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downsizing1 Derek F. Channon and John McGee
Ironically, seldom discussed in the context of reengineering and indeed denied, but nevertheless, a common consequence, downsizing refers to a head count reduction which usually occurs as a result of attempts to achieve radical shifts in productivity in the face of declining or slowing sales. These transformations have tended to result in head count cuts of around 25% against initial stretch targets of 40%. In particular, downsizing has occurred with white collar workers as a result of improved information technology, this having led to savage reduction in corporate staff (see DELAYERING). In 2007, nearly 1 million employees lost their jobs in mass layoff (50+ employees) programs in the United States (Bain, 2011). Over 85% of Fortune 1000 firms downsized between 1987 and 1991, with more than 50% downsizing in 1990 alone, when almost a million American managers lost their jobs. Similar trends have also occurred in Europe. Only in Japan has the philosophy of permanent employment been largely maintained, although even there pressures have been mounting, recruitment has been sharply cut back, excess workers have been transferred to subsidiaries or suppliers, and firms have been forced to diversify in efforts to maintain employment. Nevertheless, downsizing is not necessarily a reactive and negative phenomenon but, rather, can be part of the process of “right sizing,” whereby the head count employed is appropriate for the firm to gain or maintain competitive advantage. This is the outcome of the Japanese kaizen practice in which costs are continuously reduced and the workforce is actually redeployed to new activities. Unfortunately, however, when a firm suffers a serious decline in profits, downsizing occurs as a first-response cost cutting device. It is often not necessarily the most appropriate response; but it occurs because the firm has failed to monitor changes in its external environment and is faced with unexpected cost pressures, resulting from poor quality, inflexibility, obsolescent strategies, failure to develop new products, technology bypasses, and failure to monitor the appropriate
competitors. The workforce, therefore, tends to suffer as a result of managerial failures rather than through any fault of its own. Furthermore, the downsizing exercise itself does not address the underlying causes of strategic failure; and, moreover, the reduction in morale caused by downsizing, the probable future resistance to change, and the loss of faith in management can in the long term far outweigh the shortterm reduction in cost. The actual process can also prove costly, notably in those countries in which social legislation makes redundancy terms especially expensive. Deep cuts, known as “extreme downsizing” may store up problems later for companies. For example, Alcoa cut 30,000 of 90,000 jobs in 2009–2010 with immediate profit gains and expectations of longer term success (NPR, 2012) but some commentators disagreed citing serious consequences for employee morale, safety, and unconscious sacrifice of the competitive and competence qualities that are required in tough markets (see references below for discussion on morale effects). It is important, therefore, to gain employee commitment, rather than compliance, to the need for continuous cost reduction. Japanese companies have achieved this by their policy of permanent employment. While kaizen policies are common, the response of the Japanese workforce to endaka, the rapid appreciation of the yen, has been to double efforts to cut costs; for example, by dramatically increasing employee suggestions. There are also alternatives to downsizing. As in Japan, most Western companies stop hiring. Many encourage early retirement, do not replace leavers, and the like. Other strategies might include outsourcing, job sharing, restricted overtime, short-time working, and switches to part-time working. Salary cuts are used infrequently (but not for top management in Japan). When downsizing becomes inevitable, it is important that it is done effectively. A number of conclusions on how this should be achieved have been identified: • couple productive restructuring with downsizing, either concurrently or in immediate sequence
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper. Copyright © 2014 John Wiley & Sons, Ltd.
2 downsizing • • •
• • • • •
continue top down and bottom up downsizing pay special attention to both employees who lose their jobs and those who do not insure that adequate advance notice is provided and involve the workforce in the process downsize not only inside the firm but within the firm’s external network keep your head – and your heart and soul – during a crisis insure that early warning systems are in place to avoid future blind spots create and sustain an information-porous organization use competitive benchmarking to insure that you do not suddenly wake up to find that you are no longer competitive.
ENDNOTES 1 Original article by Derek F. Channon. Updated
by John McGee. Bibliography Bain & Company Guide (2011) Management Tools 2011: an Executive Guide, Bain & Company Inc, Boston, MA.
Cameron, K.S., Freeman, S.J. and Mishra, A.K. (1991) Best practices in white collar downsizing managing contradictions. Academy of Management Executive, 5 (3), 57–73. Cooper, C.L. and Burke, R.J. (2000) The Organization in Crisis: Downsizing, Restructuring, and Privatization, Blackwell Publishing, Oxford, pp. 44–57. De Meuse, K.P. and Marks, M.L. (2003) Resizing the Organization: Managing Layoffs, Divestitures, and Closings, Pfeiffer, USA, pp. 1–38. Gandolfi, F. (2008) Learning from the past – downsizing lessons for managers. Journal of Management Research, 8 (1 April), 3–17. Mishra, A.K., Mishra, K.E. and Spreitzer, G.M. (2009) Downsizing the company without downsizing morale. Sloan Management Review, 50 (3 Spring), 39–44. NPR (National Public Radio) (2012) “Extreme Downsizing may Hurt Companies Later”, www.npr.org/ templates/story/story.php?storyld=129036823 Trevor, C.O. and Nyberg, A. (2008) Keeping your headcount when all about you are losing theirs. Academy of Management Journal, 51 (2), 259–276.
