Corporate Downsizing

Downsizing has become an extremely popular strategy in today's business environment. Companies began downsizing in the late 1970's to cut costs and improve the bottom line (Mishra et al., 1998). The term "downsizing" was coined to describe the action of dismissing a large portion of a company's workforce in a very short period of time. According to online encyclopedia http://en.wikipedia.org downsizing refers to "layoffs initiated by a company in order to cut labor costs by reducing the size of the company." Downsizing became a familiar management mantra in the late 1980's and early 1990's. In fact, three million jobs were lost between 1989 and 1998 (Mishra et al., 1998). More than 350,000 jobs were lost in 2001 (DeSouza & Donaldson, 2002). Downsizing has become almost a way of life for U.S. companies. Typically, the first round of job cuts are followed by a second round of cuts a short time later. Not everyone agrees with the reasoning behind downsizing. According to an article in the Journal of Banking and Financial Services, downsizing is merely "a short-sighted business strategy motivated by arrogant CEO's eager to appease shareholders (Unkles, 2001). Others feel downsizing is a necessary tool to ensure business survival in the face of a changing economy. Regardless, the costs of downsizing are high, and the payoffs of downsizing are mixed at best. This paper doesn't serve as an approach to downsizing, rather, it explores the many aspects of downsizing, from when it's time to downsize to what steps that can be taken to avoid the process altogether.

Corporate Downsizing: An Overview

There are many reasons why a company downsizes. Layoffs began as a way for companies to offset a decline in earnings, but quickly became a popular practice even in companies that were doing well financially. A 1994 survey by the American Management Association found that two-thirds of all workers who were laid off were college-educated, salaried employees (Downs, 1995). Today, the term downsizing is used to refer to a narrow effort to reduce the workforce and also to broaden efforts to improve work systems or redesign the total organization. Companies may downsize to increase capital, as a result of a merge with another company (where additional staff are not needed), poor cash flow (which results in payroll issues), changes in technology, and lastly due to a change in organizational structure (Krepps, 1997).

Companies often "downsize" using the following techniques:

a. Reorganization/Restructuring. Reorganization involves changing the distribution of responsibility. It also has technical, political, economic and social aspects. Restructuring involves moving, adding, or the elimination of departments which aren't needed. Restructuring also helps by focusing on the strengths of the company (Hoskisson & Hitt, 1994).

b. Workforce reduction. Downsizing or workforce reduction is a strategy to streamline, tighten and shrink the company structure with respect to the number of people the company employs.

c. Reengineering. This involves changing the way work processes are carried out (to better serve the client or customer). This method is also used to redefine and reduce the business practices of an organization.

d. Rightsizing. Rightsizing can involve reducing the workforce as well as eliminating functions, reducing expenses, and redesigning systems and policies.

e. De-layering. De-layering involves removing one or more levels of management (those deemed least necessary).

The Upside of downsizing

Even in an ideal economy, downsizing can occur. Although downsizing is typically thought in a negative respect, there are some benefits to downsizing. Such benefits include:

a. Harder working employees. Remaining employees may see this as a wake-up call, thus improving their performance.

b. Having fewer employees forces managers to carefully control work flow. In some cases, these layoffs may result in making a company more efficient.

c. Displaced workers often find better or higher paying jobs.

d. Companies often develop newer or cheaper products.

e. Entrepreneurs pursue opportunities.

Many displaced workers move to new jobs in areas that need labor in order to expand. However, the positive effects of downsizing are far exceeded by the troubles caused by downsizing

The Dark Side of Downsizing

Downsizing, even if used with the best intentions, still has a dark side. The involuntary job loss experienced by terminated employees has a number of psychological, social, and financial effects on employees as well as their families. Some of the effects of downsizing include:

a. Most laid-off employees receive a severance check that includes one week's pay for every year of service, their accrued vacation and sick pay, supplemental unemployment benefits, and outplacement benefits that can be as much as fifteen percent of their salary.

b. Loss of skilled employees (those most likely to get the job done through the downsizing process).

c. Some companies lay off too many workers (which results in rehiring laid-off employees as consultants, thus taking a bite out of the bottom line).

d. Poor morale of "survivors"-Surveys have shown that 31% of survivors of downsizing say that still don't trust their employer.

e. Poor physical and mental health of the terminated employee.

f. Increased employee resistance to change.

g. Reduced morale of those managers implementing the layoffs (Mishra et al., 1998).

Downsizing in Action

No matter how successful a company might become, there's always room for resizing in a workplace that grows very quickly (AskMen.com, 2004). The list of companies that have downsized is long and varied. In the early 1990's, layoff announcements created a very small dent, less than 1 percent, in relative stock price performance (Zimmerman, 2001). During that time, companies that laid off fifteen percent or more of their workforce performed significantly below average in the following three years.

According to a 1993 report by Fortune magazine, many CEO's from the Forbe's 500 top companies earned