labor Research, 22(4), 851-862.

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