Business Decision of Downsizing

Downsizing/Rightsizing One of the harsh realities of working in the 21st century is a fundamental change in the social contract from years past wherein American workers were virtually assured of a job for their lifetimes providing they worked hard and demonstrated loyalty to their companies. By sharp contrast, today's workplace is characterized by mergers and acquisitions as well as so-called "downsizing" or "rightsizing" initiatives that are simply buzz words for employee terminations wherein even the most qualified and valuable employees may be lost through short-sighted and misguided personnel interventions.

This paper provides an exploration of the peer-reviewed and scholarly literature to identify the history of the intervention, current models and application, and views on future application or relevance of the intervention of "downsizing." A summary of the research and important findings are presented in the conclusion.

Review and Discussion In the decades following World War II, job security was an accepted part of the American workplace and many workers came to believe in a social contract that provided them with a career if they followed the rules and worked hard. For instance, Karake-Shalhoub (1999) reports that, "Downsizing has changed the ways in which companies and their employees relate. Traditionally, loyalty was rewarded with security. However, with many organizations downsizing, they are no longer able or willing to guarantee lifelong employment" (p. 2).

All of that has changed, though, and it would seem no one is immune from being laid off, fired or otherwise terminated from jobs they may have once believed were theirs for life. In this regard, DeMeuse and Marks (2003) report that, "Today, layoffs, divestitures, and closings are found in organizations of every size, in every industry, and just about every geographical location. What once were infrequent and, in some cases, unheard-of occurrences in most work organizations have become regularly occurring actions" (p. 1).

Unfortunately, the regularity with which American jobs are being lost through outsourcing overseas has compounded the problem, and these trends have changed the workplace in fundamental ways. In this regard, Karake-Shalhoub notes that, "The global economic recession has forced companies to look closely at ways in which they can cut costs. In many cases, the solution has been found in downsizing, and outsourcing has been used as a vehicle" (p. 2). Perhaps the most troubling aspect of the downsizing and rightsizing trends in recent years is their pervasiveness.

For instance, according to Custard (2007), "The work environment has basically changed. Once a government job was considered to be job security for life. Now restructuring, privatization, downsizing, and rightsizing are the words we use to describe a workplace in constant change, where job security may vaporize in the next budget cycle" (p. 4). Likewise, the private sector has not been immune to these same forces and, Custard notes that, "Private industry is no different. We hear news of layoffs and corporate restructuring every day.

Company relocations and mergers make the workplace turbulent even in healthy companies" (p. 4). In fact, such interventions are not unique to the United States but have extended to many developed nations in the West in recent years (Jinabhai, 2005). This point is also made by Kivimaki, Vahtera, Elovainio, Pentti and Virtanen (2003) who report, "Downsizing, defined as the reduction of personnel in organizations and businesses, has become a significant characteristic of working life in developed countries" (p. 57).

In addition, the terms "downsizing" and rightsizing" can also include the elimination of redundant positions, layoffs that are temporary in nature, not replacing retiring employees or those who leave the company otherwise, permitting temporary work contracts to expire without being renewed, as well as not hiring of staff to cover for employees on sick leave, maternity leave, and so forth (Kivimaki).

According to these authors, "Because many of these actions do not reduce the core staff complement, reduction in days worked may more accurately reflect downsizing than the number of employees laid off" (Kivimaki et al., p. 58). In an increasingly globalized and competitive marketplace, many companies have sought viable alternatives to reduce costs in the workplace and have used employee terminations for this purpose (Capozzi, 2003).

Not surprisingly, such drastic personnel interventions can have enormously adverse effects on those terminated, as well as the morale of remaining employees who will naturally be worried about whether they are next in line for termination. In this regard, Capozzi emphasizes that, "Downsizing, or rightsizing as it is sometimes called, is nothing more than termination of an employee or group of employees. Employees, particularly long-term employees, have difficulty facing the fact the organization is not loyal to them and will perceive the termination to be punishment" (p. 781).

Indeed, Capozzi notes that such adverse personnel actions have resulted in an increasing incidence in violence in the American workplace in recent years. Furthermore, downsizing interventions will naturally result in the remaining employees having to "take up the slack" for their unfortunate downsized coworkers, adding yet more fuel to the poor morale fires which can have some severe consequences for the company's future. According to Karake-Shalhoud, "When companies downsize and lay off employees, they expect the remaining employees to pull together for the common good.

Instead, companies often discover that employees have become suspicious and less productive. When employees feel less loyal, they focus on protecting their self-interests rather than on working for the good of the firm" (p. 2). Likewise, as Borman, Hanson and Hedge (1997) point out, "As globalization and downsizing of many organizations continue apace, they are compelled to require more of employees, including 'continuous improvement' in acquisition of new skills and flexibility in work focus as the external business environment changes" (p. 299).

While some observers might suggest that downsizing represents a discrete problem that only affects a certain segment of society, Labib and Applebaum (1993) suggest that such personnel interventions carry enormous implications for all of American society. For example, according to these authors, "The current tendency of organizations to restructure and ultimately to downsize has a major negative impact on the organizations themselves, on their surviving and terminated employees, on the government, and on society as a whole.

In fact, it is everyone's problem, and it seems to have become more the rule than the exception that it used to be in the not too distant past" (Labib & Applebaum, p. 69). Notwithstanding the profound consequences for those fortunate enough to keep their jobs, certainly, the impact on the terminated employees is much more severe, though. According to Kiviaki and her colleagues, "Downsizing can be hypothesized to increase the risk of health problems for those losing their jobs.

The findings obtained from studies of unemployment and life events support this hypothesis and suggest deleterious psychological and physical health outcomes for those who have lost their jobs. [Studies] show increased morbidity in victims during anticipation phase and after the workplace closure" (p. 57). Clearly, this strict focus on improving profitability in the short-term by eliminating qualified employees can be misguided and have unintended consequences over the long-term.

This is not to say, of course, that companies should not or cannot reduce their employee base for good cause; after all, if a company is losing money and headed for the brink, all of the stakeholders involved will be adversely affected and employee terminations may be the only viable alternative for survival. In fact, many American companies became management heavy following the end of World War II and the introduction of the GI Bill that allowed millions of returning GIs to attend college and assume middle management jobs.

This bloated condition was in sharp contrast to Japanese companies where managers were expected to oversee many more employees than their American counterparts, helping make them "lean and mean" by comparison. This is to say, though, that opting for downsizing in lieu of other, perhaps more timely and effective management interventions represents a potentially fatal blow for some companies that may already be in trouble. As Bogle (2007) points out, in times of financial difficulty or during a shaky economy, "The temptation to run the business around the numbers becomes overwhelming.

To meet the numbers, important long-term initiatives are usually the first to be cut; downsizing (artfully renamed 'rightsizing') is next in line; financial standards are then pushed to the limit; and finally, earnings become so illusory and subjective that credibility is lost" (p. 24).

As a result, companies electing to downsize their staff rather than using other innovative approaches to business reformulation stand to lose it all: "What can all too easily follow is severe damage to the corporation's reputation and then its business, happening right under the noses of our corporate directors and traditional gatekeepers" (Bogle, p. 25).

Moreover, even assuming that companies are able to avoid the violent retributions by laid-off employees going "postal" and negative publicity in the media that have characterized some downsizing initiatives when long-time employees are downsized, the organization inevitably stands to lose valuable tacit knowledge that can be irreplaceable, further compounding the adverse impact of such personnel interventions. As Droege and Hoobler (2003), point out, "An enormous amount of information and knowledge resides in the minds..

Of key people, but this material is rarely organized in a fashion that allows for its transmission to other. Employee turnover can negatively affect firm performance through loss of social capital. We expand this by taking into account the tacit knowledge that firms lose when employees leave" (p. 50). Although.