Downsizing

Downsizing Definition

Downsizing often makes the cover page of newspapers because they impact so many people at once and have drastic consequences. But before going further, let's have a look at its definition:

Companies are not always doing great; sometimes, they have to make sacrifices and drastically reduce their workforce to lower their labor cost so the company can survive. As such, it is an unfortunate reality of the current working environment and a necessary evil for companies to stay afloat.

Although downsizing can be the result of unprofitable businesses that need to cut costs, it is not always the case, and there are many other reasons for it:

• It can result from a strategic move where a company decides to exit an unprofitable market.

• The company can stop diversification and focus more on its main activity. Therefore, it might lay off an entire department.

• After a merger or an acquisition, some employees become redundant, and the company can decide to lay them off.

• A new technology or machinery can make some employment irrelevant, and the company might decide to let them go and modernize its equipment.

• A company can decide to relocate its activity to another area or market.

• Demand reduction for a particular product or service might force the company to reduce its staff.

As you can see, there are many reasons, other than simply reducing costs, for a company to reduce its workforce.

Fig. 1 - Businessman leaving a company

Downsizing Mergers and Acquisitions

When a company acquires another, it's through a process called vertical or horizontal integration, depending on the company's nature. This acquisition often results in downsizing.

There are several reasons why downsizing immediately follows a merger or acquisition:

1. When a company acquires or merges with another, some posts will become redundant, so the company might choose to lay them off.

2. Some companies acquire another for a specific reason, like buying a technology they have created or a patent they own. In those cases, they might not need employees and lay off a large portion of this company's workforce.

3. Finally, when a company acquires another, it needs to justify its purchase and will look for profits and ways to reduce expenses immediately. One way to minimize those expenses is to lay off its workforce.

Downsizing Strategies

The three main downsizing strategies are:

• Voluntary Downsizing; where the company offers incentives for employees to leave voluntarily. This might include offering early retirement packages, payouts for unused vacation time, or other benefits. This strategy is often used when the company is looking to reduce headcount without causing too much disruption to the organization.

• Involuntary Downsizing; where the company lays off employees without offering them any incentives. This is usually done when the company is in financial trouble, or when there is a need to quickly reduce headcount. Involuntary downsizing can be very disruptive and can damage employee morale and motivation.

• Right-sizing; where the company focuses on reducing costs by streamlining processes and eliminating unnecessary positions. This strategy is often used when the company is looking to improve efficiency and reduce costs. It is a more targeted approach than other downsizing strategies and can be less disruptive to the organization.

Downsizing Types

Laying off an employee is not easy; downsizing is even more challenging, and many people will suffer from it. As a result, companies have developed different strategies to help them mitigate the consequences. There are generally three types of downsizing strategies: workforce reduction, work redesign, and systematic strategy.²

Workforce reduction

The first downsizing strategy is about reducing the number of employees and can be done in many different ways (see Figure 2 below):

• Layoff: the most obvious downsizing strategy is to fire employees. The company might offer a buy-out package for people who leave the company voluntarily.

• Early retirement: in some cases, companies can encourage people to retire earlier. To motivate their employees, they might offer early retirement packages and incentives.

• Transfer and outplacement: when a company changes location, instead of laying off an employee, they might offer to relocate them to another branch.

• Sabbatical: company can propose for their employee to leave for a specific period and agree to rehire them after a while.

• Hiring freeze: a longer-term strategy is not to replace retired and temporary workers who finished their contracts.

• Attrition or Salary reduction: by reducing the salary of their employee, they can accomplish two-goals, either the person accepts it, and the company saves money, or the employee leaves the company.

Work redesign

This strategy aims to rethink how the company works and reduce the total workload by redesigning employees' jobs. The financial result is slower than reducing labor, but it can keep many people to work, but often at lower pay.

In a work redesign strategy, the company is rethinking the way it works; the organization can do it by eliminating specific functions, merging different departments to work together, reducing the number of hours of a particular task, or stopping payment for after-hours work.

Systemic strategy

This strategy focuses on changing the company's culture and values. They make the employee accountable to reduce costs. For example, they might shift a customer's satisfaction priority to reduce cost by increasing the response time, finding cheaper raw materials, etc.

Fig. 3 - Layoff survivor syndrome

Downsizing Advantages and Disadvantages

There are many short and long-term advantages and disadvantages that companies have to consider in a downsizing environment:

Advantages:

• Decrease operational costs and increase the business's profitability.

• Redesigning the way the company works can make it more effective and productive.

• When laying off employees, the company can decide to retain only the best talent and lay off only the less productive people.

• It's an opportunity for the company to reevaluate its values and determine what it stands for.

• The company is making an unpopular strategic move, but it can very well be necessary for it to survive over the long term.

Disadvantages:

• Constant changes and reducing the workforce imply more work for the survivor employees, which can lead to more stress and pressure on their shoulders.

• Employees might feel betrayed, demotivated, and their job satisfaction will decrease.

• This complex environment increases the incentive for people to participate in office politics and backstab each other.

• The company's customers might be worried that those changes will affect the quality of products or services they buy.

• The company's stock price is also negatively impacted in the short term as it creates more uncertainty for the future.

• As it is an unpopular move, it creates a bad public image that might negatively affect the company over the long term.

• If downsizing is the consequence of a merger or an acquisition, it can also lead to losing the company's culture and identity.

Although there are clear financial benefits to downsizing that can be easily evaluated over the short-term such as: operating cost reduction, increasing profitability, stopping unprofitable activities, etc., the company should also consider the long-term implications and distress caused by this strategy: reduction of job satisfaction, poor image, loss of the company's culture and values, etc. Therefore, the company must determine if its strategy is worth the cost.