What is downsizing what are the different approaches of downsizing employees in the organizations?

Although the first definition of downsizing in the Merriam-Webster dictionary is to reduce in size, in the world of business the term refers to the termination of employees from a company because their positions are no longer needed. There is usually some organization restructuring involved with downsizing. The downsizing definition may also encompass the closing of plants and facilities where downsized employees once worked.

Layoff vs. Downsizing Definition

Layoff is another term used to describe a group of employees who are terminated as part of cost-cutting efforts. With a layoff, positions are typically not eliminated even though the employees who once filled the position are no longer working. The loss of employment may be temporary, and some commitment may be made to employees of a possible rehire at a later date. However, employees are not usually given a future opportunity to do the same job at the same location when a business downsizes. Other terms used to describe downsizing include right-sizing and reduction in force (RIF).

Layoffs are more common in businesses with temporary or seasonal employees, such as jobs in the tourism industry that are linked to a specific tourist season. Construction jobs in areas where work stops in bad weather are subject to layoffs. A layoff may also occur in any industry during an economic downturn due to a loss in business, with the implication that positions may be filled again when business improves.

Reasons for Downsizing

Although cost reduction is the goal for most companies that downsize, many factors lead to the downsizing decision. Automation is often involved, with jobs previously performed by humans taken over by computers and other machines. Lower demand for a company’s goods and services is another reason often given for downsizing, with low-performing departments targeted for staff reductions. Downsizing may also be used to eliminate duplicate positions when two companies merge or when one company buys out another.

Approaches to Downsizing

The downsizing meaning does not include a time period for completion. A company may terminate employees all at once or over an extended period. Due to the current climate of global competition, downsized positions are not always eliminated; they may be relocated overseas where cheaper labor is available. Whatever the approach, downsizing a business typically has a damaging effect on employee morale and profitability.

A modern example of the negative impact of downsizing is Nokia. After seeing record profits in 2008, the Finnish telecommunications company attempted to cut costs by closing a plant in Germany and downsizing 2,300 jobs. The announcement led to protests, a shutdown and a boycott of Nokia products. The Harvard Business Review puts company losses at $227 million due to fallout from the proposed downsizing. The Nokia brand also took a beating. Three years later, with its mobile phone business collapsing, the company began a restructuring program that downsized 18,000 employees around the world.

Downsizing Results

The history of U.S. businesses over the past several decades shows that the value of a company’s publicly traded stock usually rises following a downsizing announcement or any announcement about cutting costs. There is a perception that an organization will be leaner and more efficient after shedding employees. Management may also bank on remaining employees becoming more productive to keep their jobs secure.

Despite short-term gains, downsizing may hurt a business more than it helps. According to the Harvard Business Review, a team of researchers who looked at business information for almost 5,000 companies dating back to 2010 found that organizations that downsized within the period were twice as likely to declare bankruptcy subsequently. Although money was saved in the short term by eliminating employees, many companies were unable to fill knowledge gaps left by employees who were let go. Companies that survived downsizing leveraged intangible resources like remaining employee knowledge to revamp operations and streamline processes.

In business, downsizing refers to reducing operating costs – making a company leaner – often described as ‘trimming the fat’. This involves reducing the size of the workforce, plant closures, and making the firm’s departments more productive and efficient.

The aim of downsizing is to restructure an organization in order to make it more competitive. It is a natural progression in terms of the development of an organization.

Some people say downsizing differs from a layoff, with downsizing being a more permanent measure, while a layoff might include a chance of rehiring the workers who lost their jobs at a later date. Today, the term ‘layoff’ can mean either the temporary suspension or permanent termination of a job.

If not prepared and carried out properly, downsizing can have unpleasant repercussions for a business.

It is a very common measure that businesses enforce during times of market volatility or poor financial performance.

Many people, especially workers unions, say downsizing is simply a euphemism or doublespeak for a layoff.

Companies typically downsize in order to:

• Improve efficiency (by replacing employees with machinery).
• Reduce costs.
• Rightsize resources relative to market demand.
• Take advantage of cost synergies after a merger.
• Increase profits by reducing overhead costs.
• Respond to a decline in demand for the company’s products or services.

Businesses can go about downsizing in different ways. Some may go for a ‘gentler’ approach by offering early retirement and the possibility to transfer to a subsidiary company.

Unfortunately, for some of the workforce, the most common way to downsize is to terminate the employment of a chunk of workers.

Those in charge of downsizing will target staff and departments that are seen as ‘redundant’ (surplus to requirements) or loss-makers.

Businesses that are downsizing attempt to take the necessary steps to ensure that people who are highly valued are kept on. However, often employees who consider themselves as ‘key personnel’ find themselves out of a job, especially if the trimming is aimed at management personnel.

The trimming process may occur gradually, bit-by-bit over a period of a couple of years, or suddenly, with one giant slice.

Even when prepared meticulously and carried out properly, the whole process of downsizing can be extremely nerve-wrecking for employees, even for those who are kept on, because everyone starts wondering how safe their jobs are and whether they might be next.

How should companies approach downsizing?

It is important to look at the consequences of downsizing and ensure that the value created from trying to make the business more streamlined outweighs the potential damage to the reputation of the company and decline in employee morale.

There are costs associated with the process. It is vital to carefully evaluate factors such as the potential lower productivity, talent loss, cost of severance packages, and future hiring and training costs.

Most experts say it is in the company’s best interest to make sure the downsizing process is done smoothly. This can be achieved by proper planning and determining the right amount of job cuts – one that suits both the company and its shareholders.

Outplacement

Outplacement refers to a downsizing company’s efforts to help former employees transition to new jobs. Some consultancy firms provide outplacement services, which are paid for by the former employer.

The aim of the outplacement professional is to provide advice and psychological support. The service includes:

• career guidance,
• resume writing,
• career evaluation,
• interview preparation,
• job search skills, and
• how to target the job market.

Video – Key considerations to downsizing

Mike Sweeney, Emeritus Professor of Operations Management at the Cranfield School of Management, England, discusses five key steps to successfully manage downsizing or plant closure.

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