The report first explains how downsizing, or reducing layers of middle managers and the act of redundancy in the organisation is defined, then discusses the different ways in which or measures by which the organizations carry out downsizing activities
Executive Summary
An uncertain economic climate and an emerging global marketplace, over the past decade, have caused organizations to re-evaluate how they function. The report first explains how downsizing, or reducing layers of middle managers and the act of redundancy in the organisation is defined, then discusses the different ways in which or measures by which the organizations carry out downsizing activities and the reasons that prompt companies to downsize and their effects.
This report also covers the strategic concerns in planning a downsizing operation and attempts to determine some specific reasons why some companies succeed at downsizing while others do not.
Introduction
One change which has occurred regularly in many companies is known as downsizing, rightsizing or re-engineering. This has occurred alongside the removal of managerial levels known as delayering. Organisations have cut staff, some by natural attrition others by forced redundancy but all have done it to improve efficiency to compete in the marketplace (Ader, 1998).
The important reason for change in the organisations was the need to improve productivity of the employees and firm (Parks, 1995). Ader (1998) argued that for organisations wishing to increase productivity, they must make the decision to transform the overall business objectives by assisting workers in achieving them through process redesign, organisational changes, training and continuous measurement. Nevertheless, "....if you plan a 30% productivity increase, and do not reduce the workforce by 30%...you defeat your own objective." (Ader, 1998)
Employing organisations of all sizes, locations and business activities have been under great pressures to cut back costs generally, and man power costs in particular. They have had a face recession at home and declining domestic orders, a difficult time with export orders because of downturn in the businesses, in their partners, fluctuating currency rates, low rates of return on industrial investment, high real interest charges, and changing technology. Under pressure on a number of fronts, and because of the knock-on effect of reduced consumer, many employers have been compelled to reduce costs and to reduce manning levels. Downsizing was just one of an array of methods considered and used to reduce manpower, and one that was usually implemented after other methods had been tried and failed (Gordon 1984).
Downsizing, re-engineering and re-structuring have been studied in recent organizational literature on corporate change as a means to improve organizational efficiency through organizational change. The following brief discussion and two questions will attempt to clarify the relationship of these terms for organizations attempting to improve organizational efficiency and effectiveness while reducing organizational slack:
What is their desired future market focus?
* Focus on growing or changing markets; or
* Reduce costs in a stable or declining market.
2 Which method to improve efficiency should be used?
* Reduce staff; or
* Redesign work processes.
Strategies for improving organizational efficiency
Leatt et al. (1997) adopted the following figure which depicts the relationship between these three strategies such as downsizing, re-engineering or redesigning with regard to both market focus and employees.
In the following figure, it appears that downsizing is a strategy that attempts to improve organizational efficiency in stable or declining markets, through the reduction in staff. This will be the focus of this article.
Many definitions of "downsizing" suggest a resulting improvement in organizational efficiency and performance by reducing labour costs. Proponents of downsizing point to resulting "lower overhead, less bureaucracy, faster decision-making, smoother organizational communications, greater entrepreneurship, and better productivity" (Bruton et al., 1996). Yet, not all downsizing operations succeed. The following Table represents the advantages and disadvantages of some common techniques utilized in downsizing (Leatt et al., 1997).
Advantages and disadvantages of some common technique utilised in downsizing
Downsizing
Definition of technique
Advantages
Disadvantages
Across the board cuts
Each department takes a ...
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Many definitions of "downsizing" suggest a resulting improvement in organizational efficiency and performance by reducing labour costs. Proponents of downsizing point to resulting "lower overhead, less bureaucracy, faster decision-making, smoother organizational communications, greater entrepreneurship, and better productivity" (Bruton et al., 1996). Yet, not all downsizing operations succeed. The following Table represents the advantages and disadvantages of some common techniques utilized in downsizing (Leatt et al., 1997).
Advantages and disadvantages of some common technique utilised in downsizing
Downsizing
Definition of technique
Advantages
Disadvantages
Across the board cuts
Each department takes a fixed percentage cut in its staff
Pain felt equally throughout the organisation
Penalised efficient parts of the organization
Early retirement
Opportunity for individuals to leave without financial penalties, and financial incentives paid based on age and length of service
Easy, gentle implementation, employees not forced to leave against their will
Net gains may be zero.
Outsourcing
Contracting with another organisation delivering of certain goods or services
Cost saving early on
Long-term problems may arise if contractor does not fully understand the needs of organisation
Temporary employees
Use part-time employees instead of permanent ones.
Cost saving from lower salaries and benefits
Usually lower skill level employees
Delayering
Horizontal slice removed from the organization with work being absorbed by higher and lower individuals
All operating units across the organisation are effected
May overload other employees who have had not proper training.
Source: Leath et. al. (1997)
Surveys from different Authors
Bruton et al. (1996) cite a 1991 Wyatt company survey of 1,005 downsized firms. Only 2l percent had satisfactory shareholder ROI increases and 46 percent found that reducing the number of employees did not prove to reduce expenses as much as anticipated. Other analysts also conclude that downsizing is unsuccessful in achieving goals sought by organizations (Leatt et al., 1997). Hitt et al. (1994) estimate that fewer than half of the companies reviewed achieved a reduction in overall expenditures, and less than one quarter successfully improved productivity. Another study conducted by Worrell et al. (1991) concluded that downsizing can have a negative impact on organizational performance in both the short and long term. Bruton et al. (1996) also show that the stock value of most downsized firms tends to show declines two years after they made reductions in staff. Chitwood (1997) cites a recent study conducted by the Academy of Management of Fortune 100 companies that engaged in downsizing activities between 1983-1995, results indicated that only 18 percent of companies grew in volume, while 25 percent decreased in profit, and 44 percent either merged, were acquired or declared bankruptcy. Hupfeld (1997) reinforces this by stating that in relation to downsizing, "the results are never as good as planned".
Colby (1996) believes that most organizations suffer from excess staffing and this renders them uncompetitive. Cutting back on staff will thus reduce costs. With everything else remaining the same, organizational efficiency should improve, and a case can be made for downsizing. So why does downsizing succeed in some companies and not in others? From the latest research, it seems that "why" a company decides to undergo change as well as the state of the company's organizational context may have an important effect on the success of a downsizing operation.
Downsizing creates important effects inside and outside an organizational environment. In fact, downsizing results in breaking the organization into several or many groups. A group of employees' leaves, sometimes, a group may receive advance layoff notification and a group stays. Confusion is high because employees who lose their jobs may not really understand why, since it was not their fault. The decision is often not related to their performance, while the ones who stay have done nothing more to keep their positions (Appelbaum et al., 1997).
Short-term solutions to long-term problems
One of the rationales as to why downsizing operations can fail is the use of downsizing to achieve short-term goals in the face of long-term organizational problems. Heller (1996) further notes that being too quick to downsize may increase profits in the short term but result in disaffected workers and middle managers. This leaves organizations unable to fulfill long-term goals such as the improvement of goods and services and added value by innovation and initiative. Hupfeld (1997) agrees that downsizing usually happens too quickly and further comments that while downsizing may immediately benefit the bottom line, the costs will eventually creep back into the organization.
Hodgetts (1996) also believes organizational context has a major impact on downsizing because not only is the culture altered dramatically, but also the values of the leaders change and the trust of the personnel begins to fade. Each of these three factors will be examined in terms of successful downsizing implementation by varied firms.
Conclusion
Downsizing is often unsuccessful in achieving the goals sought by organizations. Recent empirical evidence has shown that downsizing as a means to improve organizational efficiency and solve long-term problems, does not always prove to be adequate (Leatt et al., 1997; Bruton et al., 1996; Worrell et al., 1991; Chitwood, 1997; Hupfeld, 1997).
There were some tactics examined as to why some corporations appear to succeed at downsizing while others do not. Predominantly companies often fail to assess their firm's readiness for change. In many instances change is not even necessary (Chitwood, 1997; Colby, 1996). Companies that fail at downsizing also often fail to explore all the possible alternatives to downsizing (Leatt et al., 1997; Hupfeld, 1997). Another reason why some corporations do not successfully downsize is the desire to achieve short-term goals while the business faces long-term problems.
Suggestion for the company
Our company need to refocus the core areas of competency. Once this is completed, the management can then consider downsizing, if the management believe they are able to function at the same level of efficiency but with fewer employees. Research has shown that firms that synthesized their downsize strategies with their particular situation did tend to have successful results (Bruton et al., 1996).
If our company undergoes downsizing, the management must also pay special attention to whether they are providing adequate training and counselling programs for the surviving employees. Clark and Koonce (1997) suggest that a formerly popular notion was that the employees who survived a layoff did not require any special attention. Instead only the employees who lost their jobs required assistance. These researchers also imply that this notion existed for two reasons. First, it was assumed that if workers were able to keep their job they would be highly satisfied and thus would raise their productivity levels. Second, it was thought that after a downsizing, employees would be so traumatized of losing their jobs when the next round of layoffs occurred, that they would work harder and raise their productivity levels (Clark and Koonce, 1997). These are not mutually exclusive.
Our company if downsizes, then should interview workers who had survived downsizing and find that these workers were angry, confused, and insecure in the aftermath of the downsizing. The company should know whether the workers or middle managers after the downsizing they are confused or not. Case studies of Compaq Computer, the state of Oregon, and Patagonia supported the need for the concerns of the surviving employees to be listened to. Also, in the case of these downsizings, the surviving employees were successfully shown that they should not feel victimized by the downsizing process, but instead should see this process as an opportunity for personal growth. This led to a successful change effort for all parties involved (Clark and Koonce, 1997). These motivating and employee job security program must be essential for increase in the productivity of our company.
We must remember that, next to the death of a relative or a friend, there is nothing more traumatic than losing a job, as it disrupts careers and families. Most organizations have neglected the downside of downsizing because they assume that the survivors will simply be pleased and happy about keeping their jobs.
The unspoken assumption is that those remaining (who were lucky enough) will produce more than the entire group did beforehand. This usually does not happen. Rather than being thankful to keep their jobs, employees are demoralized and less loyal, more angry, cynical and distrustful. Perhaps massive layoffs could be justified if they enhanced organizational functioning. Yet layoffs do not necessarily solve the problems for which they are the proposed solutions. A study of Fortune 500 organizations engaged in layoffs showed that the more severe the layoff, the worse the organization's long-term profit margin and return on equity. If the giants are negatively affected, can smaller organizations with fewer resources escape similar negative effects (Barling, 1995).
By being fair in layoff procedures, by carefully following a strategic plan and using leadership, downsizing may be possible without permanent disability if senior management takes a moment to weigh the human resource factors versus the financial bottom line.
Recommendations
For those firms that successfully completed downsizing, it would be intriguing to see whether their organizational context had changed post-downsizing or remained the same. While downsizing remains a very important topic in organizational change literature, there exists relatively little empirical research comparing the different strategies used by downsizing firms.
The issue concerning what type of training best suits the needs of surviving employees is also an issue that would be particularly interesting for further research. For example, a study needs to be conducted which would examine if surviving employees accept more the decision to have layoffs if more emphasis is placed on why this is necessary for the good of the organization, or if instead more stress is placed on showing the employee that the downsizing will provide him/her with new opportunities for individual growth. As well, valuable insight could be provided by seeing whether individuals who are more influenced by one of these two approaches have different attributes than employees preferring the other approach. Such information would also benefit in determining what additional characteristics belong to leaders, as opposed to followers, victims and avengers.
Finally, insightful information could also be provided by further research that would compare post-downsizing surviving employee job satisfaction, absenteeism, and turnover for firms which provide substantial amounts of training and counselling for their surviving employees as opposed to firms which do not provide this type of support for these employees. If such a study supported the hypothesis that job satisfaction was higher for employees of firms that provided such programs, and also that absenteeism and turnover was lower for these organizations, this type of information would be useful in order to convince the management of our company about the merits of providing training and counselling programs for surviving employees. And the management should evaluate which method of downsizing is suitable for the success of the organisation. This is one of the downsizing challenges
References:
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