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Downsizing


1.   Introduction

Once people are viewed as assets to develop; now they are viewed as costs to cut (Central, 1998).  Increased domestic and international competition, deregulation, mergers and acquisitions, pressures for increased profitability and performance have all played a part in forcing business organizations to adopt downsizing as the prevalent strategy since late 1980s.  Downsizing aims to achieve greater organization efficiency by job elimination (Stone, 1998).  However, downsizing is more than a simple reduction in head counts.  There has been increased appreciation for the impact layoffs have on the human resources who remain since these individuals represent the future success of their organizations.

Downsizing may be the most traumatic of all organizational changes.  Robbins et al (1996) argue that even the best planned and executed downsizing effort creates tremendous anxiety for those remaining employees (survivors) in the organization.  Most downsized organizations are failed in achieving desired outcomes due to lack of proper planning and addressing feeling to the survivors.  Downsizing can threaten employees・ sense of well-being and hit morale.  If actions are not taken to address these problems, there would be long-term effects as survivors represent an essential resource for the organizational future survival.

However, there are also potential benefits from downsizing if it is managed effectively with proper intervention to build morale of existing staff members.  Gebhart (1997) argues that the downsizing trend is a clear ethical paradigm shift.  Lifetime employment is no longer promised or implied.  Organizations must be able to step forward to a new psychological contract with a solemn commitment to treat all employees with dignity in the downsizing process (Gebhart, 1997).

2.   Discussion

Downsizing sometimes called rightsizing, RIFs (reductions in force), and restructuring (Robbins et al, 1996).  It is defined as .a set of activities designed to make an organization more efficient, productive, and/or competitive through the planned elimination of positions or jobs・ (Ferris et al, 1996).  Since labor costs represent a big part of an organizational total costs, it is an attractive to start for downsizing.  Hence, downsizing is often viewed as .forcing people to leave their current employment through no fault of their own・ (Fawcett, 1997).  The whole theme of downsizing equates to lowering operating expenses by employee elimination to show a greater profit for the organization (Choy, 1999).

Downsizing became the corporate buzzword nowadays and most organizations use downsizing as one of their strategic planning to improve effectiveness and efficiency.  Massive layoffs have been spreading over.  Business Review Weekly (Nankervis et al, 1999) has shown the top five staff cutters recorded at Australian commercial enterprises since 1990 (Figure 1).  Some organizations use downsizing as long-term strategies and play it as repeated actions.  One research (Figure 2) has discovered that 24 percent of 500 surveyed organizations have downsized three times or more in the past three years (HR Plaza, 1999). 

2.1    The effects of downsizing

Bourque et al (Dupuis et al, 1996) argue that massive downsizing very often seems to generate more problems than it solves, and only rarely does it achieve its original financial objectives.  Frequently organizational performance suffers due to a drop of employees・ morale, which are not easily recovered.  Therefore, downsizing has long-term negative effects on both employees and organizations.

2.1.1 Employees

A downsizing begins with a sense of violation and ends with angry, sad and depressed employees.  The loss of co-workers and friends is a painful experience to survivors, who may feel guilty and deep-sensed unfairness and suffer from .survivor sickness・ (Central, 1998).  The symptoms include fear of persecution, inner tension, diminished self-esteem, lack of initiative, general apathy, depression and a paradoxical sense of guilt (Dupuis et al, 1996).  Walter (1997) argues that managerial leadership has lagged from downsizing also because managers experience the same symptoms as co-workers, as well as the burden of providing undefined leadership during the transition period.

People need a vision of the future, a sense of what they are trying to achieve, and they also need to know that they are part of a goal-oriented team pulling in the same direction (Bacal, 1998).  However, downsizing has disrupted survivors・ sense of futility with respect to the long-term planning of the organizations.  They may feel distrust and betrayal by the management that their commitment to the organization may suffer and seek for other jobs for sense of security.

Reduction of organizational or hierarchical layers redefines traditional career paths and reduces opportunities for promotion.  The new reporting channels require adaptation, information evaporate all affect survivors in their well-being.  They may feel confusion about their mandate and dissatisfy with communication from leaders.  They may think performance by merit no longer exists that may cause decreasing motivation.  Sharing the work from the laid-offs may frustrate and overburden survivors, which cause them to display unusual stress behaviors.

Elimination of specific jobs may lose good people simply because they have held the less essential jobs.  The emphasis on generalist rather than specialist skills hurt the psychological contract between the organizations and employees.  Survivors may build the employment relationship temporary and their prime loyalty being to themselves not the organizations (Stone, 1998).

All of these effects would hit the employees・ morale, reduce trust and productivity, and ultimately a loss of business (Stone, 1998).  Beach (Monk, 1998) has defined morale as .the total satisfaction a person derives from his/her job, working group, boss, organization and environment.  Morale pertains to the general feeling of well-being satisfaction and happiness of people・.  Hence, low morale generally indicates bad signs such as absenteeism, breaches of discipline, higher employee turnover, complaints, lower output, loss of interest, group conflicts, disloyalty and sabotage.  Consequently, low morale can decrease productivity, effectiveness and efficiency that hurt the competitive advantage of the organization.

2.1.2 Organizations

Downsizing can hit morale and translate into a number of organizational problems. Margulis (Dupuis et al, 1996) warns that the best and the brightest employees will often leave the organization after downsizing.  The costs of hiring new employees are enormous for an organization that has lost not only its best people but along with their special know-how and expertise.  The consequences can be disastrous for the organization to keep up with its competitors because of a drop in the quality of its products and services.  A research from HR Plaza (Figure 3) has shown a funny result that 35 percent of organizations found they have lost their valuable talents and have to even paying more to re-employ former employees after downsizing (HR Plaza, 1997).

Furthermore, most organizations have found that downsizing cannot achieve desired outcomes as expected.  The survey from the Wall Street Journal (Figure 4) illustrates the facts (Noe et al, 1997).

Gebhart (1997) argue that it is a common myth to assume downsizing can bring about immediate savings and an improved corporate financial performance.  In fact, there is frequently an immediate short-term increase in expense as the cost of downsizing is amortized (Gebhart, 1997).  New costs include development of a layoff strategy; retrain employees to prepare them for new tasks and technologies; separation allowances, enhanced retirements, special outplacement benefits; and potential legal claims for wrongful dismissal.  Also, downsized organizations often move towards less risk-taking and innovation, destructive conflict tend to increase, internal competition for resources increases, individual survivors devote less effort to working together and more attention to doing things that will protect themselves, general listlessness and lethargy, and decrease service levels and increased public hostility (Bacal, 1998). 

2.2        Effective downsizing interventions

Some literatures view downsizing as a .positive strategic planning tool・ in preparing organizations to deal with the challenges the next two decades have in offer, and an opportunity to revitalize the organization (Jones, 1996).  The anticipated benefits of downsizing increase operational efficiency of the organization in terms of the economic level.  Noe et al (1997) emphasize that downsizing can provide opportunities for human resource management.  It often allows the organization to .get rid of dead wood・ and make way for fresh ideas.  It is often a unique opportunity to change an organizational culture and can demonstrate to top management decision-makers the value of the organizational human resource to its ultimate success.

Some organizations have used downsizing efforts to implement increased employee participation programs such as empowerment, self-managed work teams, and mentoring to help redefine employees・ own job.  The upside of downsizing is significant.  The relationship between the company and the employee today is much less paternalistic and less autocratic.  Downsizing helps to develop a high performance workplace, the survivors have opportunities to learn new skills and gain broader job experience (Robbins et al, 1996).  The workforce as a whole is more diverse and has more ability to response change around them.

Although there are more arguments on the negative effects on downsizing, there are times when a reduction in workforce is clearly necessary.  In order to reap the benefits of downsizing as discussed above, Mishra et al (Choy, 1999) argue that management should never see downsizing as a short-term fix.  Instead, it must integrate the decision to downsize into a well-crafted, credible vision that makes clear how downsizing will create a competitive advantage with ethical considerations.  Therefore, a careful and systematic invention is required for the transition.

Brockner (Dupuis et al, 1996) proposes a well-planned intervention, which is divided into three basic stages: before, during and after downsizing.  However, ethical viewpoints should be considered too.  Without concerns on ethical issue, downsizing can only achieve short-term results and cannot obtain the long-term potential benefits because lack of employees and public supports.

2.2.1        Before downsizing

The actions before downsizing are to assess the relationship between strategy, corporate culture and downsizing, notify affected individuals well in advance, identify champions that will be involved in the new organization, provide training for managers and supervisors (Dupuis et al, 1996).

Choy (1999) suggests that management should first consider ethical issue to show compassion towards the needs of each individual within the organization.  For example, implementing hiring freezes, salary freezes, overtime restrictions, pay cuts, elimination of bonuses, shortened workweeks, or unpaid vacation can show the employees that management is doing everything they can to save their jobs and to keep the company healthy.  Downsizing should then be considered if these attempts are failed.  This includes an analysis of the corporate culture and a thorough articulation of the issues and concerns that have resulted in the decision to reduce the workforce (Gebhart, 1997).  Stone (1998) emphasizes that downsizing should be a product of the organization aligning its strategic business objectives and shaping its corporate cultural to better fit its changing environment.

According to Gebhart (1997), the announcement of the decision to employees should be handled with ethical concerns, of which a forthright, honest and timely fashion is vital to the maintenance of trust.  Deep expressions of regret are combined with the conviction that this is the right and necessary decision.  Walter (1997) argues that it is critical to convey the message as everyone・s responsibility to determine continued competitiveness.  The organization may encourage all employees to participate in shaping, not just implementing, but also the organizational redesign plan.  This paradigm shift requires collaborate planning for functional and cross-functional areas.  If an organization simply reduces the number of its employees without changing its work processes, work overload and staffing growth will recur eventually.

Finally, those who continue employment after downsizing often feel demoralized and alienated from the organization.  If trust is damaged or broken, the survivors may act on their need to retaliate or defend themselves from what they believe will be further mismanagement (Gebhart, 1997).  Supervisors and managers must be trained to recognize, understand and respond to the trauma being experienced by survivors.  As with support for departing employees, specific strategies must be created in response to the ongoing grief, negativity, mistrust, and fear.

2.2.2        During downsizing

During downsizing, the necessary actions are to provide employees with as much information as possible, open communications, help those encountering difficulties, treat victims and survivors with respect and dignity, make senior managers more accessible, and organize events to facilitate the transition (Dupuis et al, 1996).

Employees do not get information about downsizing from formal channel would look from informal channel like the grapevine.  The disadvantage of the grapevine is that it may transmit incorrect and untimely information.  When grapevine passes inaccurate or unconfirmed information, especially about rumored layoff or other stressful events, employees who cannot verify the truth may feel demoralized.  The Lawrence Ragan Communications (1998) recommends to communicate immediately with employees details of .3Ls・: layoffs, losses and lawsuits, as well as other important news affecting the organization.  Hence, management must create open communication channels to increase information exchange by developing formal and informal channels such as newsletters, email, bulletin boards, annual report, suggestion box, etc.

Brockner (Dupuis et al, 1996) proposes a perception of fairness model to treat victims.  The studies show that concerns from employees regarding the downsizing process include reasons and justification for the cuts, strategy consistent with the corporate culture, employee involvement in the decision-making process, sufficient information and frank communication, cuts extend to the upper levels of the organization, knowledge of the process used for cutting positions, services available to those leaving the organization.  Researches support this view that survivors of a layoff are most affected when they feel those laid-off are not compensated fairly, or are unfairly let go (Pisarnweerawong, 1996).  Therefore, a proactive planning providing counseling and guidance (for example, providing online listings of available openings in other companies) to help those laid-offs can ease the stress from the survivors.

For the survivors, the organization also needs to anticipate and plan to address the immediate loss of morale, trust in management and ability to cope with stress that occur in the wake of a downsizing to prevent those negative feelings fester and hinder employees from moving forward (Mishra et al, 1998).  Fox (1997) suggests that the management should help employees overcoming five types of loss: security (not feeling in control), competence (don・t know what to do), relationship (familiar relationships are gone), direction (don・t know where they are going), territory (feel uncertain about what is theirs).

According to Walter (1997), two diverse groups of survivors are likely to emerge from downsizing: independent and dependent ones (Figure 5).  Independent employees would challenge the status quo, be confident to recognize their skills and know what is needed to be competitive in the new paradigm.  However, the dependent employees would resist, remain paralyzed, and avoid efforts to change the status quo.  The management・s major challenge is to encourage, support, and motivate this latter group to embrace the new paradigm.  Their resistance to change is most often based on job insecurity which leads to a self-defeating cycle.  The fear of this group must be directly and positively addressed with available training options in place.  This can be handled by fostering employee loyalty through promise of continued employability.  Employees equate security with their value in the workplace, which is assured by a wide range of marketable skills and the comfort that their present employment is insured as long as they add value to the organization.

Finally, management must be visible and sensitive to responding to the impact of the change (Walter, 1997).  Gebhart (1997) argues that ethical response is necessary to provide empathy and understanding to those who are experiencing the full emotional gauntlet: fear, anger, grief, loss, guilt, and the erosion of self-esteem.  This support can be provided in a highly personalized way by specialists who take the time to listen, to provide counsel and reassurance, who assess deeper personal and family needs, and who then help persons become focused for the essential task of finding new employment.  Frequent written and oral communication is also essential to create new organizational direction.  Ambiguity during the transition can be replaced by feelings of power and control as each employee contributes to the redesign of work and openly confronts the related issues of overload, stress, and uncertainty.  Continued evaluation of the restructuring process must occur on all levels. 

2.2.3        After downsizing

The actions after downsizing are to solicit employee participation, work towards job enrichment, eliminate useless work, and make sure that survivors recognize new opportunities (Dupuis et al, 1996).

Open communication, managerial support and employee retraining are the keys to motivate the survivors of downsizing.  Positive, inter-group relations between managers and their supervisor share a positive effect on management involvement, organizational trust, and organizational commitment, which return gaining employees・ loyalty, trust and eventually increase job satisfaction.  The management should encourage employees・ participation and enrich them by clearly defining and communicating the organizational short-term and long-term vision and values (Jones, 1996).  They may also consider using contingent workers to relief the survivors・ workload.  The benefits include flexibility, cost control and expertise that can be focused immediately on specific tasks and projects.

Gebhart (1997) emphasizes that the new ethical issue the organization should manage is to shift from a former pledge of lifetime employment to a new pledge of lifetime employability.  It involves providing employees with increasing skills and competencies that will be marketable when employment ends.  Ray et al (1995) states the results of training such as improved employee morale or job satisfaction are often described as intangible and hard to measure. 

Finally, the management must set new performance targets and communicate downwards the new performance standards, change reward and pay systems that matches new goals and objectives.  The organization should create alternative career paths.  For example, the organization can allow employees to advance by moving horizontally rather than vertically, for example job enrichment and self-directed teams with help and coach from managers.

3.   Conclusion

Downsizing attracts considerable criticism for its short-term fix and social irresponsibility.  The negative effects of downsizing can threaten employees・ sense of well-being and hit morale, and ultimately translates problems to organizational level such as decrease of productivity and competitive advantage.  However, there are also potential benefits of downsizing such as operational efficiency, revitalize human resources, increase skills diversity, etc.  Leading staff through downsizing requires organizations to use a systematic approach of intervention with ethical considerations to build morale of existing staff members.  It is a complicated task that involves the management in recognizing the natural reactions of survivors, and determining the right timing for moving the organization from the emotional reactions to a focus on the present and future.  The consequences of improper management of the process can be disastrous.

To conclude, it must be emphasized that downsizing should be a product of the organization aligning its strategic business objective and shaping its corporate culture to better fit its changing environment.  Therefore, downsizing needs to be conducted in a humane way with honesty, compassion and good communication with all concerned in order to be effective for the long-term.


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