Project Report: Human Resource Management

How to deal with

Downsizing
Executive Summary
Organizational downsizing is a reduction in organizational size and operating costs
implemented by management in order to improve organizational efficiency, productivity and/or
the competitiveness of the organization. It affects the work processes of an organization since
the end result of the downsizing is typically fewer people performing the same workload that
existed before the downsizing took place. Downsizing can also be carried out to align the firm's
skill and talent with the broader market. Eliminating any part of an organizational structure that
is not directly adding any value to the final product is a production and management
philosophy known as lean enterprise. For example, a company may pursue downsizing to weed
out employees with obsolete skills which may not be useful in its future direction. The act of
downsizing results in two categories of people:

 Victims: The people who involuntarily lose their jobs due to organizational downsizing.
 Survivors: The employees who remain after organizational downsizing takes place.

Many organizations feel downsizing would make survivors more grateful and thus, can fuel
more output with reduced costs. But if improperly handled, it can lead to a sense of withdrawal
and frustration in the environment. Thus, to avoid common problems, caution and planning are
essential before choosing to downsize. The HR professionals should prepare for downsizing in
the following manner:

 Seize the opportunity to help shape the agendas and strategies of the organization with
respect to workforce issues.
 Educate executives about the effects of employment downsizing on those laid off,
survivors, the psychological contract, high-involvement workplaces, knowledge based
organizations, long-term financial performance and communities.
 Ensure that managers are cautious in implementing downsizing strategies that can
impose such traumatic costs on employees, both on those who leave and those who
stay.
 If employment downsizing is necessary, take steps now to address the unpleasant
symptoms associated with survivors’ syndrome. Doing so will help control stress,
voluntary turnover, drop in productivity and innovation, and other unpleasant side
effects.

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Why is Downsizing done?
Firms all over the world undertake downsizing with the expectation that they will achieve
economic benefits. The belief that there are only two ways to make money in business—cutting
costs or increasing revenues—leads to this expectation. Payroll expenses are fixed costs, so by
cutting payroll—other things remaining equal—firms should reduce expenses. Reduced
expenses translate into increased earnings. Earnings drive stock prices higher, and this makes
investors and analysts happy. The key phrase here is ceteris paribus (i.e. other things remaining
equal). Many organizations define workers only in terms of how much they cost and fail to
consider the value they create. For this reason, other things often do not remain equal, so many
of the anticipated benefits of employment downsizing do not materialize. In addition to a
smaller payroll, a downsized organization often means:

 Lost business as a result of fewer salespeople

 Lack of new products since there are fewer R&D staff members
 Reduced productivity when high performers leave as morale decreases
Such missed opportunities—resulting from downsizing—can have a huge negative impact on
the fortunes of an organization. Beyond missed opportunities, large layoffs tend to result in a
substantial decline in employee morale and commitment and a significant increase in stress.
And for the bottom line, research indicates that companies with very deep layoffs
underperform the market by as much as eight percent over the ensuing three years. But firms
are still resorting to layoffs due to the following reasons:

1. Poor economic conditions prompt employers to terminate workers

2. Mergers and acquisitions cause downsizing so that the firm has optimal workforce
3. Organizational restructuring such as branch closings, departmental consolidation or
cost reduction techniques
4. A product or service category loses command in the marketplace
5. To increase overall efficiency

In many cases, downsizing is also a cloning response as companies copy their rivals. Sometimes,
this seems to be the only choice if a company wants to remain competitive when rivals reduce
wages to cut costs. There is also a tendency—known as the vividness heuristic—to give undue
attention and weight to particularly vivid or newsworthy examples of downsizing. Companies
that have reaped dramatic benefits from downsizing and redesigning business processes, such
as General Electric and Procter & Gamble, become templates for how the process works—
disregarding thousands of companies that cut payrolls but continued to struggle. Executive

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overconfidence exacerbates this problem. A chief executive officer is far more likely to see
himself or herself pulling off what Jack Welch did at GE than to recognize the probability that
layoffs will make only a trivial difference. Some companies resort to downsizing because CEOs
are worried about complaints from shareholders and analysts. Even before Citigroup
announced layoffs, for example, a chorus of critics insisted that the company was a bloated
giant that needed to get its costs under control. Even if the job cuts did not improve the stock
price, they served as a signal that the company was listening. The layoffs did not, however,
prevent Citigroup from filing for bankruptcy in November 2009.

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What are the effects of Downsizing?
Financial Cost
 Potential salaries that the company pays might decrease, but severance packages need
to be disbursed
 Survivors often need to be paid extra for handling the excess work left by those who
leave

Downsizing reduces the amount the company pays in salaries and benefits, but it comes with its
own set of costs. Severance packages and payment for any continued benefits potentially cost a
large chunk of money at the time of downsizing, depending on how many people are let go and
what their contracts say about layoffs. Any employees who have built up vacation time receive
a payout for that amount, adding to the costs. Employees who stay with the company often
take on the responsibilities of those who leave. This takes time away from their own duties and
may result in overtime, costing even more money. If the business turns around and there is a
need to hire more employees in the future, the company incurs more expenses for advertising,
recruiting, screening and hiring employees.

Decreased Morale
 Downsizing announcement is enough to create a morale drop in the employees
 Extra responsibilities and overtime cause frustration in survivors
 Survivors feel continually threatened for yet another round of layoffs

As soon as the downsizing announcement occurs, the company morale is expected to decline.
Employees worry about who will lose their jobs and how the company will function once they
are gone. After the downsizing takes place, remaining employees may face greater work
responsibilities without extra pay, decreasing morale even further. The employees may worry
that another round of layoffs are possible. If the reasons for downsizing or the process of
eliminating employees is considered questionable by employees, the company may lose trust
and respect. Downsizing may also actually increase the likelihood of bankruptcy due to the
reduced productivity, customer satisfaction and morale. Firms that have downsized are much
more likely to declare bankruptcy in the future, irrespective of their financial health.

Reduced Creativity and Productivity

 Employees avert risk taking and drop any creative idea they formerly had
 Employees may not wish to share their creative solutions with the current organization

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According to a study performed by Harvard Business School, downsizing is one of the factors
that cause a decrease in creativity in the workplace. Losing employees with valuable
institutional knowledge can reduce innovation. Remaining employees may struggle to manage
increased workloads and stress, leaving little time to learn new skills—which can negate any
theoretical gain in productivity. Losing trust in management also inevitably results in less
engagement and loyalty. The workplace becomes a less creative environment and employees
don't make as many bold, creative moves in their work. In some cases, the employees may
reserve ideas in case they too are downsized or decide to move to a different company. Lower
creativity sometimes translates into lower productivity and fewer innovative ideas to keep the
company competitive.

Sense of Procedural Justice

 Survivors are likely to react negatively if the layoff decision is perceived as ‘ill
intentioned’
 The level of survivors’ input is positively related to the procedural justice perceptions

Procedural justice is referred to as the fairness of the process used to implement the
downsizing, which is often operationalized by the decision rule used to choose who is laid off
and in terms of the amount of advance notice provided to the victims of downsizing. Perceived
justice is considered to be a detrimental aspect of motivation in the downsizing context by
many researchers. Procedural justice plays the most important role in predicting employees’
attitudes, and this type of procedural fairness is also related to job satisfaction, trust in
management, organizational commitment, turnover intentions and continuance commitment.
When the layoff decision is based on individual performance indicators, survivors are more
likely to perceive downsizing as predictable and less threatening.

Downsizing also creates potential for Legal Issues. Even if the company has a valid reason for
downsizing, it faces the potential for legal fallout if any of the terminated employees feel they
were targeted unfairly. Accusations of discrimination or unjustified layoffs leave the company
exposed to expensive lawsuits. The company also stands to earn a bad reputation which could
further hurt business. Employees’ beliefs about the reorganization such as downsizing, will also
influence their Commitment and Trust. When survivors experience lack of trust, they are likely
to feel threatened by downsizing, which can lead to resistance to organizational change rather
than it leads to comfortable feelings with regard to the organization that facilitates the change.
Research has shown that the lack of commitment and trust in management can act as a
moderating factor on personal strain like burnout, and is also likely to create cynical feelings.

How to manage the Downsizing process?

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When Uber downsized by cutting over 400 tech jobs this year, many eyebrows were raised.
Downsizing is not something businesses take lightly. It often involves difficult decisions and
uncomfortable conversations before, during and after the process. Whether it is the result of
mergers, acquisitions, market downturns, financial constraints or some other major event,
companies that find themselves having to downsize their workforces are often unsure how to
do this the right way.

Generally, an organization that decides to downsize does so by using four broad strategies:

 Attrition, in which firms do not replace a person who leaves, is the simplest method.
With this approach, employees have the opportunity to exercise free choice in deciding
whether to stay or leave, and thus the potential for conflict and feelings of
powerlessness is minimized. At the same time, however, attrition may pose serious
problems for management, because it is unplanned and uncontrollable.

 Voluntary Termination, which includes buy-out offers, is a second approach to

downsizing a workforce. The main advantage of a buy-out is that it gives employees a
choice, which tends to reduce some of the stigma associated with the loss of a job. The
buy-out plans recently offered by Ford Motor Company and General Motors are typical.
o At Ford Motor Company, offers ranged from $35,000 for workers with 30 or
more years of service, who could keep their full retiree benefits, to a flat
payment of $100,000 to younger workers who agreed to leave the automaker
and to give up retiree health care and Ford pensions. For workers who chose to
go to college or vocational school for four years, Ford provided tuition, half their
usual pay and full medical coverage. Workers who chose this plan could keep any
accumulated pension but had to leave behind any retiree health benefits. Almost
half of Ford’s hourly production workers (38,000 workers) took one of the offers.
o At General Motors, 35,000 workers accepted checks ranging from $35,000 to
$140,000 to retire early. Another 12,600 employees at GM’s former parts unit,
Delphi, did the same, helping the automaker slash $5 billion in costs.

 Early Retirement Incentives (ERI), in which a company offers more generous retirement
benefits in return for an employee’s promise to leave at a certain time in the future, is a
third downsizing strategy and one that is often part of a larger buy-out scheme.
Sometimes, early retirement offers are staggered to prevent a mass exodus. Retention
bonuses with different quit dates may be used to ensure an orderly exit. From an
organizational viewpoint, managers assume that early retirement opens up promotional
opportunities for younger workers, but one research study found that it is difficult to
predict accurately how many older workers will take an ERI. Typically, about one-third of

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 those offered ERIs accept them, but there is a great deal of variation. On the positive
side, poor performers are more likely to take ERIs because they lack confidence about
future pay increases.

 Compulsory Termination, in which departing employees are given no choice, is the final
downsizing strategy and is typical of plant closures and the wholesale elimination of
departments or business units. Although it is, of course, unappealing to employees, the
managers who make the decisions do have the opportunity to design and implement
criteria based on the needs of the business. Eliminating jobs or entire business units also
makes it less likely that employees will prevail in lawsuits alleging discrimination.

The company can follow the following set of guidelines in the initial process of downsizing:

1. Identify departments and functions that are strategically critical, along with critical
employee skill sets going forward.
2. Identify criteria that reflect legitimate business needs.
3. Use a “funnel” approach to selection; that is, evaluate employees by critical skill sets
first, followed by job performance, disciplinary actions and seniority (to break ties).
4. Document the criteria and processes used.
5. Conduct analyses to ensure that there is not a disproportionate effect of layoffs on
members of protected classes and have all analyses and documentation reviewed by an
attorney.

While many companies are aware of the legal requirements that come with downsizing, not
enough employers understand the ramifications that a poor layoff process can have on their
companies. Beyond regulatory compliance issues, it is important to maintain the organization’s
reputation and keep the morale of the remaining employees from sinking to dangerous lows
during a workforce reduction. Because of this, these four critical steps should be followed when
downsizing:

1. Develop a well-thought-out transition plan

The transition process needs to be thought out beforehand, keeping the focus on company
goals and objectives. It needs a detailed plan for what employees (departing and remaining)
can expect from the organization. This needs to be part of the transition strategy. An
important task while planning for any downsizing is to carefully analyze the talent pool and
identify which key skills the company will need after the layoffs. The company should
consider how to help remaining employees impacted by the downsizing acclimate new roles
and functions as the organization moves forward. For those being let go, there should be a
plan on providing access to tools and human resources assistance through the exit process.
This will help everyone get through a stressful and uncertain time.

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2. Work closely with your human resources team
HR professionals know the rules on communicating company changes, good or bad. This
helps keeping the organization compliant. HR can also help develop communication
strategies for managers and leadership, and they can help oversee the entire workforce-
reduction process—from putting together severance packages to defining health benefits to
transferring of retirement assets. Downsizing impacts people in various stages of the
employee lifecycle, which is why solid HR support is so important.

3. Maintain open and clear communications

Good two-way communications are critical before, during and after a downsizing. To start
with, all employees should be told what the rationale is behind the layoffs. This needs to be
communicated in a humane manner, with a focus on what the company is doing to ensure a
successful transition, and without emphasizing the numbers. Over-explaining things should
also be avoided as this can often unintentionally add insult to injury. It is important to
remember that the manner in which departing employees are informed about a layoff will
have an impact on the morale of the employees that remain, as well as those who are let
go. It should also be made sure that those who are tasked with the actual layoff
notifications are well-trained on delivering the message in a professional and sympathetic
way. Providing timely electronic, written and verbal communications will also go a long way
in successfully transitioning employees. Effective ways to communicate downsizing
information include:

a. Website that employees can easily access for up-to-date information

Frequently asked questions (FAQs), milestone dates and contact information are just
a few of the documents the web site should provide. Websites and electronic
communications should not be considered a replacement for human updates,
however. It is essential that employees still have access to those running the day-to-
day operations for the transition, either via phone, email or in person.

b. Clear and concise realignment strategy for the remaining workforce

This is critical for employee retention and goes a long way in alleviating concerns
about job security, so that the team focuses on being productive and moving the
organization forward. This could include attractive retention packages for those
employees whose roles are vital to the success of the company.

4. Provide outplacement (transition) services

Outplacement services will help alleviate the stress and frustration of the displaced
employees, by giving them assistance as they transition to new employment. It will also
send a clear signal to everyone that the company takes care of its people, even when
difficult decisions need to be made. This will, in turn, help maintain the company’s

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 reputation, as well as boost the workplace mood and employee satisfaction. It can better
position the employer brand for a future workforce expansion as well.

Alternatives to Downsizing
There are many alternatives to downsizing employees, but a key consideration is whether
senior managers believe that the downturn in business is temporary or permanent.

If permanent, the only alternative to layoffs is to retrain employees to develop new lines of
business. For example, Lincoln Electric, a Cleveland based manufacturer of arc-welding
equipment, did just that when sales dropped 40 percent in the early 1990s. Rather than lay off
its high-school-educated employees, it offered to retrain volunteers in sales and marketing
techniques. Out of 1,200 employees, about 90 volunteered for the training. They were
deployed into “leopard” teams—named so because their jobs were to find “spots,” or
opportunities to exploit, in the marketplace. They did just that, selling home welding kits
through big-box retailers. By the late 1990s, the company enjoyed $800 million in sales it never
would have had but for the efforts of the leopard teams.

If senior managers believe that the downturn in business is temporary, there are many
potential ways to cut costs such as:

 Cut temporary staff  Use furloughs with incentives

 Eliminate overtime  Cancel business trips and costly
 Offer voluntary retirement perquisites
 Freeze salaries  Reduce or suspend matching
 Cut salaries contributions to company-
 Delay raises sponsored savings plans
 Freeze hiring  Raise employee contributions to
 Reduce work hours benefits plans
 Use temporary layoffs (furloughs)  Postpone or eliminate bonuses

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References
1. Lively, Richard. (2019, October 28). 4 Critical Steps When Downsizing. Retrieved from
https://rairesources.com/4-critical-steps-when-downsizing/
2. Cascio, Wayne F. (2009). SHRM Foundation’s Effective Practice Guidelines Series:
Employment Downsizing and its Alternatives. Retrieved from https://www.shrm.org/hr-
today/trends-and-forecasting/special-reports-and-expert-
views/Documents/Employment-Downsizing.pdf
3. Frost, Shelley. (n.d.) The Disadvantages of Corporate Downsizing. Retrieved from
https://smallbusiness.chron.com/disadvantages-corporate-downsizing-20390.html
4. Jager, Wouter. (n.d.) Negative effects on downsizing survivors. Retrieved from
https://edepot.wur.nl/281713
5. Halton, Clay. (2019, July 22). Downsizing. Retrieved from
https://www.investopedia.com/terms/d/downsize.asp

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