Downsizing – an Effective Form of Organisational Change That Seeks to Improve Business Performance?
DOWNSIZING – AN EFFECTIVE FORM OF ORGANISATIONAL CHANGE THAT SEEKS TO IMPROVE BUSINESS PERFORMANCE? Personnel restructuring, right sizing, reductions in force or the most common term used; downsizing, is defined by Budros (1999 : 70) as “An organization’s conscious use of permanent personnel reductions in an attempt to improve its efficiency and/or effectiveness”1 Downsizing has occurred throughout the industrialized world (Ryan & Macky, 1998)2, affected blue and white collar workers (Littler et al. 1997)3, targeted lower-level workers, professionals, middle managers, and higher-level workers (Littler, 1998)4, and permeated all industries (Morris et al. , 1999)5. It is simply known as reductions that organisations make in the number of employees that are on the payroll. Numerous organisational sociologists notably Freeman & Cameron (1993) state that downsizing is a strategic decision made by the organisation and that the term should not be confused with the term layoff.
They state “The difference between layoffs and downsizing is that layoffs are solely concerned with the individual level of analysis, while downsizing is a broader concept applicable to other levels of analysis than solely the individual level. Additionally, downsizing is a strategic decision while layoffs are an operational mechanism used to implement a downsizing strategy. ”6
Since the 1980’s downsizing in organisations has become a ubiquitous feature of all modern organisations with reductions of cost being the main catalyst for the decision by management. Many individuals believe that the main reason for downsizing is because “Foreign competition compels domestic industry to downsize by trimming fat. ”7 With the prevailing gusty winds of global economic recession, the topic of organisational downsizing is making the headlines, while the question ‘Are we going to be next? is nervously being asked by employees around the water cooler who are anxiously waiting to find out if their position is being made redundant. Currently downsizing is in full swing, with company management and directors giving the now infamous topical spiel to their employees about the organisation being hit hard by the harsh economy and they cannot afford to keep the employees on if the organisation is to remain profitable and competitive. Companies in all sectors are cutting costs on downsizing its workforce.
From computer company Dell wanting to ‘trim’ $3billion from its budgetary expenses by downsizing 8800 employees of its workforce to international coffee chain Starbucks having to shut down 600 of its coffee shops in the U. S. , downsizing its workforce by close to 12,000 people, all organisations are feeling the pinch of the recession. Both companies stated the same reason for their recent moves; save costs due to the flailing economy, which is ravaging through the U. S. and beyond.
Yet, it is not always in bleak and dire economic situations when companies downsize. Research by the American Management Association found that an overwhelming percentage of US firms downsized during the 1980’s and 1990’s even when profitable, stating “Data collected for the American Management Association show that 80 per cent of US firms that downsized were still profitable at the point of downsizing, and that on the day of announcement of rationalization their stock prices typically rose by 7 per cent. 8 In the summer of 2001, a survey conducted by PricewaterhouseCoopers found that fifty percent of the 114 companies surveyed stated that they downsized within the previous 18 months, and of those companies that downsized, fifty percent planned on downsizing again within the next 18 months. 9 So why do organisations engage in downsizing even if the organisation is prospering and their stock prices are on the rise? Or the economy is not being hit hard by crises?
Do management of the organisation believe that the organisation can continue to grow by scaling down on its workforce? Do technological advances in performing job tasks created and inspired by employee innovation render certain employment positions obsolete? Downsizing has a stigma associated with it. The work environment is effected, morale is obviously low, and employees’ are not as innovative and are not as prepared to take risks.
Reasons for organisations downsizing that may seek to improve business performance may be because salaries and benefits are possibly the major operating expenses of an organisation, the organisation can contract the jobs to a supplier of cheap labour, and thus have more money available. This would come under the Economic Theory as proposed by (Zhao) et al. which is basically an attempt to manipulate business performance. Zhao et al. found that financial outcomes of downsizing are the most dominant, but this theory has failed to deliver the financial benefits expected.
It can portray annual shareholder reports in a positive light. The company is seen to be taking proactive steps thinking and investing in its future, which sees share prices rise as the organisation is doing something constructive, as evidenced by the data collected by the American Management Institute. Some of these reasons are measures to improve business performance. If jobs can be performed cheaper, and the same results are achieved, then it would be a wise move from an organisational standpoint to contract these jobs out.
The organisation would have more operating money at its disposable which would obviously benefit the organisation. In the case of mergers or acquisitions occurring, it is inevitable that some positions will be no longer available as if both companies are in the same field of expertise, (such as banking, or manufacturing etc) having an excess amount of employees doing the same tasks would be rendered useless, as the same goals and objectives could be achieved by fewer individuals. The benefit from this is an increased amount and diversity of information is beneficial for improving the development of the organisation.
Creativity and new ideas among ‘new’ team/group members can lead to new innovative ideas being discovered which will benefit the organisation. Although these are some of the reasons why organisations choose to downsize, there is an overwhelming supply of literature on the subject that seeks to show the negative effects of downsizing. In their paper on organisational downsizing authors Anders Richtner and Par Ahlstrom10 state a lack of the organisations stock of knowledge can emerge after downsizing. As employees leave the organization critical skills may be lost which can damage customer relationships or operations”11 (Drew, 1994). Employees who have been unfortunate to be included in the organisations downsizing plan, may have their job functions incorporated into the tasks of the employees who survived the wave of downsizing, thereby having the incorporated tasks being neglected or not being carried out as effectively as they would have been done if the employees were not let go.
This may lead to ‘corporate anorexia’12 a term coined by Hamel and Prahalad, which they described as leaner organisations not necessarily being healthier organisations. It is, as they explain a business disorder, marked by an extreme fear of being insufficient that leads to excessive cost cutting to the point of serious loss of business and sometimes bankruptcy. Another theory proposed by (Zhao) et al. was the Institutional Theory. This sees downsizing as a response to environmental uncertainty. Organisations may choose to implement downsizing as it gives the management a sense of control.
In times when organisational decision making executives are unable to forecast the environment, they may make decisions based by what similar organisations are doing. Executives may choose this strategy because information, professional advice, and executive training programs suggest that it can result in performance improvements when an organisation is a certain size. Another theory proposed by (Zhao) et al. on why downsizing strategies have been pursued to improve business performance is the Socio-Cognitive Theory.
This theory sees downsizing being based on managers’ mental models that view it as being an “effective way of conducting business better, faster and smarter. ”13 The managers’ decisions to downsize are socially constructed through social interaction and connected enactment process. Yet, currently there is no empirical evidence that exists to hold that this theory holds well in practice. The theories presented on downsizing in this paper seek to show the how downsizing can improve business performance. Downsizing if done when only necessary can improve business performance, as it can save the organisation money, and make it more competitive.
By letting excess employees go ‘corporate anorexia’ could take form and present itself in an organisation, a state no organisation would like to find themselves in. It is important that an organisation downsizes only when it needs to be done, not when other organisations are doing it. There is a severe lack of conclusive evidence supporting long term benefits of downsizing. Ample amounts of literature exist that highlight the negative aspects of downsizing in the long run. The effects downsizing has on its surviving employees can be severe.
However if downsizing is to be implemented, it should be managed effectively to maximise organisational performance, which why it was being implemented in the first place. There are many terms and definitions that try to explain best practice. Wikipedia which is the collectively created and controlled encyclopaedia gives a simple definition on the term best practice. It is defined as “An idea that asserts that there is a technique, method, process, activity, incentive or reward that is more effective at delivering a particular outcome than any other technique, method, process, etc. 14 In the context of downsizing within the organisation establishing best practice would be to put in place a set of procedures that would allow for smooth, open and transparent interactions within the organisation during a time where downsizing is required in order to maximise organisational performance. When a company decides to downsize it must have a clear idea of what it is hoping to achieve through its downsizing and a clear plan of how to do this (best practice). Downsizing is very hard and therefore requires all of the company’s resources if it is to be effective.
If a company decides that it must downsize than it is vital to avoid agitation to employees, and therefore it must be an open practice which makes effective communication vital throughout the whole organisation. A key element in regard to best practice for downsizing is that if the company must downsize then it must be done within legal parameters, and the company should be clear about what employee must leave the organisation e. g. “Lay off ten percent of employees across all departments on a seniority- only basis.
This way no employee can claim that he or she was dismissed for discriminatory reasons. ”15 (Heathfield, S, 2009) It must also be acknowledged that this method of downsizing can be inefficient in that it may deprive the company of employees with key skills, and or have a larger negative impact on some departments compared with others. During any downsizing it is vital that a climate of trust exists within the organisation in order to limit the impact of the low morale that surviving employees may experience.
If there is no trust between employees and management then downsizing can have further damaging effects on the organisation and far from benefiting the organisation it will weaken it further. This will occur if there is no trust and can lead to remaining employees resenting management, not caring, more sick days and generally not putting the same amount of effort into their work that the applied before the downsizing. This was the result of a bad downsizing in a company in the UK. Survivors began to resign themselves to insecurity and channel their distaste towards management in order to cope with instability. “Survivors reported unfairness, mistrust, shock and demoralisation as their key reactions to redundancy. ”16 (Campbell-Jamison et al, 2001) This sort of low morale is known as ‘Survivor Syndrome’ Survivor Syndrome can be defined as a term which has been used to describe the reactions and behaviours of people who have survived massive and adverse events, i. e. organisational downsizing.
This term relates to the workplace after employees who survive large scale redundancies may feel guilt at having survived or low morale and a feeling of despair. To sum up best practice in relation to downsizing it can be seen as a process where by downsizing is deployed only when necessary, in an open and clear fashion with good communication, within legal parameters and most importantly in a way that limits the fall out with remaining employees who remain after the downsizing in order to maximise organisational performance and employee morale.
In order for downsizing to be effective and maximise organisational performance it must be managed correctly. Part of this effective management is the need to acknowledge that this is a massive change in the organisation that will have a big impact on how work is done in the organisation and the morale of the employees within the organisation, and therefore this change should be managed correctly. For this to occur several things need to happen.
Firstly and most fundamentally in order to manage downsizing properly it must have been firstly evaluated that downsizing is needed in the organisation and that it is not just a show off of a no nonsense attitude by new owners of a company. Secondly staff must have it clearly explained to them why there had to be redundancies and why some people lost their jobs while others didn’t. This will help to reassure them of the safety of their position within the organisation and raise morale which is ound to be down after redundancies and can also help lessen the effects of ‘survivor syndrome. ’ Thirdly in downsizing management, most organisations will try to help employees that have been made redundant to move on and find future employment. This has been seen as a proactive step from an organisational standpoint, as it is the right thing to do and can help raise the morale of the remaining employees by showing that the organisation is a caring one. “This is ethical, reasonable and positive.
Plus, your survivors are watching. ”17 (Heathfield, S, 2009) After downsizing it is important to direct as much energy as possible into the employees that have survived the wave of downsizing as they are likely to be suffering from low morale. If this energy is directed properly it can help with quicker recovery after downsizing and will minimise the damage to trust between staff and management, and can also help to boost productivity even though the there has been downsizing this could be seen as consolidation.
Finally employees that remain must be given assurances that they are valued, this is most effective when it is done on a one to one basis where the employee is reassured of their value to the organisation and the security of their position within the organisation. It is evident from this piece it can be seen that there is much empirical evidence to suggest that downsizing can be a damaging form of organisational change and there is very little to suggest that it is of benefit. However if downsizing is to be deployed as a form of organisational change it is important that it is only used where necessary to avoid ‘corporate anorexia. Also when it has been decided that downsizing is the best however unpalatable option it is vitally important that the organisation has an established set of best practices to implement the downsizing and that the management team is ready to oversee the downsizing and work hard with the survivors to regain trust and improve overall organisation performance. Bibliography The following sources were used in the compiling of this project: 1 http://swoba. hhs. se/hastba/papers/hastba2006_001. pdf 2 http://www. cmr-journal. org/article/viewfile/72/34: Article entitled How Do Organizations Implement Downsizing? 3 http://www. mr-journal. org/article/viewfile/72/34 Article entitled How Do Organizations Implement Downsizing? 4 http://www. cmr-journal. org/article/viewfile/72/34 Article entitled How Do Organizations Implement Downsizing? 5 http://www. cmr-journal. org/article/viewfile/72/34 Article entitled How Do Organizations Implement Downsizing? 6 http://swoba. hhs. se/hastba/papers/hastba2006_001. pdf 7 Downsizing in America-Reality, Causes and Consequences. Page 16. By William J. Baumol, Alan Blinder, and Edward N. Wolff. Published by Russell Sage Foundation. 8 The Employment Relationship -Key Challenges for H.
R. By Paul R. Sparrow and Cary L. Cooper. Published by Butterworth Heinemann. 9 http://hr. blr. com/news. aspx? id=7457 10 http://swoba. hhs. se/hastba/papers/hastba2006_001. pdf 11 http://swoba. hhs. se/hastba/papers/hastba2006_001. pdf 12 Competing for the Future. By Gary Hamel and C. K. Prahalad. Page 12. Published by Harvard Business Press. Accessed through: http://books. google. ie/books? id=rgvGFiiYCXYC&pg=PA12&lpg=PA12&dq=corporate+anorexia+hamel+and+prahalad&source=bl&ots=BtoG_Ytyac&sig=mK-90ek2Fh_M6pvDbV24PRtfV2M&hl=en&ei=fGTCSaG8B6SLjAequZWfCw&sa=X&oi=book_result&resnum=1&ct=result 3 The Employment Relationship -Key Challenges for H. R. By Paul R. Sparrow and Cary L. Cooper. Published by Butterworth Heinemann. 14 http://en. wikipedia. org/wiki/Best_practices 15 http://humanresources. about. com/od/layoffsdownsizing/a/downsizing. htm 16 Campbell-Jameson, F. , Worral, L, and Cooper C, 2001. Downsizing in Britain and its effects on survivors and their organisations. ‘Anxiety, Stress and Coping’ Vol 14, p. 35. 17 http://humanresources. about. com/od/layoffsdownsizing/a/downsizing2. htm