Downsizing as a management strategy: organizational and human resource implications

Downsizing has become a management mantra. Today organizations employ downsizing strategy not only as a cost cutting measure but also as a favorable restructuring strategy slated to increase the organizations productivity and competitiveness. Downsizing instills a sense of fear and undermines the enthusiasm, morale and commitment towards the organization. Organizations should focus on other areas of cost cutting and performance enhancing. In the event that downsizing is unavoidable, organizations should have in place proactive HR policies to prepare, train and to motivate surviving employees so as to minimize the negative impact. Neglecting to do so is unprofessional and could prove to be a costly oversight.

Introduction

Downsizing has become a buzzword in today's organizational context. Though downsizing, as an organizational reengineering strategy has become a familiar trend, the implications are more so in the current period of economic recession. In today's corporate world, 'job security' is a misnomer and large-scale layoffs have become a common occurrence. Organizations downsize as a cost cutting measure, to eliminate redundancy and to improve the overall profitability of the concern. As per the data from the U.S. bureau of labor statistics, national unemployment rate stood at 9.6% which is significantly higher from the 6% recorded one year ago and private employment payroll decreased by 5%. Statistics further indicate that a total of 1776 mass layoffs occurred in the third quarter of 2009 resulting in a job loss for around 277,924 employees. [BLS] While some companies in distress use downsizing as a strategic control measure, in other well performing organizations, downsizing naturally follows outsourcing or relocation of the production to overseas locations. However, there are several downsides to downsizing ranging from economic repercussions for the ousted employees, loss of morale and reduced organization commitment, and high attrition rate in organizations. A brief overview of this important topic will help us understand the dynamics of organizational downsizing and its human resource implications.

Organizational Downsizing

Downsizing has become a much employed management tool with a view to cutting costs and improving organizational efficiency. Downsizing can be defined as, 'a set of organizational activities undertaken by the management, designed to improve organizational efficiency, productivity, and/or competitiveness.' [ICMR] Initially, downsizing was done only by corporate establishments as an economic viability measure in the view of growing competition and falling demands, but over the last two decades downsizing has become a management tool that is employed even by financially sound organizations as a strategic productivity management approach. The growing number of mergers and acquisitions witnessed in the 1990's further added to the downsizing trend with companies restructuring or reengineering to optimize resources. By 1995, 85% of the fortune 500 companies had already downsized. [Franco Gandolfi, pg 2] Rapid computerization and automation of production processes further contributed to downsizing in many sectors as an efficiency measure. The enormous implications of downsizing for the employee, the organization and the collective societal context, has prompted vast attention from management professionals worldover to assess the impact of downsizing. A brief analysis of some of these empirical research studies on the implications of downsizing suggests an entirely different and opposite effect that could be called 'the downside of downsizing'. [ICMR]

Results of Downsizing

Several studies conducted over the past decade have reported negative outcomes for downsizing. The look at some of these studies would help us better understand the impact of downsizing. Griggs and Hyland (2003) reported the results of the worldwide study conducted by Washington-based global consulting firm Watson wyatt. This study conducted in 1991 included a total of 1,005 global firms. The researchers of the study concluded that the expected organizational benefits of downsizing were not visible. In all, only 46% of the firms that downsized reported cost savings, less than 33% reported increase in profits, and only 21% reported considerable ROI for stockholders. [Franco Gandolfi, pg 6] Another longitudinal study by Bergmann et.al (2004) focused on the impact of downsizing on five measures of financial performance. The study showed that firms that downsized under-performed during the next two years. Also it was shown that firms with small downsizing (3% or less) performed well in the first year following downsizing. Overall it was reported that firms with 10% or more of downsizing performed poorly compared to firms with much lower downsizing rates. Macky (2004) was a New Zealand study (conducted between 1997 and 1999) that analyzed 155 firms (45 stock listed and 110 non-listed) for the financial effects of downsizing. All the firms in the study employed atleast 50 employees. This study convincingly proved that firms that downsized financially under performed than firms that did not downsize during the study period. [Franco Gandolfi, pg 8] These studies clearly suggest that downsizing has been a failure for the companies. Downsizing as a cost cutting and performance enhancing measure has not proven successful for most firms and the reasons are many.

The Downside of Downsizing

Voluntary Turnover

Given the significant impact that downsizing has on voluntary turnover, it is very surprising that there is not much literature devoted to studying this relationship. The shock value of downsizing and the consequences are studied by management researchers. Batt, Colvin, & Keefe, (2002) for example focused on this important aspect of downsizing and reported negative effects. Downsizing affects the morale of the employees and this in turn affects the organizational productivity. According to Mitchell and Lee (1994) downsizing is "very distinguishable event that jars employees toward deliberate judgments about their jobs and, perhaps, to voluntarily quit their job." [Trevor & Nyberg, pg 5] While Knudsen et.al (2003) reported the negative influence of downsizing on job satisfaction, Armstrong-Stassen, (2002) concluded that downsizing affected trust and job involvement. These studies confirm that downsizing undermines the organizational commitment of the surviving employees many of whom look for new opportunities and quit at the earliest. [Trevor & Nyberg, pg 6]

Guthrie and Datta (2008) is an important and more recent study that focused on the effects of downsizing on the organizational performance. Using statistical analysis the researchers of this study compared 122 manufacturing firms across America. After adjusting for prior performances, the researchers discerned that downsizing did not result in any significant performance boost. On the contrary the study results suggested that downsizing had a significant negative impact on the firms profitability. The researchers also concluded that downsizing was particularly bad for research and development (R&D) and low capital intensity organizations. [Guthrie] Another recent study is Trevor & Nyberg. This study analyzed the relationship between downsizing, voluntary turnover rates and the important moderating role of HR policies in mitigating the adversary impacts of downsizing. The researchers carefully selected 442 companies from the (Levering & Moskowitz, 2000) database of 1000 companies that qualified for the 1998 and 1999 Fortune Magazine lists of "The 100 Best Companies to Work for in America." Of these 442 companies, only 267 companies (106 in 1998 and 161 in 1999) completed the data requirements for the study and all these companies were asked to fill out a detailed questionnaire pertaining to management practices as designed by Hewitt Associates.

As part of the qualification for the Fortune 100 magazine list, all the companies were requested to conduct a random employee survey of 250 and 275 employees in 1998 and 1999 respectively. Variables such as voluntary turnover rate, downsizing rate, and organizational commitment were measured. The researchers also included 12 measures as indices of human resource practices in the organizations. The survey also included questions asking about the existence of "an ombudsman who is designated to address any employee complaints, or a grievance or appeal process available to nonunion employees." [Trevor & Nyberg, pg (16)]

Overall it was found that downsizing occurred in 38% of the sample (102 companies). Logical regression analysis and multivariate tests were performed on the final completed data. The statistical analysis indicated that downsizing had a considerable effect on voluntary turnover rates. As a statistical measure one unit of downsizing increased voluntary turnover rate by .058%. The study also found that strong procedural justice practices as indicated by high rating of the HR measures tended to mitigate the negative effects of downsizing on the voluntary turnover rate. For instance, the study showed that downsizing .02 of the workforce resulted in an increase in voluntary turnover rate by about 63% in the absence of sound grievance address policies. While for the same rate of downsizing the increase in voluntary turnover rate was only 13% when the procedural justice index was high. [Trevor & Nyberg, pg 23]

Organizational Implications

Given the detrimental effects and the failure of organizations implementing downsizing it is necessary to analyze the mistakes. Almost all the studies that report failed downsizing indicate a total neglect on the part of the HR management. In this regard several studies have reached the consensus that appropriate planning, training and open communication are crucial for the success of downsizing operations. Studies have also pointed out the importance of proper training for the surviving workers so they are better prepared to handle the new roles and tasks assigned to them. Keeping the surviving employees motivated is crucial for the productivity of the organization.. As Dr. Judith Bardwick, author of the book 'One foot out the Door' writes, "After years of downsizing…most of today's workers have concluded that [companies] no longer value them. So they, in turn, no longer feel engaged in their work or committed to the company. The reality of mutual co-dependence between employees and organizations, and the advantages gained from long-term mutual commitment and engagement has been lost." [Caela Farren]

Many studies such as Beylerian & Kleiner, (2003) and Devine et al., (2003) report the gross negligence of organizations in dealing with the survivors of downsizing. The constant fear of losing the job and the insecurity that arises causes loss of organizational commitment and dysfunctional attitudes in 'surviving workers'. This is cited as the important reason why downsizing fails in most of the organizations. [Jeffery R. Woodall, pg 2] The organization should have clear HR policies that are oriented towards preparing the surviving employees embrace the change to the organizational structure. Therefore providing training and support prior to, during, and after the downsizing are very vital. This would help minimize the effects of 'survivor aftershocks' or what is also called as 'survivor illness'.

Conclusion

Downsizing has become a management mantra. Today organizations employ downsizing strategy not only as a cost cutting measure but also as a favorable restructuring strategy slated to increase the organizations productivity and competitiveness. Downsizing definitely has serious detrimental effects for the organization. The huge number of organizational failures post downsizing is enough proof of the detrimental effects of downsizing. Employee satisfaction and commitment to the organization are crucial for the productivity and success of any business. Downsizing has a negative impact on this important aspect as it instills a sense of fear and undermines the enthusiasm, morale and commitment towards the organization. Downsizing increases voluntary turnover rate leaving the organization leaner and understaffed. Companies that overlook the effects of downsizing on the survivor's motivation and their 'change readiness' are seriously risking their business by downsizing. HR management that fails to address these vital issues pertaining to downsizing are grossly negligent of employee dynamics. Downsizing is bad and a failed strategy that should be avoided as much as possible. Organizations should focus on other areas of cost cutting and performance enhancing. In the event that downsizing is unavoidable, organizations should have in place proactive HR policies to prepare, train and to motivate surviving employees so as to minimize the negative impact. Neglecting to do so is unprofessional and could prove to be a costly oversight.