Responsible Downsizing
Last week we looked at the concept of “Responsible Restructuring” taken from an eponymous publication by EBBF and the ILO. This week’s entry examines “Responsible Downsizing”-reducing the number of jobs in a company-an action recommended only after other types of restructuring were tried (strategic, ownership, production, outsourcing, etc.).
Few words in management vocabulary elicit such strong reactions as “downsizing”. When companies announce a large downsizing, financial analysts often shift to “buy” recommendations in anticipation of share prices rising, whereas workers, many managers, their families, and local communities tremble over the potential consequences. Is socially responsible downsizing really an oxymoron?
For purposes of this article, downsizing is defined as a reduction in the number of jobs. It may take place at the level of a work unit, of a factory, of an entire business, or even a total global corporation, or sector of the economy. Often downsizing is carried out without layoffs, and when it is necessary, many companies go to great lengths to provide assistance in finding alternative employment and by offering generous separation packages.
In reaction to the intensity of global competition and increasing turbulence in many markets, most large companies have found it necessary to downsize in order to remain competitive and in many cases to survive. The loss of major customers, the disappearance of some markets, the collapse of prices due to chronic overcapacity, the obligation to outsource or contract manufacture abroad, often leave management no alternative but to downsize. So the issue is often not whether to downsize but rather how to do it responsibly, that is, in a way that takes the interests of employees, their families, local communities, and other concerned stakeholders into account.
Hidden costs of downsizing
The downsizing process is even more important because many companies fail to achieve the improvements in productivity and profits that they had expected. Several surveys have concluded that fewer than half of companies that downsize actually improve shareholder value. They often discover that the longer-term costs of their actions are greater than the short-term savings. The reasons for such widespread failure is that there are often very significant hidden costs of downsizing. These costs include the loss of key talent and valuable corporate memory, loss of customers due to a decline in quality and service, lower productivity, decline in innovation and risk taking, and even erosion in external reputation and brand image. They usually stem from the effects of job insecurity, increased resistance to change, decreased motivation, stress, and erosion in trust and loyalty, all of which often accompany downsizing.
Four downsizing strategies
To a large extent, these important hidden costs result from ineffective strategies of downsizing. More specifically, companies which dictate arbitrary across-the-board percentage reductions in personnel, which focus on eliminating people quickly, which rely largely on layoffs to realize the reductions, tend to be the ones which experience heavy hidden costs. Therefore, if the circumstances dictate such a strategy, as in a crisis situation where survival may be at stake, it is even more important to be conscious of the risks being incurred and to adopt measures to minimize these risks.
Three other strategies tend to be more successful and lend themselves to more responsible practices and more positive results. The first of these is plant or site closings which may be necessary because of overcapacity, sharp market declines, post-merger consolidation, or going out of a line of business.
Responsible practices which contribute to improved profitability include excellent communications, top management support and presence, minimizing layoffs, outplacement assistance, partnershipping with communities and workers’ representatives, generous benefit packages and allowances, reasonable notice, job creation, community “safety nets” and site rehabilitation.
The second is a systemic strategy of “continuous downsizing” with a no layoff policy and a lean management philosophy and culture. Because of unfavourable past experience, more and more European companies are finding that continually seeking productivity improvements without layoffs has a higher payoff in the long run than periodic downsizing exercises with massive layoffs. Japanese companies discovered this long ago.
Another downsizing strategy is an intermediary process which focuses on streamlining and eliminating work as a basis for reducing the number of jobs. These opportunities may result from investment in labour-saving technology, reengineering business processes, project team profit improvement programmes, restructuring of logistics systems, and rationalization of manufacturing, or outsourcing.
Question for discussion: Next week we’ll consider some ‘best practices’ in downsizing that implement these ideas, but do you have any examples to share of ‘responsible downsizing’?
