EMPLOYEE
DOWNSIZING
Case Code- HROB016
Publication Date -2002
DOWNSIZING BLUES ALL OVER THE WORLD
Continued form previous page
THE DOWNSIZING PHENOMENON WORLDWIDE
Downsizing as a management tool was first introduced in the US during the
mid-20th century. It refers to the process of reducing the number of employees
on the operating payroll by way of terminations, retirements or spin-offs. The
process essentially involves the dismissal of a large portion of a company's
workforce within a very short span of time.
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From the management's point of view, downsizing can be
defined as 'a set of organizational activities undertaken by the
management, designed to improve organizational efficiency, productivity,
and/or competitiveness.' This definition places downsizing in the category
of management tools such as reengineering and rightsizing. Downsizing is
not the same as traditional layoffs. In traditional layoffs, employees are
asked to leave temporarily and return when the market situation improves.
But in downsizing, employees are asked to leave permanently. Both
strategies share one common feature: employees are dismissed not for
incompetence but because management decided to reduce the overall work
force. In late 1990s and early 2000s, different organizations adopted
different kinds of downsizing techniques and strategies.
In the 1980s, downsizing was mostly resorted to by weak companies facing
high demand erosion for their products or facing severe competition from
other companies. Due to these factors, these companies found it unviable
to maintain a huge workforce and hence downsized a large number of
employees. |
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Soon, downsizing came to be seen as a tool adopted by weak companies, and
investors began selling stocks of such companies in anticipation of their
decreased future profitability. However, by the 1990s, as even financially sound
companies began downsizing, investors began considering the practice as a means
to reduce costs, improve productivity and increase profitability.
This new development went against conventional microeconomic theory, according
to which a weak firm laid off workers in anticipation of a slump in demand, and
a strong firm hired more workers to increase production anticipating an increase
in demand. In the 1990s, most firms were downsizing in spite of an economic
boom; labor costs were not rising in relation to productivity and the companies
anticipated greater demand for their products. However, this phenomenon is not
very difficult to understand. During the early 1990s, organizations resorted to
downsizing on account of various reasons: to eliminate duplication of work after
mergers and acquisitions (M&As), to optimize resources and cut costs, and to
increase productivity and efficiency by eliminating unnecessary intermediary
channels.
Companies expected the productivity of employees remaining after downsizing to
increase as they thought it would be easier to train and manage a smaller
workforce. However, according to Hickok, an industry analyst, downsizing
resulted in vast cultural changes (mostly negative) in the organization instead
of an increase in cost savings or productivity. Hickok observed the following
changes in organizational culture after downsizing: power shift from middle
management to top management/owners; shift in focus from the welfare if the
individual employee to the welfare of the organization as a whole; change in
working relationships (from being familial to competitive); and change in
employer-employee relationship (from being long-term and stable to being
short-term and contingent). Other negative effects of downsizing included
depression, anxiety, frustration, anger and bitterness in the downsized
employees.
The harmful effects of downsizing could be seen in 'survivors' as well. They
experienced low morale and high stress and had to cope with an increase in
workload. In addition, they felt and downsizing syndrome marked with
frustration, anger, depression, envy and guilt. The very thought of downsizing
created anxiety in both the downsized employees and those who survived. They
were concerned about possible job loss, relations with new superiors, revised
performance expectations and uncertainties regarding career advancement (Refer
Exhibit I for guidelines to tide over the downsizing phase).
THE FIRST PHASE
THE SECOND PHASE
TACKLING THE EVILS OF DOWNSIZING
LESSONS FROM THE 'DOWNSIZING BEST PRACTICES' COMPANIES
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This case study is intended to be used as a basis for class discussion rather
than to illustrate either effective or ineffective handling of a management
situation. This case was compiled from published sources.
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