Smart Ways to Downsize and Things to Avoid

Companies considering downsizing as a strategy for surviving the current economic recession should know one thing about the experience that many companies had with downsizing: It did not work.

“Research shows that downsizing very seldom works,” Clint Chadwick, PhD, an associate professor of business strategy at The University of Alabama in Huntsville, said in a news release.

Cutting payroll without having a plan for improving productivity and efficiency dooms many downsized companies to reduced productivity, demoralized employees and shrinking income.

“One problem is that the finance people look only at the numbers instead of thinking of the business as a system,” Chadwick said. “Then you get these long-term, unintended consequences because you thought of a complex system too simplistically.”

Research into the dynamics of downsizing led Chadwick to develop two lists to help managers plan staff reductions that cut costs without sending their companies into a potential “death spiral.”

Smart ways to downsize

  • Strategically redesign the organization’s systems for creating value

    “If a firm is failing, that is the environment telling you that your strategy is failing,” he said. “Tossing employees out the door doesn’t fix the strategy. If you don’t fix the strategy you could find yourself with fewer employees and the same problems.”

  • Be explicit about the criteria used to select employees who are released

    “If you aren’t, employees will fill in the information gaps,” he said. “They will make their own, potentially harmful inferences. If they decide staff cuts are arbitrary, for instance, they might panic. You might as well give employees the real story.”

  • Give employees who are to be released advance notice

    “Employees will infer what is going to happen to them in the future based what on you do to their colleagues. If you toss people out on the street with no warning, your other employees will wonder if that might happen to them,” Chadwick said. “You can give too much warning, but you need to give people time to get their affairs in order.”

  • Invest in making survivors’ skills more marketable

    “This is a credibility issue,” he said. “Once you cross the line to downsizing, the only credible guarantee you can make to employees is to keep their skills marketable and fresh. If you say you’re never going to downsize again, no one believes it.”

  • Give notice to “downsized” employees personally ahead of public notification

    “Treating people right has a positive effect on the ‘survivors.’ It’s humiliating to be downsized. All of the survivors are watching. It arouses fear and indignation if you mistreat their co-workers,” he said.

  • Outplacement assistance

    “This is a way of acknowledging that the company has obligations to its employees. Employers reap what they sow in terms of employee loyalty. Not treating people with decency is a way of telling the people who stay behind that they are disposable,” Chadwick said. “If you do that, expect the best and most productive survivors to dust off their resumes and start looking for jobs elsewhere.”

  • Severance pay

    “There are not only ethical concerns — you are causing a major disruption in people’s lives — but the survivors are watching,” he said. “The post-downsizing turnover of the employees you intended to keep is a referendum on their confidence in management.”

  • Involve middle and lower-level managers in the process

    “You need input from middle management because if they participate there in more buy-in,” he said. “Plus, they are the people who have to implement the downsizing plan.”

  • During the course of downsizing, increase both the amount and the openness of communication with employees

    “Otherwise, people fill in the gaps with their own suppositions. People will value misinformation over no information. Without some basis for hope, you can create learned helplessness in employees,” he said. “How productive are you if you live your entire corporate life in a fox hole?”

Things to avoid in downsizing

  • Have security escort terminated employees out of the firm

    “Justified as a way of avoiding violent incidents, this actually increases the likelihood of problems later,” he said. “If you stage a perp walk right down the middle of the firm when the termination isn’t for cause, that can really tick people off. They go home upset and humiliated, that stews for a few days and now those former employees are more likely to consider violence as an option.”

  • Percentage cuts of employees across the board

    “That’s just politically easy. It goes against the notion of fixing the problem,” he said. “It means you don’t know what the problem is. You had better make sure that shrinking the firm doesn’t leave you with a failing system that’s now also understaffed.”

  • Multiple waves of downsizing over time

    “This is a path to learned helplessness for employees. They can begin to take a fatalist view of their jobs,” Chadwick said. “Plus, downsizing multiple times says that management got it wrong, that they don’t know how to fix the problems.”

  • Have employees re-apply for their redesigned jobs

    “Why would you do that? It is a way for management to tell employees, ‘There are no promises to anyone.’ But your best employees will understand that there is no difference in applying to their present employer and applying to a new employer. Your good people will take off. They don’t want to play those games,” he said.

  • Base downsizing on seniority

    “The problem is, the skills you want to keep aren’t necessarily correlated to seniority. If you have to cut employees, you need to cut based on differences in skills, abilities and productivity,” he said. “If you use early retirement as a way to cut head count, for example, you could be paying your most valuable employees to leave.”

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