Downsizing - myths & methods

The economy is heading into recession, therefore it is worth asking what organisations gain from downsizing. Perhaps surprisingly, Rock the Boat’s evidence suggests that organisations achieve no financial gains and, in many cases, the aftermath of job cuts leads to poor performance and pressure to cut even more jobs. So what is the best approach for organisations facing the current economic climate who want to secure their long term viability?

Recent studies have looked for evidence that downsizing leads to improvements in financial performance. The results are mixed, due in part to the difficulty of separating out several distinct phenomena. For example, in the case of a company confronting falling demand for its products, downsizing looks like a way to survive. The stock market may react positively to downsizing announcements in the very short term, particularly when such announcements are coupled with a credible plan for improving performance. However, our research suggests there is little evidence that in general, long term financial performance or stock prices are improved by job cuts.

It is a fact that some organisations deal with economic slowdowns well and others do not. Those that downsize might have deeply entrenched problems that are difficult to address and simply axing jobs will not resolve these issues. Such problems may be largely the result of poor management and therein adds another dimension to the downsizing dilemma as organisations with weak management rarely downsize effectively.

Much of the downsizing and job cuts that organisations openly discuss in the media do not actually require any lay-offs. Hiring freezes or slowdowns, when combined with natural attrition, may cut the workforce and associated labour costs. When your competitors appear to be slashing jobs, it is important to understand just what they are slashing. Sometimes, it turns out, job ‘cuts’ may even refer to the elimination of planned new positions. This gives the impression that jobs are being cut, even though total employment stays the same or grows.

Organisations that aim to downsize successfully might think of lessons learned from our experts at Rock the Boat. Tasks that can be pulled in from contractors and reassigned to employees, for example, can prevent companies from having to make lay-offs. Similarly, some employees can be redeployed to parts of the business that are growing or likely to grow in the future and thus the need for lay-offs can be minimised. Buy-outs and voluntary departures can also make things easier. However, the latter can be a very slow way to restructure in a rapidly changing world. Hiring freezes and reliance on attrition come with their own costs. It is difficult to infuse new skills and abilities into an organisation when you’re not hiring. Relying on attrition alone is particularly risky. In this mode, organisations are purely reactive. Asking for volunteers to leave the organisation runs the risk that the most able employees leave. On the whole our consultants observed during the last recessions that voluntary redundancy programmes were well oversubscribed.

Nevertheless, some organisations do manage to downsize effectively and some themes can be identified among them. Effective downsizing requires clarity of purpose, credibility and clear communication. Organisations seeking to cut jobs in response to market-driven downturns, for example, can make this clear and credible by setting out straightforward criteria for re-employment should the company see the market recover. Failure to do so leads employees to suspect, often with good reason, that the market is being used as a scapegoat for other kinds of changes and in turn leads to a scepticism that makes it difficult to implement those changes.

On the other hand, organisations may also seek to downsize as a way of changing the mix of skills and attributes of their workforce. In this view, downsizing can be a small part of a strategy of continuous improvement and renewal. Again, clear communication of this strategy and its underlying rationale is critical; employees, with good reason, will want to know how they fit into the plan, and if not, what they might do about it.

Many managers will be faced with the task of making lay-offs. Most managers find this process difficult and very often don’t receive the training and support required to deal with these challenges. Many, though not all, of the problems of downsizing can be associated with low levels of trust between those making the decisions and those on the receiving end and this is where clear communication is vital.

Downsizing can disrupt networks that are crucial for sustained performance, such as those that permit innovation. There is often such a focus on the task of reducing the workforce that there is little attention paid to those employees who remain in the organisation. There are psychological blows; stress increases as well as feelings of insecurity among these employees. Further stress is likely to result from demands to increase productivity, from the struggle to adapt to job changes and from changes in structure.

Not all insecurity caused by downsizing is a bad thing. Survivors do not want to be targeted for the next round, so they can be motivated. Moderate levels of insecurity, in fact, can help - but not high levels. When people remain insecure in spite of their best efforts, motivation suffers. Such employees will redirect their attention from the good of the company to protecting themselves.

Employers should consider ways to provide more global security even as they generate local insecurity. This can be done by assessing employees’ interest in skill development. Employees who believe that their organisations are committed to keeping them employable will reciprocate with greater commitment and such organisations may also be more likely to retain valued workers.

Rock the Boat have successfully helped organisations realise that approaches other than job cuts may be better solutions for the problems they face and their long term sustainability. To find out ways in which we can support your organisation through this challenging climate or to discuss points raised in this article visit our contact page.

Niall Foster