Downsizing and Outsourcing

Kamal Uddin Ahmed Ph.D.

NSU MBA, HRP&S, HRM 602, Fall’2022

Friday, 04 Nov’2022
Downsizing and Restructuring
Appreciate the importance of defining
downsizing - why orgs engage in downsizing
Complexity of downsizing decisions
Impact of downsizing on the survivors and
the organization – how to address
Components of the effective downsizing
strategy – to enhance organizational
performance
Comprehend the concept of “psychological
contract”
Developing the awareness of importance of
HRM in managing the downsizing process
Downsizing Phenomenon
Organizations became obsessed with reducing
workforce to operate in a “lean and mean” fashion
Downsizing cut into the muscles of orgs
Reductions characterized as “mean”
Destroying the lives of victims of cutbacks
Leaving demoralized and frightened group of
survivors–critical to components of HRP
Until 1990, focus on - growth –“bigger is better”
syndrome
Downsizing on single experience, not supported
by research are frequently in conflict
Orgs around the globe striving to improve their
competitive position and respond to challenges of
a global economy must pay attention
Not restricted to pvt sectors only, govts intent on
trimming deficits and managing costs reduced
 Defining D&R
Building-down, de-hiring, de-recruitment, reduction in force,
rightsizing (box-11.1)

Three types of downsizing strategies

1. Workforce reduction
2. Work redesign
3. Systematic change

Merely cutting back the number of people in the

organization was not sufficient to achieve organizational
goals. Consequently some firms began placing more
attention on “rightsizing” or “restructuring” the workplace

Three types of restructuring

1. Portfolio restructuring
2. Financial restructuring
3. Organizational restructuring
Downsizing and Restructuring
Workforce reduction
A short-term strategy aimed at cutting the
number of employees through such
programes as attrition, early retirement
or voluntary severance packages, and
layoffs or terminations.
Allows a relatively quick reduction
Impact is often short-term
In many cases organization loses
valuable human resources
 Downsizing and Restructuring
Work redesign
A medium-term strategy. Orgs focus on
work process and assess whether specific
functions, products, and/or services
should be changed or eliminated
Combined with workforce reduction,
elimination of functions, groups, or
divisions; reduction of bureaucracy;
redesign of tasks that employees perform
Some planning is required, so, takes
somewhat longer to implement and gets
away from the problem of the org simply
doing what it always has done but with fewer
people
Rank the work activities of the org based on
their importance to the business strategy
Four categories of work
Competitive advantage work – core work processes
Strategic support work – assists in completing
competitive advantage work
Essential support work – not a source of
competitive advantage but must be completed if the
firm is to continue to operate (completing tax or
zoning forms)
Non-essential work – does not add value and is not
required for the firm to operate, but continues to be
done because of the past organizational practices
Elimination of non-essential work often produces
significant benefits for the organization
 Downsizing and Restructuring
Systematic change
Long-term strategy. Changing the org’s culture
and the attitudes and the values of employees
with the on going goal of reducing costs and
enhancing quality
Takes considerable time to implement
Consider downsizing as an evolutionary part of an
organization’s life with the goal of continuous
improvement
Because of the human and financial commitment to
this strategy, the impact on the organization’s
bottom line is rarely immediate, and,
consequently, the approach is less than appealing
to firms that focus on short term profits or
budget goals
 How useful is to reduce the
number of employees
Merely cutting back the number of employees
was not sufficient to achieve organizational
goals. Consequently some firms began placing
more attention on “rightsizing” or
“restructuring” workforce
Three types of Restructuring :
1. Portfolio restructuring - involves changes to
the business portfolio of the organization
2. Financial restructuring - such financial
changes as reducing cash flow, increasing
levels of debt
3. Organizational restructuring - major
reconfiguration of internal administrative
structure that is associated with an intentional
management change program
Why do organizations downsize
Declining profits
Business downturn or increased pressure from
competitors
Merging with another organization, resulting in
duplication of efforts
Introduction of new technology
The need to reduce operating costs
The desire to decrease levels of management
Getting rid of employee “deadwood”
Managers believe that cutting people will result
in reduced costs and improved fin performance
Consequences of downsizing

Study after study shows that

following a downsizing,
surviving employees become
narrow-minded, self-absorbed,
and risk averse. Morale sinks,
productivity drops, and
survivors distrust management
Downsizing decision
Going through a downsize is a very painful difficult
experience
Change agent as opposed to corporate assassin
Tough and ugly work
The stress is palpable. I’m vilified throughout the
company … that’s tough thing to carry around
Many downsizing are not well planned
Frequently ignore the linkage between downsizing
and strategic direction of the organization and
underestimate the impact of downsizing on the
organization and its human resources
Do not carefully see feasible alternatives
Alternatives to downsizing
Cutting nonpersonnel costs – energy
conservation, planned capital
expenditure, leasing of capital
equipment, club membership, reduction
in travel cost
Cutting personnel equipment – hiring
freeze, job sharing, reduction in work
hours
Providing incentives for voluntary
resignation or early retirement
Inplacement and Outplacement
Inplacement : reabsorbing excess or
inappropriately placed workers into a
restructured organization
Outplacement : providing a program of
counseling and job search assistance for
workers who have been terminated
Common benefits provided to displaced
workers were severance pay, continuation
of employee benefits, outplacement
counseling, extended notice period,
retraining assistance, family counseling
Planning for downsizing
Determining how many people will lose
their jobs
Determining who will be let go
Determining how the reduction will be
carried out
Determining the legal consequences
Designing current and future work plans
Implementing the decision – related issues
Performing follow-up evaluation and
assessment
 Approaches to workforce reduction
Workforce reduction Examples Degree of Implementa
approach protection tion
to employee time
Attrition Hiring Freeze High Slow
Voluntary Early retirement
redeployment Voluntary buyout
Work sharing
Involuntary Transfer
redeployment Demotion
Imposed job
sharing
Layoff with Retaining
assistance Job counseling
Advance notice
Layoff without Termination
assistance No advance notice
No severance
Low Fast
Adjusting to job loss
Advance notification of layoffs
Severance pay and extended benefits
Education and retraining programs
Outplacement assistance to inform
employees of new job opportunities
Clear, direct, and empathetic
announcement of layoff decisions
Consideration of HR planning practices
The “survivors” of downsizing
Pain of being downsized is very severe
Impact on family life, career plans, and personal
esteem are devastating and social costs can be
enormous
What about survivors ?
Initial anger, pain followed by cynicism
Stress, bred of uncertainty, necessity of doing more with
less, skyrockets
Trust in the company and the management plummets
Spend days juggling more work and avoiding anything
that approaches risk taking or innovation
Survivor reactions
Produces a number of dysfunctional behaviors
some impacts are :
Negative attitudes and behaviours : job insecurity,
fear, stress, lower self- confidence and self-
esteem, lower commitment to the organization
may lead to increased turnover, absenteeism
Reduced performance capabilities : fear that the
best employees will leave since quality workers
are more attractive to other firms
Lower organizational productivity : the above two
may destroy or markedly harm team activities and
result in lower productivity
Emotions of survivors

Anger
Anxiety
Cynicism
Resentment
Retribution
Hope
Financial performance and downsizing
Impact of layoff announcement on stock market
prices found that shareholders generally reacted
negatively to the announcement, particularly
when a large number of workers was let go
Continue to perform more poorly
No consistent relationship between downsizing
and profitability
For short-term – improved financial performance
“Asset downsizers” (cut in workforce and
expenditure) generated higher returns
Consequences of Downsizing(HR)
Benefits of restructuring frequently fail to
transpire if HR issues are not carefully
thought out and resolved appropriately
High human costs, psychological trauma
experienced both by those let go and
survivors, reduced employee
commitment, lower performance among
employees due to job insecurity, greater
attention by the mgt to downsizing process
while ignoring customer needs, loss of
valuable employees, a shift from innovation
to protection of one’s turf, lower morale,
potential litigation
Effective Downsizing Strategies
Cutting the number of people in an organization is not a
“quick-fix” remedy
Prior to embarking on any workforce reduction effort,
firms should carefully consider the consequences
Considerable care and planning must go into the
decision and the reasons for reduction must be
communicated to employees
Must pay attention to critical aspects of redesigning
the organization and the implementation of cultural
change
Managers must have sufficient experience or training
with regard to downsizing and restructuring
Establish a shared vision of organization and a
clearly stated strategy supported by management,
understood by employees, and involving a sense of
“ownership” by members of the firm
HR dept. must play an active role in the early stage
Strategic Downsizing
Policies and programs to address problems
associated with cutting HR
Must be integrated as part of the organization’s
overall strategic plan
Change issues need to be considered by
organizations seeking to remain competitive in
today’s economy
Effective downsizing dependent on
comprehensive planning for change , proper
communication of the plan, credibility of the
organization with employees, suppliers, and other
stakeholders; and consideration and compassion
for both employees who are terminated and those
remaining
Must not ignore more time-consuming but
critical strategies of redesigning org, developing a
systematic strategy predicted on massive cultural
change within firm
Strategic Downsizing
Effective downsizing strategy requires
consideration of
The tactics used to reduce the
workforce
The implementation processes used
during downsizing and the redesign of
work
The change to or impacts on structures
and processes within the organization
Effective and ineffective downsizing
strategies
Ineffective downsizing practices :
1. Offering voluntary early retirement programs
2. Instituting across-the-board layoffs
3. Eliminating training programs
4. Making personal cutbacks that are too deep
5. Placing survivors in jobs for which they lack the
necessary skills and hoping that they will learn
by experience
6. Emphasizing employee accountability instead
of employee involvement
7. Expecting survivors to “row harder”
8. Implementing layoffs slowly in phases over time
9. Promising high monetary rewards rather than
careers
Successful downsizings
An expressed higher commitment to job security
An ideology based on progressive decision making
and a culture that focuses on human resources
An entrepreneurial spirit within the organization
Investment in training, new technology, and a quality
management/customer focus
The manner in which the workforce reduction was
carried out : reasons clearly explained, employees
perceive cuts were necessary, employee input to DM
process fair, methods communicated, employee
perceive assistance fair, cuts were targeted not across
the board, part of strategic management process
Important to attend to rumors, provide survivors with
available information on downsizing, ensure survivors
aware of new goal, make expectations clear, tell
survivors that they are valued, allow time for grieving
(key issues of effective downsizing Box 11.5)
Best practices of Downsizing
1. Downsizing should be initiated from the top but
requires hands-on involvement from all employees
2. Workforce reduction must be selective in application
and long-term in emphasis
3. Special attention should be paid both to those who
lose their jobs and to the survivors who remain
4. Decision-makers should identify precisely where
redundancies, excess costs, and inefficiencies
exist and attack those specific areas
5. Downsizing should result in the formation of small,
semi-autonomous organizations within the broader
organization
6. Downsizing must be proactive strategy focused on
increasing performance
HRM issues

Managing the Changing

Psychological Contract
The “New Deal” in Employment
Altering the Psychological
Contract
Downsizing and “High Involvement”
HRM
Labour Relations Issues
 Psychological contract
An unwritten commitment between
employers and their employees that
historically guaranteed job security and
loyalty
Over the years changed dramatically
Historical notions of job security and
rewards for loyal and long service to the
organization have, in many instances, been
replaced by ongoing change, uncertainty,
and considerable shedding of employees
The “New Deal” in employment

Moved away from the expectation of

lifetime employment
From paternalism and a community
of loyalty to the new order of
“community of purpose”
Completion of the task or mission
rather than on loyalty to the
organization
 Altering the psychological
contract
Accommodation
Transformation
Challenge the old contract
Prepare for change
Generate the new contract terms
Live with the new contract
 Downsizing and high-
involvement” HRM
While considering the implications of
downsizing from HRM perspectives–
6 key issues identified
1. Shifting of responsibility
2. Paradox of laying off some employees
3. Movement from traditional hierarchical career
paths
4. Development of training programs
5. Compensation packages
6. Focus on the learning organization
HR experts to play considerable
role in downsizing
1. Advising on restructuring the
organization
2. Developing skill inventories and
planning charts
3. Communicating the downsizing
decision effectively
4. Evaluating the downsizing program
after completion
Outsourcing
 Outsourcing
When an organization contracts with
another org to provide services or
products of major function or activity
Work that is traditionally done
internally, shifted to an external
provider
Differs from alliance/partnership/JV
There is no profit sharing or mutual
contribution
Outsourcing HR functions
Workforce solutions : outsourcing of
entire HR department, a profit centre that
produced gains in flexibility, accountability,
competitiveness and profitability.
In HR, the functions most likely to be
outsourced are temporary staffing,
payroll, training, recruiting, and benefits
administration (Box 14.2)
HR departments are under increasing
pressure to produce and who can best do
thodeliverables, not just do-ables, and
so are searching to determine which
activities add values.
 Outsourcing in large organizations

Larger organizations rarely engage in 100%

outsourcing for three reasons
The HR function is so critical to the
culture and strategic objectives of an
organization that it must be closely
managed by the organization itself
Situations arise that are impossible to
predict, such as disputes, and the
unpredictability makes it difficult to
develop a contractual arrangement with
a vendor. Timeliness of response is crucial
Lack of providers of total HRM services
 Rationale for Outsourcing
Six major reasons for outsourcing
1. Financial : save money, 0-40% (15% average). Cost
control
2. Strategic focus : functions of Core competence by
own and secondary functions – outsourcing
3. Technical : organizations want to improve technical
service or they cannot find technical talent, or they
need quick and reliable access to new technologies.
4. Improved service : managers can choose “best-of-
breed” vendors that have outstanding track records
5. Specialized expertise : complex laws and regulations
governing HR, requires specific expertise. Motto –
“outsource when somebody can do it better than you.
Access to leading practices
6. Organizational politics : to get rid of a troublesome
department, where employees are underperforming
 Risks and limitations
Are the anticipated benefits realized ? Projected
benefits vs. Actual benefits
What are the risks to service levels ? Needs of the
user changes, contract change. Vendor may
become competitor. Terms in the contract should
replicate limitation to competitive advantage. Erect
strategic block
Employee morale : effect on employee morale
and performance. Employees may feel resentful
and retaliatory. Outsourcing decisions may
alienate and “deskill” employees
Does outsourcing reduce value of the organization
? The vendor may even sell the acquired know-
how and company secrets to the competitor.
Outsourcing IT reduces the firm’s capability for
cross functional synergies and capability
Management of outsourcing

Selecting the vendor

Negotiating the contract
Monitor and arrangement
 Thanks for
Your Patience