DOWNSIZING WORKFORCES

During the past decade in the United States, a large number of firms initiated aggressive programs to downsize their workforces. Downsizing is reducing the size of an organizational workforce. To avoid the negative terminology, some firms have called it “rightsizing.” But the end result is that many people lose their jobs.

CAUSES OF DOWNSIZING There are two major reasons why organizations with a

surplus of workers have instituted downsizing. First, many organizations have

not competed effectively with foreign and domestic competition. With higher

cost structures and lower productivity rates, many of these firms have had lower financial performance and have not adapted to rapid changes in their industries.

Consequently, due to both competitive pressures and intense scrutiny by financial investors, corporations have had to take aggressive actions to improve organizational results. Cutting back the number of employees is one approach that demonstrates that management is trying to produce better results.

Another cause for downsizing has been the proliferation of mergers in many industries. One only has to look at the financial or telecommunications industry to see the consolidation in the number of firms. While some mergers are between two huge firms, such as British Petroleum and Amoco, or Norwest and Wells- Fargo banks, others have been smaller mergers, such as the merger of two local hospitals. But a common result of most mergers and acquisitions is that there is an excess of employees once the firms have been combined. Because much of the rationale for combinations is financial, eliminating employees with overlapping responsibilities is a primary concern. The wave of merger and acquisition activity in the United States has often left the new, combined companies with redundant departments, plants and people.

In both causes for downsizing, there often is an undercurrent of change that management believes to be necessary. By restructuring the organization, management hopes to realign it to achieve strategic objectives. In some firms that have downsized, more jobs have been created than jobs eliminated; but often the new jobs are filled by employees with different capabilities and in different organizational areas from those in the old jobs.

CONSEQUENCES OF DOWNSIZING Despite the extensive usage of downsizing throughout many industries and organizations, there are significant questions about the longer-term value of downsizing. In some companies organizational performance has not improved significantly, although operating expenses decline in the short term. Only 43% of the firms in a study by the American Management Association (AMA) had an increase in operating profits as an immediate result of organizational restructurings, and only 30% had an increase in worker productivity. For instance, both Kodak Corporation and Apple Computer have cut thousands of workers in the past few years, and both firms are continuing to lose money or lag their competitors in profitability.25 In the case of Kodak and many downsized firms, despite eliminating many workers, the final number of employees changed very little, but the disruption in the organization has caused significant problems. What these firms and others have found is that just cutting payroll expenses does not produce profits and strengthen growth if the firm’s products, services, and productivity are flawed.

In some downsizings, so many employees in critical areas have been eliminated— or have chosen to leave—that customer service and productivity have declined.

In the telecommunications industry, so many of the craft and technical workers of Bell Atlantic accepted a company buyout offer that the remaining installation and repair technicians could not keep up with customer service demands and work orders. At AT&T about 20% more managers elected to leave the firm than was anticipated, which reduced the managerial depth needed to handle the dynamic environmental facing AT&T.

Corporations that are closing facilities or eliminating departments may need to offer financial transition arrangements. A transition stay bonus is extra payment for employees whose jobs are being eliminated, thereby motivating

them to remain with the organization for a period of time.

Just as critical is the impact of job elimination on the remaining employees.

The AMA survey found that in 69% of the surveyed firms, employee morale declined in the short term and 28% of the firms had longer-term declines in employee morale. Additionally, resignations and employee turnover all increased substantially in the year following the downsizing. These consequences are crucial challenges to be addressed by HR management when organizational restructurings occur.

MANAGING SURVIVORS OF DOWNSIZING A common myth is that those who are

still around after downsizing in any of its many forms are so glad to have a job

that they pose no problems to the organization. However, some observers draw

an analogy between those who survive downsizing and those who survive wartime but experience guilt because they were spared while their friends were not. The result is that the performance of the survivors and the communications throughout the organization may be affected.

The first major reduction in force (RIF) of workers ever undertaken in a firm is often a major jolt to the employees’ view of the company. Bitterness, anger, disbelief, and shock all are common reactions. For those who survive the cuts, the paternalistic culture and image of the firm as a “lifetime” employer often is gone forever. Survivors need information about why the actions had to be taken, and what the future holds for them personally. The more that employees are involved in the regrouping, the more likely the transition is to be smooth. Managers, too, find downsizing situations very stressful and react negatively to having to be the bearers of bad news.