The truth behind Downsizing and Recessions: are all the effects negative?

Indeed the prospects for retaining one's job has been difficult in the recent past due to the bleak economic situation among other contingent factors,whether it be manufacturing sector firms such as Tata steel or financial giants like UBS.  This article aims to analyse reasons behind why firms downsize, its effect, and key factors to take into consideration when it comes to laying off workers. 

Why do firms downsize? 

·         Everyone in the market does so
·         financial reasons          Cut costs, especially overheads
·         Increase adaptability
·         Speed up decision-making
·         Focus on companies’ key competencies
·         Increase productivity
·         Outsourcing
·         Improve shareholders’ equity

     Why do firms engage in downsizing NOW?

·         Competition intensified on the global scale
·         Product life cycles decreased, thus need fast responses
·         Diverse customers’ needs require a more agile response
·         Escalating employee benefit cost
·         Automatizing happened
·         Bottom line performance essential,due to takeover threat and the need to cut costs
·         Some managers believe that downsizing is a good strategy to become profitable
·         Growth of contracting services triggered outsourcing
·         Employees require more flexibility and the traditional long term attachment of an individual to an employer is no longer popular

The effects of downsizing

    Effects on the firm’s bottom line -The research evidence is mixed.

According to Wyatt, 1/3 of companies saw increase in profits after the layoffs as much as expected, less than ½ said that cuts reduced expenses as much as expected. Bases on AMA research, those firms who cut jobs first reported an increase in profits and decrease after a short period of time. However, no causal relationship between downsizing and profit was proved. In general studies suggest that financial effects of downsizing in the SR and LR are negative.

One possible reason for not finding causal relationships is that layoffs are not accompanied by significant permanent changes. Layoffs are simply there for a short period of time, with positions being filled again after some time.

Another set of studies state that the way layoffs are implemented will determine the effect on firm’s financial performance. Long term improvement can be observed if cuts are combined with asset restructuring, strategic changes, or changes in organisational structures. The effect is particular vivid when prior to introduction of the cuts had deteriorated performance in comparison to competitors in the market. In other words, downsizing has a positive effect on long term performance only if it is part of the fundamental change in an organization’s strategy, structure, culture and/or work arrangements. 

It is unclear that downsizing boots productivity. According to National Bureau of Economic Research found that plants that increased employment as well as productivity contributed almost as much to overall productivity growth in the 1980s as the plants that increased productivity as the pants that increased productivity at the expense of employment. Productivity depends on differences between companies, not cut offs. According to AMA, achieving quality and productivity improvements in conjunction with downsizing depended significantly on the amount of training activity in which firms engaged following the job elimination.

    Employee Morale and Attitudes

      Cuts have negative effect on employee morale and attitudes. They cause distrust, demotivation, loss of valued employees, stress and overwork by the stayers. All of those have immediate and long term affects. In addition to increased turnover, voluntary departures and increased disability claims. The reason for the above is that those employees who stayed feel that they will be next to be fired, this demoralises them, makes them stressed, cause chronic fatigue and as a result can get sick.

    Downsizing in work environments that emphasize creativity

      Cuts are very distractive for such firms. Cuts cause job insecurity. Insecurity causes lack of creativity and risk-taking. Also, downsizing diminishes the stability of workforce and their speed and effectiveness in communicating. Although these effects can disappear with time, immediate effects are still painful. Loss of employees also destroys the existing relationships within group as well as some external connections fired employees had.

Who leaves: Downsizing and Workforce Quality

Sometimes some of the most able employers leave. The reason for this can be that firms tend to first rely on voluntary quits and thus offer generous terms for the leavers. In turn, those who choose to leave are those who believe they can get a good job elsewhere which will tend to be the better employees.

However, employers can choose who leaves. Nonetheless, the survivors will still feel the threat of being fired and may quietly searching for new job. Of course, the better the employee is, the more likely that those efforts will bear fruits in the form of an outside job offer and hence non-volunteer downsizing program may result in some voluntary quits, which will tend to be concentrated among the more able.

What is more, employees can affect their own termination decision. If good terms are offered for leaving, they might fear that in the future this will not be the case.Thus they will attempt to leave immediately by for example, refusing restructuring reassignment, which protects him/her from termination. Adverse selection can happen, because the best employees will tend to choose to leave.

    Downsizing and society

Job loss has profound negative effect for the displaced employees and their families. This adds to the social cost of downsizing.

Research showed that unemployment and job loss also leads to criminality, drug/alcohol abuse, domestic violence, separation and divorce, decline in health, depression, suicide, children’s’ well being.

However, there are potentially positive effects on community, such as: layoffs promote superior matching of workers to jobs and increased dynamism and risk taking in the economy, thereby fuelling economic growth. Also new jobs are created and compensate for the downsizing and outsourcing.

The moral of the story....

      Downsizing is likely to work better when it is part of a well conceived general strategy of restructuring the firm and its workforce.This happens because downsizing programmes that go beyond the layoffs and pursue underlying organisational problems or try to exploit real opportunities are more likely to address the real problems or successfully exploit the real opportunities.Also the survivors of the downsizing campaign are not likely to reduce their morale and loyalty if downsizing serve a purpose.  Employers, it is useful to explain employees why cuts are happening!

Must you downsize?

      Family-like cultures will suffer more because of downsizing than other types of firms. Firms that depend on good relationships with the surrounding community and that loom larger on the local labour market will also find downsizing more costly. Firms in a tight labour market will face a stronger adverse selection problem in terms of who departs and thus on the community and on the psychological state of the survivors.

     

     Technology and work organisations: when the tasks are interdependent, downsizing tends to be more disruptive, both economically and socially. With respect to business strategy, organisations that seek competitive advantage from continuous improvement or by transferring knowledge gained in one product, service, or division to another part of the firm will tend to suffer most from the knowledge losses wrought by downsizing.

     Organizations, with seniority-based protections may stand to gain less economically from downsizing, because the layoffs will disproportionately hit workers with lower seniority, who are presumably are making less money. Also organisation needs to consider its benefit plans employees have.

      Need to consider alternatives, such as wage cuts, hours adjustment, job transfers, reassignment of work across plants, etc…

     factors to consider about firm’s ability to downsize:

a)Inventory policy (if firm is able to store inventory workers can produce for inventory)

b)    The extent of uniformity in its operations across work sites (if uniformed, can relocate workers for needed work)

c) The extent to which it has cross trained workers

d)    Extent of vertical integration (if high, can relocate workers where there is demand for them)

How to downsize if you must: process considerations:

     The following can reduce the adverse effects of downsizing:

1)  Explain workers the reason for downsizing

2)  There should be extensive communication before, during and after cuts.

3)  It should be clear to employees that you have given due consideration to alternatives to downsizing.

4)  The process should be perceived as embodying distributing and procedural justice.

5) The process should be kind to the leavers. However, don’t over do, can cause uncontrolled voluntary departures.

6)  There should be support services for the “survivors”. Such as – good sense of where the firm is headed after the layoffs are done, intensive retraining, resocialisation, etc…

     Massacre or drip-drip-drip?

Dramatic or gradual?

Local labour markets may be better able to absorb the discharged workers if they are discharged gradually. This can reduce the adverse effects on the local community.

However, those who have suffered through the downsizing tend to believe that a “get it over with in one fell swoop” is better.

According to AMA, dislocative effects associated with layoffs abate considerably after the first year following the downsizing. And beneficial effects from lay offs appear only after some time after they occurred. Thus, by moving boldly and rapidly, companies may minimize the long-term psychological damage and also perhaps achieve a more pronounced and rapid increase in shareholder equity.

     Across the board or targeted lay offs?

Targeted lay offs lead to internal political activity aimed at redirecting the ax at some other target. Such political activities are particularly destructive, when a firm’s culture and technology emphasize cooperation and collegiality. Thus, targeted is too painful, especially for managers who are supposed to solve the occurred issues among employees.

Regarding the across the board layoffs, the issue of distributive injustice may occur. Units that are performing exceptionally or that have disciplined efforts keep their headcount down and thus should be reduced less. Thus, across the board downsizing will also score low on procedural justice because of the arbitrariness and inflexibility of the targets.

What is more in companies where departments are interdependent everyone will feel intense loss of friends and colleagues. Also cutting on all the departments will push employees to think that management doesn’t have a clear plan on what should be done.

     Layoffs, seniority and age
Age (more experience vs more years of potential service)
If company decided to cut on the older workers, it should consider early retirement programmes to avoid the adverse selection and appearance of age discrimination.If loyalty is important – don’t lay off older workers. Moreover, lawsuits can occur is the case of a particular discrimination occurs (i.e. age, sex, etc). Layoff should be based on more than just age!

Dealing with the community (reputation concerns)

      Firm needs to think how to help local community as well as its ex-employees. I.e. subsidize re-training, etc. However, the amount of effort depends on the interest of your organisation to be a “good citizen” of the affected locales.

Conclusion:

     Use cost and benefit analysis and weight your decisions properly

     Lay offs have profound effect on the firm, managers, employees and local community.

     There is shortage of the solid research confirming the positive impact of downsizing on profits nd productivity.  Also it is not fully understandable how to downsize properly.

     Need to think about how, why and who

     Managers should make a rational informed decision and communicate it to employees.

     If downsizing is followed by outsourcing, companies need to make sure that the process is effective and makes sense (i.e. doesn’t lead to hiring the laid off workers as consultants).