EMPLOYEE
DOWNSIZING
Case Code- HROB016
Publication Date -2002
DOWNSIZING BLUES ALL OVER THE WORLD
THE DOWNSIZING PHENOMENONWORLDWIDE
THE FIRST PHASE
THE SECOND PHASE
Continued form previous page
THE SECOND PHASE
By the mid-1990s, factors such as increased investor awareness, stronger
economies, fall in inflation, increasing national incomes, decrease in level of
unemployment, and high profits, reduced the need for downsizing across the
globe. However, just as the downsizing trend seemed to be on a decline, it
picked up momentum again in the late-1990s, this time spreading to developing
countries as well.
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This change was attributed to factors such as
worldwide economic recession, increase in global competition, the slump in
the IT industry, dynamic changes in technologies, and increase in the
availability of a temporary employee base. Rationalization of the labor
force and wage reduction took place at an alarming rate during the late
1990s and early 21st century, with increased strategic alliances and
growing popularity of concepts such as lean manufacturing and outsourcing
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Criticism of downsizing and its ill-effects soon began resurfacing. Many
companies suffered from negative effects of downsizing and lost some of
their best employees. Other problems such as the uneven distribution of
employees (too many employees in a certain division and inadequate
employees in another), excess workload on the survivors, resistance to
change from the survivors, reduced productivity and fall in quality levels
also cropped up. As in the early 1990s, many organizations downsized even
though it was not necessary, because it appeared to be the popular thing
to do. |
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Due to the loss of experienced workers, companies incurred expenditure on
overtime pay and employment of temporary and contract workers. It was reported
that about half of the companies that downsized their workforce ended up
recruiting new or former staff within a few years after downsizing because of
insufficient workers or lack of experienced people. The US-based global telecom
giant AT&T was one such company, which earned the dubious reputation of
frequently rehiring its former employees because the retained employees were
unable to handle the work load.
AT&T frequently rehired former employees until it absorbed the 'shock' of
downsizing. It was also reported that in some cases, AT&T even paid recruitment
firms twice the salaries of laid-off workers to bring them back to AT&T. A
former AT&T manager commented, "It seemed like they would fire someone and [the
worker] would be right back at their desk the next day." Justifying the above,
Frank Carrubba, Former Operations Director, AT&T, said, "It does not happen that
much, but who better to bring back than someone who knows the ropes?" Very few
people bought this argument, and the rationale behind downsizing and then
rehiring former employees/recruiting new staff began to be questioned by the
media as well as the regulatory authorities in various parts of the world.
Meanwhile, allegations that downsizing was being adopted by companies to support
the increasingly fat pay-checks of their senior executives increased. AT&T was
again in the news in this regard. In 1996, the company doubled the remuneration
of its Chairman, even as over 40,000 employees were downsized. Leading Internet
start-up AOL was also criticized for the same reasons. The increase in salary
and bonuses of AOL's six highest paid executive officers was between 8.9% to
25.2% during 2000. The average increase in salary and bonus of each officer was
about 16%, with the remuneration of the CEO exceeding $73 million during the
period. Shortly after this raise, AOL downsized 2,400 employees in January 2001.
Following the demand that the executive officers should also share in the
'sacrifice' associated with downsizing, some companies voluntarily announced
that they would cut down on the remuneration and bonuses of their top executives
in case of massive layoffs. Ford was one of the first companies to announce such
an initiative. It announced that over 6,000 of its top executives, including its
CEO, would forgo their bonus in 2001. Other major companies that announced that
their top executives would forgo cash compensations when a large number of
workers were laid off were AMR Corp., Delta, Continental and Southwest Airlines.
In addition to the above, companies adopted many strategies to deal with the
criticisms they were facing because of downsizing.
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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