22.5 Downsizing

Downsizing is a reduction of the workforce, often as a result of financial losses, cash flow difficulties, loss of contracts, technological changes, or action taken by competition. This reduction can be achieved by attrition, early retirement, and transfers within the company, as well as by layoffs. Indeed, downsizing – if it is managed in a socially responsible way – can be and often is a good opportunity to reduce costs, improve competitiveness and reinvigorate an organization. Radical downsizing has been a popular strategy and financial markets have usually applauded these drastic efforts.

However, downsizing can also strip an organization of valuable human assets and lead to deteriorating productivity, morale and loyalty. Downsizing can be planned and systematic, but often layoffs are done as a spectacular “quick fix” to send highly visible signals to investors. The actual impact of such layoffs on profitability may then be negligible in comparison to their magnitude. In many cases, downsizing fails to increase long-term shareholder value. The hidden economic and social costs of downsizing include the loss of key talent and valuable corporate memory, higher turnover and absenteeism, loss of customers due to a decline in quality and service, decline in entrepreneurship, innovation and risk-taking, and even an erosion of external reputation and brand image, and increased legal and administrative costs. High social costs usually stem from the effects of job insecurity, increased resistance to change, decreased motivation, stress, and loss of trust and loyalty.

Nevertheless, in certain cases downsizing is difficult to avoid. It can be both economically effective and socially responsible if it is conceived and executed as a part of wider transformation efforts. A good strategy may be continuous downsizing, with no major layoffs and a lean management philosophy and culture. The best downsizing practices normally emphasize:

●corporate social responsibility reflected in the corporate ethics and code of conduct;

●business vision, mission, strategy and goals, and aligning actions around them;

●leading transformation, not just downsizing, based on continuous improvement;

●focusing on people, communication, partnership and participation.

It is important for a management consultant to be well prepared to help with recovery measures after downsizing. These may involve defining a new shared vision and focusing on the future rather than the past, providing support to survivors as well as those laid off, facilitating changes in organization, job design, work-shifts and responsibilities, mapping out and updating in-house skills and translating them into company competencies, revitalizing sales and improving customer relationship management.