Effective and ineffective downsizing strategies

A number of studies have pointed out downsizing strategies and practices that do not work. For
instance, one study identified nine ineffective downsizing practices (most of which have been.
identified in other studies):
1. Offering voluntary early-retirement programs
2. Instituting across-the-board layoffs
3. Eliminating training programs
4. Making personnel cutbacks that are too deep
5. Placing survivors in jobs for which they lack the necessary skills and hoping
that they will learn by experience
6. Emphasizing employee accountability instead of employee involvement
7. Expecting survivors to row harder
8. Implementing layoffs slowly in phases over time
9. Promising high monetary rewards rather than careers
One set of' studies attempted to identify the practices that distinguished successful and
unsuccessful workforce reduction efforts. Five key issues associated with more successful
downsizings were as follows:
1. An expressed higher commitment to job security: A number of successful organizations met
with survivors of workforce reduction and assured them that they were an important component
of the restructured organization.
2. An ideology based on progressive decision-making and a culture that focuses on human
resources: Again, organizations with these attributes were overwhelmingly more likely to have
higher economic performance and overall employee satisfaction scores. A progressive decisionmaking ideology is characterized by participative decision-making, explanations of proposed
Changes to those affected, open channels of communication, and employee input into the
decision-making process.
3. An entrepreneurial spirit within the organization: Organizations that performed better after a
workforce reduction were more likely to underscore the importance of both innovation in the
development of new products or services and the presence of an entrepreneurial culture.
4. Investment in training, new technology and a quality management/customer/ client focus:
While there is often a tendency to cut training and investment in new technology, organizations
with lower investment in these two areas tended to be less successful in their workforce
reduction strategies. Similarly, moving away from a focus on quality and the customer leads to
a number of negative consequences.
5. The manner in which the workforce reduction was carried out: While there was little evidence
that aspects of the severance arrangement provided to employees who were let go was
associated with enhanced performance, the results indicated that more successful reductions were
characterized by the following:
The reasons for the reduction were clearly explained to employees.
The employees perceived that the cuts were necessary.
Employee input into the decision-making process was fair.
The methods used to select which employees to let go were communicated to employees.

 Employees perceived that the assistance provided to workers who were let go was fair
Cuts were targeted rather than across the board.
Downsizing was part of the strategic management process.

The role of communications in the downsizing decision cannot be over emphasized. Consider the
experience of one receptionist in a dot-com firm-They called us down for a meeting and told us
the dream was over. They laid everyone off. The company is gone.
It is important to (1) attend to rumours, (2) provide survivors with available information on the
downsizing, (3) ensure that survivors are aware of the , new organizational goals, (4) make
expectations clear, (5) tell survivors that they are valued and (6) allow time for grieving.

Consequences of downsizing:
When a small business has more employees than it requires, managers may decide to downsize
the organization. This can be the result of increased efficiency or reduction in demand. While
downsizing affects everyone in the organization, it has the most significant effect on employees
who are dismissed and have to leave the company.

Severance Pay
Employees who lose their jobs because of downsizing may be entitled to receive severance pay.
Employees are entitled to receive severance pay if their contract of employment provides for it or
their employer has a policy or practice of paying severance pay. Businesses who employ more
than 100 people must give their employees 60 days written notice of a mass layoff or pay
compensation. Receiving a lump-sum payment at the end of their employment can be a positive
for employees as they can clear debts or build up their savings.

Alternative Employment
It may be upsetting for an employee to hear that he will lose his current job. However, it also
opens up other opportunities he may not otherwise have considered. Many businesses offer
departing employees help to find another job, known as outplacement support. An employee may
find a job that offers better terms and conditions than his previous role. Some departing
employees seize the opportunity to set up in business for themselves, using their severance pay to
fund their new venture.

Psychological Impact
When an employee is told that he is losing his job as part of a downsizing process, he may
become despondent. He may compare himself unfavorably to colleagues who will remain with
the company and lose confidence in his skills and abilities. Alternatively, an employee may

become angry at the company for making the decision to dismiss him. Over time, that anger can
turn to bitterness. To deal with the psychological effects of downsizing on departing employees,
many companies offer counseling support.

Financial Impact
Employees construct a lifestyle based on receiving a regular income. This includes taking on
debts and mortgages based on their ability to make monthly payments. Losing a job can be a
financial blow for the departing employee if he cannot find alternative employment quickly.
Severance pay and unemployment benefits may not cover his all of his expenses for more than a
few weeks. Even if he finds a job, it may pay a lower salary than his previous job. If this
happens, his lifestyle may have to change to accommodate his lower earnings.

The Disadvantages of Corporate Downsizing

Corporate downsizing serves as a way for a company to maintain profitability levels, but the
action often causes negative effects within the workplace. The people who leave aren't the only
ones who feel the effects. The remaining employees feel the negative effects even after the
downsizing takes place, and those can have a harmful effect on your business.
Financial Cost

Downsizing reduces the amount you pay in salaries and benefits, but it comes with its own set of
costs. Severance packages and payment for any continued benefits potentially cost you a large
chunk of money at the time of downsizing, depending on how many people you let go and what
their contracts say about layoffs. Any employees who have built up vacation time receive a
payout for that amount, adding to your costs. Employees who stay with the company often take
on the responsibilities of those who leave. This takes time away from their own duties and may
result in overtime, costing you more money. If the business turns around and you need to hire
more employees in the future, you incur more expenses for advertising, recruiting, screening and
hiring employees.
Decreased Morale

As soon as the downsizing announcement occurs, expect the company morale to decline.
Employees worry about who will lose their jobs and how the company will function once they
are gone. After the downsizing takes place, remaining employees may face greater work
responsibilities without extra pay, decreasing morale even further. The employees may worry
that another round of layoffs are possible. If the reasons for downsizing or the process of
eliminating employees is considered questionable by employees, you may lose trust and respect.
Productivity and Creativity Drops

According to a study performed by Teresa Amabile from Harvard Business School, downsizing
is one of the factors that cause a decrease in creativity in the workplace. The workplace becomes
a less creative environment and employees don't make as many bold, creative moves in their
work. In some cases, the employees may reserve ideas in case they too are downsized or decide
to move to a different company. Lower creativity sometimes translates into lower productivity
and fewer innovative ideas to keep your company competitive.
Potential for Legal Issues

Even if your company has a valid reason for downsizing, you face the potential for legal fallout
if any of the terminated employees feel they were targeted unfairly. Accusations of
discrimination or unjustified layoffs leave you exposed to expensive lawsuits. Your company
also stands to earn a bad reputation which could further hurt business.