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Exploring downsizing: A case study on the use of accounting information.

Abstract: The restructuring of large corporations has become a regular part of business in the last two decades. Nonetheless, very little study of this phenomenon has been conducted. This paper reports on qualitative fieldwork conducted at three large corporations. Three ideal types for downsizing efforts are proposed. In addition, common influences upon all three are developed. The role of management accounting in the process and its outcomes is analyzed.


After a long history where progressive growth and expansion were taken as normal, if not inevitable, for large corporations, a new regime began in the 1970s. Following the bursting of the conglomerate bubble, the proverbial wisdom in managerial thought began to include the curious notion that adding to corporate might could be accomplished by decreasing its girth. Accordingly, the lexicon of business expanded to include "downsizing" and a more benign "restructuring" to describe the purposeful decision to forsake component parts of the business enterprise and the markets that they tapped. Typically this was done not under the duress of collapse or of persisting losses, but instead because the continuation of certain operations was not consistent with profit and growth expectations, or because they did not "fit" with the other portions of the business.

The accounting and management literatures have more successfully and persistently problematized growth than they have its converse (e.g., Miller 1991). Although the continuation of the boundaries of the firm through time have been less frequently assumed, theories that assume growth still predominate even within the critical camps of the literature (e.g., Morgan and Roberts 1997). Furthermore, many writers implicitly assume that whereas growth is strategic and therefore inherently multidimensional, contractions are fundamentally economic and therefore rather mechanical. Elsewhere, a more open appreciation of the intertwining of the social has elaborated our understanding of management accounting practices (e.g., Granlund and Lukka 1998).

The studies that have focused on decisions that decrease the size and complexity of large business enterprises typically restrict their attention to the effects of such decisions, especially upon the stock price of the firm. Hopwood (1978) asks researchers to be particularly attentive to the limiting ways that problems are defined and positioned. Accordingly, research that focuses on consequences fails to appreciate the internal workings of a downsizing decision. Managers are much too excluded from the focal point that they possess at these times by such a preference in the literature. Only if the downsizing/restructuring event is conceived as a managerial project can the reification of it be avoided. In keeping with recent accounts of the "flexible firm" (e.g., Mouritsen 1998), this instance would seem to be essential to a fuller appreciation. It also puts more emphasis on what managers do at the expense of what they should do (see Cooper and Scapens 1983).

This paper attempts to add a missing aspect of the downsizing story. Fieldwork conducted at three large companies included extensive interviews directed at these decisions. This inquiry was buttressed by the examination of archival and public information pertaining to these firms. In this way, the motives behind the actions were clarified. This included a search for the actual role of accounting information.

This research supports the notion that important qualitative differences exist within the universe of downsizing/restructuring. While not mutually exclusive, three ideal types emerged from the fieldwork. This classification stems from the primary motivation of the managers, which in turn is the product of the organization's culture and history. This paper offers the tripartite typology as a framework for subsequent research.

We find that accounting numbers play a central, but somewhat unexpected role in downsizing decisions. Part of this is closely monitored metrics that are routinely produced by management accounting systems. However, another interface is how performance is measured in an incentive system dominated environment. These results are offered as a way of illustrating that the use of accounting in this context is neither mechanical nor impersonal, but instead infused with interests and personal objectives.

The remainder of this paper comprises seven sections. The first provides a brief review of the literature. The next two detail the nature of the methodology and its application in this context. The substance of our conclusions is contained in the following three sections that relate the types of downsizing, the drivers of downsizing, and the role of accounting in these processes. The final section offers concluding thoughts on the questions raised by this work.


The history of large business enterprise in the twentieth century could be characterized as struggles with the identification of proper size and scope. For much of this time, businesses were content to stay within the confines of particular product lines. During this era, there was a close relationship between the corporate name and a particular generic product. Even those businesses that found advantage in vertical integration, and therefore were involved in more than a singular value-added transformation process, still were tightly focused on narrow objectives. In the 1960s, the emergence of the conglomerate suggested that such monotonic relationships were falling in favor of an overarching financial management. Entities such as International Telephone and Telegraph (ITT) were not clearly identified as the providers of a particular good or service. In this approach, operational businesses were important only as part of a portfolio strategy in which managers attended to rates of return and possibly accepted short-run ownership horizons.

The conventional managerial wisdom that buttressed the emergence of these corporate empires underestimated the difficulty of their management. New dilemmas of coordination and control developed that indicated that size of the portfolio of activities could not grow without limit. The new managerial advice from academe and consultants recommended the construction of, and adherence to, mission and vision statements. Management was called to identify specific core competencies and shed that which they did not have particular advantages in performing. While this often meant that functions could be outsourced, it also provided a new challenge to the proliferation of commonly owned business units. Thus, by the 1980s corporate restructurings that entailed the divestiture of viable portions of the organizations came to be recognized as a necessary reaction to the excesses of the continuing pursuit of new profit opportunities and new markets. The recognition of new plateaus of international competition has been cited as a reason for the increase in downsizing activity in recent years (Appelbaum et al. 1987). McKendrick (1996) posits that regulatory turbulence often translates into "rule changes" for industries that can alter the best laid plans of companies and justify restructurings. Survey work suggests that managers expect the pace of restructuring activities will quicken (Temme 1996).

The emergence of downsizing has required that it be normalized as a regular feature of the corporate landscape. For example, Vollman and Brazas (1993) suggest a more robust conceptualization of downsizing that distances this event from the mass layoffs that occur when a company comes under economic duress. Going further, Freeman (1994) characterizes restructuring as part of the continuous improvement process. In fact, downsizing has become such a predictable event that policies about its conduct have become common (McCune et al. 1988).

Restructuring has also risen to the magnitude that requires particular attention from accounting standard setters. Adequate disclosure of restructuring changes in the financial statements has been pursued (Securities and Exchange Commission, 1986) and continues to be refined and elaborated (see Securities and Exchange Commission, 1999). Regulations also have continued to exhibit concern over abuses centering around the persistent nature and magnitudes of these extraordinary charges (see Levitt 1998).

The popular press has led the way in identifying the human consequences taken by corporate restructuring. The motivation for downsizing alone would seem to be inconsistent with the conception of corporations in service of a broad class of stakeholders. Whereas downsizing might serve shareholders who seek the capital appreciation of their investments, it does so often at the expense of employees and communities (Hodgetts 1996). Although such groups are often neglected as stakeholders (see Roberts and Mahoney 2000), downsizing is particularly disruptive in that it creates extreme uncertainty about economic futures. Post-restructuring losses of productivity have been attributed to the emotional dynamics inflicted upon employees (Navran 1994). A body of literature has developed on managing human resources in these processes (e.g., Mone 1994; Navran 1994). Gordon (1996) challenges representations of the new corporation as "lean and mean" suggesting that "fat and mean" might be more appropriate. He notes that Amer ican firms employ a record number of managers and supervisors, while the wages of average workers in the U.S. have declined for more than 20 years, despite a steadily growing economy over that period. U.S. Bureau of Labor Statistics indicate that in 1994 supervisory employees in the private nonfarm sector were paid $1.3 trillion in total compensation, or almost a quarter of all national income received by all income recipients in the U.S. As Gordon (1996) notes, this meant that 20 cents of every dollar paid for goods and services in the U.S. went to cover the salaries and benefits of supervisory employees.

Downsizing itself might alter the organization in ways that these managers do not anticipate. The outcome of a proper restructuring is not just a smaller organization, but a fundamentally different one (Freeman 1994). Nonetheless, the impact of downsizing on organizations is complex and poorly appreciated (DeWitt 1993). Therefore, many studies relate to the unique downsizing issues in particular industries (e.g., Gustafson 1996; Hutnyan 1990), eschewing the pursuit of generalizable organizational consequences. One unifying theme is found in those studies that examine the impact of downsizing on information technology architecture (Klein 1990) and ownership (Radding 1992). Connor (1993) goes as far as to suggest that downsizing creates unique information systems opportunities.

Changing the boundaries of the organization through restructuring is believed by many to provide new information about securities valuation. Accordingly, tests of price reactions to announcements have been frequent. Evidence on this point is mixed. Brickley and Van Drunen (1990) found positive stock reactions for those actions that were thought to exploit key efficiencies. In a meta-analysis, Berger et al. (1998) generalize that finding by showing that there is, on average, little gained on this dimension. Another study found that downsizing firms underperform those with more stable contours (Morris et al. 1999).

Very few studies have framed the downsizing decision as the phenomenon to be explained. The available evidence points to pressures that emanate from poor past performance and inadequate past growth (Brickley and Van Drunen 1990). Donaldson (1990) in a detailed case study of General Mills through the 1980s shows however that these pressures are only relevant in that they tip the balance of power in the internal governance structure. That element that calls for such decisions is empowered by financial techniques such as benchmarking and return on equity targets. Downsizing can also be a defensive strategy, triggered not by the desire for growth, but by the desire to avoid a hostile takeover attempt by another company (Zantout 1994). To some extent, restructuring in the wake of such threats can be successful in fending off unwelcome suitors primarily through a renewed commitment to a focused future (John et al. 1992). The possibility that restructurings are not purely financial, but may be a multifaceted impres sion management technique, also exists (see Elliott and Shaw 1988).

In sum, the literature has established that downsizing/restructuring is a particularly interesting event for a variety of purposes. However, for the most part, downsizing has been addressed under a "black box" approach. The circumstances preceding this decision have been explored, as have its several consequences. With the exception of Donaldson (1990), little is known about the actual behavior of managers faced with such a possibility. Accordingly, the role of accounting as an element in restructuring decisions is not well understood.


The success of the accounting literature in demonstrating the role of financial information in capital market movements has convinced many that quality research necessarily entails a high level of aggregation and a heavy reliance on standardized, publicly available databases. This belief may be most appropriate for highly organized and well-understood markets. The convenience of these powerful tools is a factor in the expansion of their use beyond their zone of competence and feeds the belief that other problems are not worthy of pursuit. It may be important to recall that what we know is a function of the methods we employ to discover.

The schism between accounting practice and research (see Bricker and Previts 1990; Dyckman 1989) is fueled by variations in the value associated with the practitioner's experience. Not all academics believe that managers have a vast store of wisdom and that one of the functions of research is to reveal it in systematic ways. Methodologies that abstract away from real-world decisions have many unexamined issues and assumptions (Briloff 2001). Other ways of conducting research have greater potential to explore the worldview of those that create and use accounting information.

The use of a case study approach seems particularly appropriate for the management accounting field. In a review of the literature, Atkinson et al. (1997) praise case approaches as a means of grappling with new developments (also see Keating 1995). In many applications, field research is a necessary prelude to more traditional forms of empirical testing as researchers sort through new forms of behavior and techniques (Kaplan 1984, 1986; Atkinson et al. 1997). Even on a continuing basis, research conducted in the field enriches the construction of the management accounting field (Ferreira and Merchant 1992; Miller and O'Leary 1997). A qualitative and field-based approach attends to calls to more directly relate management accounting to managerial work in a way that seems impracticable through other means (Jonsson 1998).

Although the potential for bias in observations will always be present in the conduct of fieldwork, various techniques mitigate its importance. The researcher should attempt to let respondents tell their own story without excessive direction that might have the effect of leading them to a preordained result. The use of multiple entities as the subject of the case also helps to mitigate idiosyncrasies (Yin 1989). We accept, however, that these procedures will only be partially successful. Nonetheless, the remaining reliability problem can offer only a modest counterweight against the "clinical" analysis that can be yielded. When the mental processes of decision makers forms a sizable portion of the question to be asked, the limitations of the case-study approach must be accepted. When observation is critical and conventional ex ante theory falls short, case studies provide a useful methodology (see also Glaser and Strauss 1967).

Based on the above, a qualitative case study of downsizing/restructuring would seem to be appropriate to begin to fill the shortfall identified in the literature. This method makes possible an inquiry into the motivations and aspirations of the managers responsible for these decisions. These individuals also possess the institutional memory that will affect future decisions (Miller and O'Leary 1994). A methodology that prioritizes the ways by which managers understand and explain their actions begins to open a world that would otherwise remain closed. It also provides a unique opportunity to view accounting in action. An interview intensive method was used by de Vries and Balazs (1997). However, by focusing on the victims of downsizing, these sources of influence could not be detected.

This study considers three Fortune 500 companies headquartered in the midwestern United States. All three would be considered to be engaged primarily in manufacturing and were known to the researchers, from review of the popular press, as having engaged in downsizing. They were selected based on their willingness to cooperate, their large size, and their reasonable proximity to the researchers. Having more than one organization was deemed essential to the conduct of the research and the three yielded a cross-section of industries, products, and competitive environments. Over a 12-month period, interviews were conducted with a total of 12 senior financial executives (i.e., CFOs, controllers, vice presidents) at their place of employment. The multisite case-study approach was also used by Labib and Appelbaum (1993) in a study of five Canadian companies to address the processes that differentiated successful downsizing efforts.

Initial approaches were made by letter and telephone. In some instances, these solicitations built upon personal relationships that had been previously developed. Given the delicacy of the matters discussed, arrangements for the interviews were made over an extended period, during which research access was negotiated and managements were reassured as to the anonymity, confidentiality, and ethical conduct of the research. Interviews, usually an hour in length, utilized a semi-structured interview method. Managers were asked to discuss specific examples, modes of operation, and analysis in their firms. The formal interviews were subsequently supplemented with telephone discussions to clarify particular points and to fill in gaps that were retrospectively identified. All interviews were taped and transcribed. Archival research and analysis buttressed the contingencies developed in the interviews and attempted to collaborate the factual matter. The high level of most of these managers naturally limited the time t hat could be expected from them for this research. It also heightened their concern that the details of current downsizing activity be excluded from conversations.

The objective of the interviews was to allow these key participants in restructuring activities to reveal how they understood it. This requires that the fine line be walked between this reality and a more distant and critical one wherein claims can be authenticated (see Hammersley and Atkinson 1983). Work of this type uses knowledge of the field to engage and interpret participants' accounts and integrates this knowledge on an ongoing basis (Denzin and Lincoln 1994). This close attention to practitioner understandings of management accounting as it is practiced is driven by a sense of the importance of these social constructions in conditioning action, and of the role of management accounting in facilitating such interpretations (Covaleski et al. 1996). Following the common practice of qualitative research, the authors developed and discussed a series of analytical memoranda (Spradley 1979; Sommer and Sommer 1991), which summarized findings from particular interviews, combined material in early attempts at sy nthesis, and gave form to the analysis of particular issues. This pragmatic approach allowed for refinement of understanding and facilitated the formal analysis presented here, albeit departing significantly from formal hypothesis testing (Geertz 1988; Denzin and Lincoln 1994).

Our archival efforts had two general objectives. Background information about the companies involved was essential to sensitize the conduct of the interviews. As important, however, is the verification of comments obtained in the interviews. The materials used were publicly available, including materials found on the Internet.


Weber (1978) developed the ideal type as an analytical tool for the social sciences. He proposed that these theoretically informed classification structures could be useful in establishing expectations for patterns in behavior that could subsequently be studied empirically. Our inquiry into how managers understand the downsizings that they have participated in supports the existence of three ideal types. This tripartite classification challenges the unity of the phenomenon and calls for a closer inspection of qualitative differences.

Table 1 provides an aggregate count of the frequency of downsizing/restructuring events for the three companies. It shows that downsizing is a far more frequent occurrence than most would suspect. All firms experienced at least four downsizings during the 1990s, with one firm showing six. Table 1 also provides some information about the size of these restructurings. As judged by the magnitude of the accounting changes reported in the financial statements, they range from the modest (i.e., 1.8 percent of pre-tax operating income) to the monumental (i.e., 127.5 percent of pre-tax operating income). These descriptive statistics support the need for some sort of organizing template, such as offered by an ideal type.

The types that we attempt to characterize pertain most distinctly to the dominant motivation for the restructuring. Motivation implies not a psychological state, but rather a larger cluster of predispositions and tendencies that dictate the flow of past and future action.

We find a different ideal type at each of our three companies. We would note that we do not find that the ideal types are so exclusive or powerful so as to preclude the overlap of types across firms. The modest number of companies that we studied opens up the additional possibility that more ideal types could exist. Nonetheless, the task of debunking the myth of homogeneity requires a first step.

Cost-Savings (Classic) Downsizing

The conventional mode of downsizing would seem to be predicated upon a desire to strip costs from a corporate entity. This type of downsizing is therefore driven by a variety of market forces mostly outside the control of the company. Input factor markets may make certain businesses more expensive than projected. Output product demand may slacken to a point where economies of scale are unavailable. These conditions may create extreme out-of-budget situations that may cause managers to perceive that certain businesses are out-of-control in ways not likely to reverse in the near term. The downsizing accomplishes the resurrection of more order and control by distancing the company from certain businesses and markets. Since the popular literature has brought such a focus to this result, it merits the title of "classical downsizing." Our evidence on managers' memories of early restructuring activity also supports the use of that name.

The cost-savings restructuring is inevitably thrust upon the managers of a corporation. The financial stress that emerges may vary in its severity and the speed at which it materialized. These exigencies are often created or exacerbated by technological change. Superior transformative processes, perhaps encapsulated in intellectual property owned by competitors, shift the relative merits of older ways of doing business.

Firm One exhibits most of the characteristics of the cost-savings downsizing ideal type. Notwithstanding some resolve on the part of its key leaders to be proactive, a strong sense of having its boundaries reshaped by market constraints was evident. The Corporate Controller of that firm illustrates this well:

I guess my experience has been really as a result of the change in market conditions. So, for example, we were in the process of going through a major restructuring of our semiconductor business. So as the semiconductor business has turned down so dramatically, and in Asia, that's where a good bit of our business is, you really have to look at how they built too much capacity. And that's really what has driven the restructuring that we've taken in the semiconductor business.

The roller-coaster ride of the semiconductor business has certainly been well documented in the business press. Reversals of the market allowed this manager to characterize the building of capacity as a mistake that required swift action as a systemic part of how the market clears excess supply.

Questions about optimal capacity loom as the critical dimension in the cost-savings restructuring. No firm is above the harsh realization that they have overbuilt relative to the needs of the market. Capacity requires constant attention and downsizing is the natural corrective mechanism for the enthusiasm of the market's upward cycle. The same controller from Firm One put it as such:

I think restructuring is generally based on manufacturing capacity in the industry. Which may be primarily you, if you're the primary source of the product. Or you may have to look across your whole industry, or against all of your competitors, and decide if you are one of 20....You're going to have to take some of your own capacity out because of your own fixed costs. Because the industry isn't large enough to handle the capacity that you and all your competitors are bringing into the market.

The cost-savings motivation is very much about the coverage of fixed costs. Plant scale requires constant rejustification in terms of projected contribution margin.

The inevitability of shedding capacity can sometimes be accomplished by shrinking the scope of businesses and reallocating the productive potential of these assets to other pursuits. Very often however, investments in specialized technologies of production cannot be directed and can only be sold. The losses produced by the latter, assuming the sale is made into a depressed market, can be significant. Managers at Firm One, however, view these downsizing moves to be endemic to the business development process. They did not seem particularly focused, or hopeful about, the prospects of building flexible capacity that could be retrofitted to new sorts of production.

The routinization of a cost-savings-style restructuring promoted a distinct impatience among managers at Firm One with businesses and product lines that failed to deliver acceptable results in the near term. The fact that a downsizing could be done, and similar ones had been done in the past, created a watch list for those activities that failed to approximate expectations. Capacity was a current condition that managers did not necessarily see as permanently fixed. In this environment, current accounting results seemed to weigh more heavily upon managers than the sense that maintaining a business or product line might have a strategic value to long-term positioning or important client relationships.

The cost-cutting type of downsizing cannot be understood except as a particular reaction to competition and as part of industry conditions. Therefore downsizing is a function of how the firm comes to understand its particular place in these contexts. Firm One had institutionalized an ongoing microeconomic review in the form of a dedicated forecasting department. This entity conducted reviews of each company business, its success in its market, and, from this information, projected its future prospects. Although this work was not specifically aimed at the discovery of downsizing targets, it provided important data for the process.

In sum, the cost-savings downsizing type exhibits a close attention to past accounting results. The use of this approach allows operating results to be the arbiter of the economy and the market. Read this way, accounting results provide the firm with a map of the future trajectory of the organization. This subjects the firm to a high degree of uncertainty and inflicts trauma upon clients of the business that are adversely affected by the short-run results. Accordingly, it is unlikely that an organization would desire to remain squarely within this ideal type for long. Even Firm One, in its efforts to be more proactive about business prognosis, aims to identify the early warning signs of runaway costs. If this is successful, then the firm begins to run its downsizing as something other than that which is constructed by the market and clearly evidenced in past accounting results. Classic downsizing is where most firms begin, but where very few want to stay.

Strategic Downsizing

A second distinct type of restructuring involves a conscious managerial refocusing on some operations of the firm at the expense of others. Sometimes corporations engage in soul-searching exercises to discover what it should be or what it can be uniquely good at being. As a result, firms need to face the reality that a certain business or operation does not fit within that vision. If the boundaries of self-definition are to be taken seriously, the continuation of such "loose ends" cannot be tolerated.

On some occasions, organizations attain a more precise self-image without systematic inquiry. After periods of unfettered diversification, organizations realize their inability to effectively manage enterprises that require different abilities and knowledge. In these instances, some indication of these shortfalls will be signaled by accounting results that fail to measure up to ex ante beliefs about what should have occurred.

Strategic downsizing also tends to occur as a direct consequence of changes in top company management. These transitions offered new leaders an ability to distance themselves from the paths taken by their predecessors. When the tone at the top is one of new beginnings and new leaders are anxious to establish their mark, it created fresh opportunities even for those lower-level managers who continued through the transition. As one manager at Firm Three bluntly spoke of such times, "You could admit to mistakes." These included mistakes that could only be corrected by downsizing decisions.

A highly proactive reading of the pulse of the market is required to accomplish strategic downsizing. The guiding spirit is often the realignment of corporate operations with the new direction of customer demand or location. This perception creates a filter for the interpretation of past accounting results. Poor results are not necessarily the mark of market change, but instead may be an indication of a market poised to emerge. This provides management with an opportunity to redirect investments and productive potential, even if it means challenging the centrality of certain operations. A company given over to a convincing strategy must think on a breathtakingly broad scale that might entail moving operations previously thought peripheral to the forefront.

Although viability of achieving corporate success through strategic differentiation has been recognized for some time (i.e., Porter and Dubin 1975), the translation of that into allocation decisions at the operational level remains less empirically certain. Putting strategic controls in place can move the company forward in these directions (Kershaw 2000). Downsizing, where necessary, is an integral part of this integration.

The effectuation of strategic downsizing requires sometimes painful selections to be made. This cannot be done on an unsystematic basis or by virtue of default decision making. Firm Three conducted a special review of its customer base as it articulated to its product lines. This consumed the work of 12 managers to create the first draft. Subsequently the group was expanded to 25 managers to ensure that more perspectives on operations could have a place at the table. As the Firm Three controller described it:

They basically had several validate what some of the information says, in some of the areas. It was basically plant closings, okay? They knew their product line better than some of the individuals on the study team. And to take a kind of a fresh eyes approach and you know, these plants that were identified for possible closure or consolidation. Which customers did we want to focus on, on a global basis? Who did we want to play a major role with?...You know, do you want to chase a platform that's producing 250,000 cars or do you want to chase a platform that's producing 10,000 cars? At the same time we were chasing all the platforms, or all the customers. We needed to focus our engineering efforts...on just certain platforms, certain customers, and not try to be all things to...or price the differential to the customer on a per unit basis.

Firm Three did not come easily to strategic downsizing, nor was it always a paragon of proactivity regarding the need to reconceive itself. The dramatic scope of the downsizing that the firm now contemplated became possible only after a weakening overall financial position that, in retrospect, had begun much earlier. However, the reaction that resulted was qualitatively different than would have been employed by a cost-savings ideal type. Rather than cutting away segments that were the worst performers, Firm Three sought some guiding conception that would enable some segments to become outliers.

As is increasingly common in manufacturing, especially in the automotive components business, Firm Three had committed itself to supply goods at a decreasing price over time. In this context, the key to profitability was to continually cut costs at a rate that was at least as pronounced as the agreed decline in revenues. This confluence called for new thinking on the general ad hoc approach that had been taken. Absent these particular circumstances, Firm Three might not have pursued strategic restructuring..

The strategic conception of the firm does not necessarily simplify. When a complex component part and distribution network exists, downsizing from a strategic template produces new challenges. As a regional vice president at Firm Three remarks:

We are very global, okay? So we have to look and there may be three or four strategic initiatives inside of my Group, or his Group [pointing to another Group VP] or any other Group. And you may be able to use restructuring as a tool in any one of those initiatives. But the interdependency is very key, especially in our business. We have product going around the world. We have product going from Europe to the States, from China to Australia, from parts of the States to China, from Brazil to other regions in South America, to North America....[w]hen you put all of that into the equation...and you're starting to source product all over the map all of a sudden, you've got to say, "Gee. What does this mean for us.".. .And the globalization, consolidation of the original equipment market.. .that sourcing equation about how they want us to build their product, design it, and source it, is driving the issues across the globe. So something you do in South America may have an impact on one customer and then in turn aff ect another. We shouldn't underestimate his [other Group VP's] point of strategic issues. It's very important and it's more complicated today than it was, say, ten years ago, to map all of these interdependencies. It's a question of, "Okay, now what are the impacts?" For example, we have a site in Europe that we're considering closure on. And all of a sudden because of a capacity constraint here in the States, it's given extra life to that facility.

In sum, strategic downsizing illustrates efforts by managers to assemble a group of businesses that makes sense as a unified group. It directly confronts the wisdom of unfettered growth as the pursuit of profits above a certain mark wherever found. In order to get to a point where the whole can exceed the sum of the parts, downsizing is often seen as a necessary project.

Merger and Acquisition Downsizing

The third ideal type for restructuring activity is unlike the other two in terms of its origin. Instead of being a particular way of perceiving the company and its constituent elements, the merger and acquisition model is rooted in a particular transaction. Following a deal that brings new businesses and operations under the corporate tent, dispositions are likely. Logically, the chances that new owners will value all that they have acquired are slim. The new company usually will reexamine the opportunity cost of maintaining an investment in purchased assets. Ideally, resources will be directed in favor of businesses with greatest promise. The opportunity to do this resides close to the reason that the transaction was sought. The converse of these expansions is some dispositions that usually occur not much after the corporate marriage.

The merger/acquisition transaction has to be considered a voluntary effort by the firm to shape its own boundaries. By converting a competitor into part of the organization, the firm redefines the market that it faces. By subsuming companies with businesses that do not overlap with the existing company (i.e., it does not compete with), the firm exposes itself to new markets. In neither does the firm accept their environment as they find it.

Downsizing as the second moment of a merger/acquisition transaction has been a time-honored part of the landscape of business, dating back to the World War II. Employees of companies that are taken over appreciate the heightened sense of job security that invariably comes with that news. Although this form of downsizing may in fact predate the cost-savings type that has been called "classic," the former has not achieved the visibility of the latter. There seems to be a much larger public acceptance of the appropriateness of new managements' selection among the purchased activities for continuation. Merger and acquisition restructuring is therefore viewed as part of the merger/acquisition, and does not require separate rationalization by the media. The vice president of Firm Two's automotive division displays these developments as part of the natural course of things in these comments:

If you look at this entire business, I mean this issue of consolidation, rationalization, and inefficiencies is not anything new or bold that has come up in the last couple of years. I mean this industry has struggled with an overcapacity thing; it's struggled with the notion that you have to be the lead producer in the industry in order to be able to have the economies and scales to be able to generate sufficient returns, and as a result of that these types of things have been going on in our business as long as I've been involved, 32 years, and I imagine that they were going on a long time before too.

Although much of the downsizing of acquired operations is anticipated from the inception of the purchase, a considerable portion remains as the ongoing effort to assimilate and digest the new businesses. Often purchased businesses are not distinctly sold off but instead are consolidated into other segments. These plans are often developed in the course of learning about these operations in ways that only an extended period of ownership can offer. In such a time, market conditions change arid technological possibilities alter the desirability of certain courses of action. On some occasions, the values sought in the merger/acquisition prove illusionary. In other cases, these potentialities exist in segments originally unexpected by the purchasers. Thus, the downsizing that will occur cannot always be predicted.

Merger and acquisition targets vary in their desirability to the firms that acquire them. In some, a large number of discrete businesses enable the purchaser to step into the shoes of the previous owner in a mostly seamless transition. In others, a particular high-margin, high-growth potential activity exists to be "cherry-picked." In the current era, the possession of specific intellectual property has the potential to be such a jewel in the crown for the buyer. This variance suggests that the extent of the inevitable downsizing is also a variable.

However accomplished, the downsizing of a merged operation has to be considered a standard operating procedure. This is testified to by the CFO at Firm Two:

[I]f you take two companies and tie them together, then there's going to be duplicate efforts there....Take two companies and put them together, and they both have head offices. Well, if you only have one company you only have need for one head office so you make the changes that are required.

Too much has been made of the overarching plan to downsize in specific ways after every corporate combination. Although the merger itself is a purposeful act, the precise contours of the entity going forward often have to await the early operating results and the resolution of "fit" questions that, at least for awhile, remain open. As put by a Firm Two vice president whose company was highly active in merger deals:

We're a global company and we have business units and major operations all over the world. And we have six business units that do manage that business. And so the initial activity would be to try and take a look at the business process and determine whether restructuring or rationalizing is required, in order to number one, accomplish our business plan, and number two, to accomplish our long-term strategic objectives. And so every business unit has their own business plan and they do know what the global objectives of [the company] are. And so they're initiating in many cases a rationalization action.

Perhaps more than any other event, mergers and acquisitions blur the divisions between nation states and further the globalization of commerce. If economies of scale call for larger, more consolidated operations, then the question still remains how best to subdivide. As put by a manager at Firm Two:

Europe is an excellent example over the years and because of changes in European economies themselves, we've been able to consolidate and rationalize operations across Europe rather than in each individual country. And so as we continue to try to operate as a single business unit those opportunities become available and we try to take advantage of them.

Apparently the folding together of entities that were bounded by nations in favor of more continental or super-regional approaches is another outcome of a world marked by a high level of mergers and acquisitions. Inevitably, loose ends that cannot be pulled together in such a fashion will be cut away.

In sum, a merger/acquisition transaction forces the hand of the managers at the surviving corporation to consider downsizing and restructuring possibilities. Assuming that not all the new pieces of business are equally desirable, the purchase event provides at least the beginning of an excellent opportunity to reevaluate the entity going forward. Although some degree of restructuring is nearly inevitable, how it is accomplished seems to be quite variable.

The Three Types Reconsidered

Table 2 summarizes the key differences found among the three ideal types discussed above. The dimensions of this comparison include the potential indicators, the analytic focus, the identity of the key decision makers and the time horizon for implementation. Most of the content of the cells has been discussed and examples from the three firms have been provided.

As illustrated by the quoted material, three firms have been used to illustrate three ideal types of downsizing. This has been done because of a match between a particular firm and a different dominant style of downsizing. Nonetheless, the ideal types have some conceptual overlap. At the risk of implying more empirical conformity than would seem to be present, areas of nonmutual exclusivity need to be made explicit. It should also be noted that although one type dominates each of the firms, each firm has experienced all three types of downsizing during the last decade. Therefore, it seems unrealistic to suspect that strict corporate devotees of one type (to the exclusion of others) will be found.

The analytical separation between cost-savings and strategic types of downsizing makes sense, both processually and conceptually. Nonetheless, it is difficult to imagine one that does not at least acknowledge the importance of the other. For example, ruthless eliminations of money-losing divisions that impose even higher costs on other segments would be counterproductive. Therefore, classical downsizing must have some strategic logic, even if it is not labeled as such. Along similar lines, divisional losses are likely to create a perceptual filter for the invocation of strategy. While it is certainly possible that companies would divest profitable businesses in the name of heightened focus, it is more likely that segments with losses would be dispatched. Unexpected losses also create heightened demand for new strategies.

The merger and acquisitions ideal type is, arguably, a hybrid of the other two. Finns acquire other entities because of strategic reasons that continue to be enacted through the secondaiy restructuring phase. This would suggest that units that did not fit with the original or modified vision would be excised. Relatively poor performance by recently acquired business operations makes it more likely that this divesture will occur. Thus, the critical motivations encapsulated in the other two ideal types conjoin in varying degrees in the merger and acquisition case.

The surprisingly critical role of mid-level managers is an element common to all three ideal types. This exists in sharp contrast to the common wisdom that downsizing is a "top down" phenomenon, managers of all three firms report that targets for corporate restructuring attention are identified by operational-level managers. Thus, downsizing "bubbles up" through the organization after being endorsed by those managers with a stronger sense for the business and its future prospects.

Another commonality of the three types is the regularity of downsizing as a tool of management. While fevered activity of this nature is to be expected as part of merger! acquisition transactions, regular contemplation of downsizing prospects occurs as a function of the review of accounting results and strategic harmony. A larger frequency may exist for the former, however, as it is easier to characterize such as "housekeeping." Strategic review, almost by definition, occurs less often but with greater intensity. Thus, it may be that frequency and magnitude are related variables. The sense of some managers is that the regularized discipline of downsizing can substitute for larger, more traumatic strategically flavored restructurings. As a group, managers across all three firms preferred the former.


This section reconfigures the ideal types developed above into a more substantive description of the causes of downsizing decisions. To an extent, this illustrates the emergence of the types that we found.

Cultural Dynamics

Accounts from managers at Firm One regarding the impact of downsizing support how disruptive and near-crisis inducing it can be. Accordingly, we suspect an important relationship between an organization's culture and its tendency toward downsizing. An organization's culture is intertwined with the businesses operated by that entity by virtue of social expectations for the entity and the self-selection of employees into that organization. Similar to the sudden introduction of new technologies, the disjunctive introduction of new operations and market tangencies can present compatibility concerns (Manson et al. 1997). There also must be an acceptable cultural fit between the productive activities, the marketing efforts, and critical support services such as information systems. The sudden decision to bifurcate parts of the organization through downsizing therefore presents cultural issues. Firm Two found this when they did not make parallel changes to its information systems area following a downsizing. Thus, d ownsizing creates an altered culture for the remaining units of an organization.

As a secondary effect, there may be a culture of downsizing. Although most pronounced in the cost-cutting downsizer (Firm One), all firms have sought to create a clear culture where short-run financial results are synonymous with success. Within such a culture, downsizing is the threat that hangs heavy in the air and behind every quarterly statement. In Firms Two and Three, this is expressed in different ways, more dependent upon projected expectations of performance than actual past performance. The downsizing culture is one that suggests that performance is the ultimate good, and therefore is fundamentally different from the usual sense of culture that privileges the extant entity above all else. In a culture of performance, the entity changes forms to suit the objective. In addition, instead of resisting change to preserve the "specialness" of the entity, organizational change is embraced as the vehicle of achievement. This new attitude feeds upon itself by self-selection mechanisms until there is little r esistance. This reached an apex in Firm Three where "flaws" in the culture were suspected for an inadequate information relay that had slowed the identification of downsizing targets.

Market Logic

All three types of downsizing are styled responses to a permanently turbulent market. As attested to in this quote from a financial vice president from Firm One, the key to downsizing decisions is the interplay between the business in question and these markets:

I guess when I look at the accounting literature and I say it's great when you can make everything black and white. These shades of gray aren't very operationally driven. They're not driven by someone sitting up here in an Ivory Tower here in World Headquarters saying, "You know, let me see what the impact is going to be on quarter 1, 2, 3, 4." Don't get me wrong. You have to do the homework. You've got to understand the impact. But a lot of it is driven by the business, by the markets, and by the customers... You have got to look at what the markets are doing; what your customer is doing; what you current state is.

Often these market forces are not the product of an invisible hand, but the various interventions that have purposefully directed them--sometimes involving more than one nation. Trade in the last two decades of the twentieth century has been marked by an unprecedented departure from bilateral treaties and their replacement with regional (i.e., NAFTA) and super-regional (i.e., GATT) accords. These understandings have pervasively scrambled the geographic dimension of corporate decision making.

Firms with a large number of discrete businesses are likely to face markets of higher complexity and uncertainty. This turbulence can impose unpredictable costs, scramble strategic plans, and undermine the values sought in merger and acquisition activity. These firms know the trend toward elaborated globalization, but how this maps into any particular short-term decision such as a downsizing event is ambiguous (see Granlund and Lukka 1998). Firm Two has apparently been very sensitive to the changing tides of the harmonization of trade as it shifts productive capacity across Europe and within its increasingly unified sense of itself as a singular entity.

Even with these interpretive issues, the symbolic sense that the market dictates certain organizational results returns us to Ouchi's (1979) conception of market and bureaucratic control. If the prices set by the market contain sufficient information, then not only must bureaucratic rules be discarded, but also must the entire bureaucracies within those sectors of the organization disfavored by these market results.

The Momentum of Expertise

Downsizing is also driven in every type by new understandings of expertise. This seems to be more complex than the spiral of technology that progressively allows for the alteration of the balances between fixed and variable costs. The new part of this story is the emergence of managerial expertise as a freestanding force. As key decision makers dissect, assemble, and discard organizational segments (whether in the name of costs or fit or inevitable mergers and acquisitions deal consequences), they decouple the tasks that the organization must accomplish and the structure needed for accomplishment. As predicted by Mintzberg (1979), this wedge gives rise to the discretion of the autonomous professional manager. This also suggests that knowledge of the business empire and the knowledge of the work of the business grow increasingly separate. Even as Firm Two sought to radically reconceive itself, it brought in people with operational expertise, but as a second thought, and really after the downsizing die had been cast.

Downsizing also preserves and sustains the life-force of managerial expertise. If this talent is always too scarce, then downsizing is a way in which this resource can be focused and deployed more effectively. This marshaling shows itself in all types of downsizing, varying only by the extent it bears upon operational managers.

Although we found a large number of managers involved in the initiation of restructuring, the pivotal role of the CEO should not be gainsaid. The growth in the conception of the firm as a singular entity with a bottom line that must be keenly attended to is evidenced in all three companies. This view, as opposed to one that focused on the rhythms of each business, thrust the CEO into the spotlight as the setter of the "tone at the top." New CEOs, anxious to leave their mark, are likely to ruthlessly slash proliferations or cherry pick from among the recent acquisitions. Leadership is a powerful socially constructed reality that makes sense out of organizational phenomenon and may be essential to sustain efficacy (Meindl et al. 1985).

Firm Three's episode of being whipsawed by escalating costs and pre-negotiated declining prices illustrates the more general point that individually rational decisions often combine into an aggregated irrationality. Whereas one dilemma could be remedied, multiple interlocked problems promote the likelihood of a downsizing when the firm perceives that it has no way out of the vice. Other examples pit bureaucratic rules that cannot be easily altered with emergent market realities, or deeply entrenched normative beliefs that have fallen out of touch with new (perhaps more commercialized) values. While these problems can be at least ameliorated, the easier way to resolve them is to transfer them to another party. Those that buy such businesses are often much less encumbered by the decisions of the past, and use their clean state to realign structures and practices with the market necessities.

Within the last few years, financial analysts have achieved great visibility as the generators of "official" expectations for future corporate results. The tendency for these expectations to be optimistic has been well documented and speculated about (e.g., Cianci 2000; Rogers and Fogarty 2001). This output tethers this corporation to the target and denies it much of an opportunity to create alternative contexts for results. A pervasive awareness of analyst expectations existed among the managers of the three companies. This reached a crescendo at Firm Three as the firm had just failed to meet expectations for the first time in several years. From our discussions of the firms, our sense is that downsizing across the ideal types is considerably influenced by the analyst-mediated environment.

The path toward downsizing is paved by the decisions to study problems that have no obvious solution. In other words, there is a certain bureaucratic imperative at work. This quote from Firm Two's CFO describes how the act of putting an issue under the microscope has its own momentum:

[T]he Chairman said, "I want a special team to study automotive and I want to discontinue the downward trend. And I want to return the automotive segment to profits."...Principally this was led by our finance organization trying to give management the information as to what was happening and why there was this margin compression. The President and CEO was made acting president of automotive and he formed a team of maybe a dozen people to begin looking at what actions we could take. No one had really said restructuring yet but everyone knew that restructuring was the answer.

The privileging of flexibility over the political (see also Mouritsen 1999) puts it within the realm of the possible for the bureaucracy to alter its own structure. At Firm Three, a frenetic pace of mergers and acquisitions led to a unit that reviewed these segments on an ongoing basis. This function was justified by a vice president of the firm in terms of the collective good:

The issue is really when restructuring plans come up and they come up to the policy level as to whether they are for the common good of the corporation. And in some cases, I mean, there is an action that could be taken in one business unit that might be detrimental to another. And that's why the decision-making processes at that level, we can sort through those issues and make the right decisions for the corporation in general.

In simplest terms, the frequency of downsizing is a function of the structure created by the organization to accomplish such transformations.

Information systems have leapt to the forefront of organizational design in the last two decades. This shift has created higher magnitudes of connectivity for top managers who are interested in direct access to the performance data of far-flung operations. The results of such close inter-connection between the center and the periphery of the organization were apparent at each firm. As data becomes institutionalized, often through enterprise-wide software platforms, operation-level managers no longer act as intermediaries and interpreters of results. Thus, the accounting results are decontextualized and asked to "speak for themselves" more readily. As a rule, instances where the information failed remote managers in making the right decision (as judged with hindsight) was invariably followed by redesigns and elaborations of the information systems. In other words, the value and place of information systems in restructuring events is beyond question in the eyes of participants.

The modern view that organizations must effectively manage knowledge also plays a part in the restructuring process. Early attempts to systematically investigate knowledge management processes have concentrated upon those service providers that sell the knowledge that they manage (e.g., Morris and Empson 1998). Beyond this lies the systematic deployment of knowledge about the technologies that enable firms to develop products in scientifically evolving areas. At their more basic level, firms have to decide how many different technologies can be effectively supported. The CFO at Firm Three captured this with the following comment:

[W]hen you're squeezed on margins you can't afford to chase all the technologies....You're going to focus on maybe two of them, and lead the market in that direction as opposed to having the customer lead you.

Firms vary in how proactively they wish to shape the knowledge resources they have. Nonetheless, in a business world more attuned to the value of intellectual property, the structure of organizations is more likely to follow than to lead.

Last, but not least, organizations are not indifferent to their share price. In addition to the extraordinary efforts to meet analyst earnings expectations, the trajectory of valuation creates independent effects. Companies that are failing to deliver capital appreciation and dividend growth to shareholders are often compelled to act in bold ways. Alternatively, companies that find their equity at all-time highs have the luxury of contemplating mergers and acquisitions previously out of their reach. As outlined above, both of these scenarios often precede downsizing events. The last few years demonstrate well that capital market swings are only modestly connected to the relative success of individual organizations.


This section suggests important commonalities across the restructuring types. To some extent, that which is similar about cost-savings-, strategic-, and merger-and-acquisition-related downsizings may be more consequential than that which makes them different. This balance is an unresolved empirical question. Nonetheless, the very powerful factors that drive organizations toward downsizing merit ample recognition. To do otherwise would tend to overstate the distinctiveness of the ideal types and understate the complexities of the ties between organizations and their environments (see also Hedberg et al. 1976).


Previous sections of this paper have indirectly touched upon the relevance of accounting information for downsizing decisions. It is possible that through making things visible and comparable in a seductively simple way, accounting becomes less a neutral "language of business" and more a serious factor in the growth and decline of entities that employ it (Morgan and Roberts 1997). Although varying in its specifics, accounting enters into all the ideal types. It is implicated in the initiation, analysis, and eventual implementation of downsizing decisions.

Cost-Centered Analysis

Accounting's most obvious role relevant to potential restructurings pertains to the identification of costs. Although the academic literature suggests that knowing costs with any certainty is a true luxury (Hopwood 2000), the managers of these three firms believe to the contrary, by acting is if costs were unproblematic. Asked for a global statement, a financial manager at Firm One said:

We knew we had too much in the way of fixed costs, so you say how does accounting enter it? They're right smack in the middle of it, in that when we are looking at our...sales volume decreases you look at what your fixed costs are and if you have one plant too many, you've got to decide to shut it down or do something with it. Or do something across the organization. So--that's pretty simplistic, but that exactly how it happens. If you're looking in the semiconductor business this year, you're looking at a 50 percent decline in sales volume. You have to do something. You cannot shoulder that, you can't absorb that expense indefinitely.

In this view, accounting is critical in understanding, and grappling with, an organization's shortcomings.

Performance Management Systems

Accounting, in the minds of many managers, defines success or failure. The information it produces is capable of fine disaggregation, allowing managers to identify operations that are pulling down more aggregated versions of performance. There was no ambiguity that successful downsizing projects could assist in this objective. In this context, as a manager at Firm One put it, "If they see they have a dog, and they are never going to reach their targets with this business, they want to get rid of it." For these purposes, the evil of excess capacity could be translated well by accounting techniques and often dominated the minds of managers.

The extent to which accounting numbers are seen as important to downsizing events can be seen in the lack of counterbalance attached to their use. Strategic considerations, whereby current results are exceeded, contextualized, or otherwise mitigated by nonaccounting factors, were not routinely encountered in the fieldwork. Furthermore, costs take the foreground even relative to revenues. Fearing that managers in operating units might focus on legal differences for revenue recognition, the CFO of Firm Three had advised operating units that: "We're telling you to ignore your legal books and only think of costs."

Although accounting results should lead to the identification of downsizing opportunities, human agency is required. Underperforming units are often identified by those in charge of them to the corporate level. The limited tolerance for the failure indicated by the accounting information is well understood, and is the lubricant between the organization's levels. Opportunities to dispose of such operations are more often more contentious when they are missed or delayed, and the accounting results continue to decline. The bias in this direction is exacerbated by the many factors that could explain a turnaround engineered by a buyer. For the most part, this post hoc assessment is not performed, rendering few downsizings bad ideas.

Exactly how accounting data comes into the process is pinpointed by a Firm One divisional vice president:

I think because we do so much forward forecasting from a financial perspective, the issue will be raised. So it will be raised just by virtue of the monthly reporting. So as the financial results outlook is being put together that will trigger discussion, automatic discussion, with the general manager locally or together with the controller. Then that will begin to get the attention of their group management. Again, via the same ongoing communications, these monthly reports, monthly operating reports that are integrating together with financial information. And again it moves kind of up the line from that. So, for example, I see the financial projections for every single division. So does our president and each of the group executives. And the group controllers would see their respective division numbers, projections, operating issues....So it's a fairly continuous communication vehicle that we have.

The seemingly counterintuitive finding that mangers recommend the downsizing of units under their supervision can only be explained by virtue of a very important piece of accounting information. The compensation of managers based upon the performance of the company provides a key linkage in understanding decision making in the modern environment. Accordingly, these clauses have been a longstanding tradition of study in the accounting literature (e.g., Healy 1985; Holthausen et al. 1995). Designed to align the interests of managers and the firm, incentive arrangements should mitigate against decisions that are optimal only for subunits of the firm. They also allow managers a way to reach higher personal incomes. It tends to displace alternative criteria of good management with a bottom-line orientation. The irony that managers are being compensated to cull their own ranks should not be lost. For those who survive, it no doubt offers higher rewards. Managerial performance incentives increase the resort to down sizing tactics since it has the potential to remove laggard segments and therefore improve managerial compensations claims. For those companies whose plans disqualified them from bonus computation restructuring charges (as nonrecurring items), this can be done on a no-cost basis. This existence of these incentives embeds the idea that shedding lower contributing units is in the best interest of the company as a form of "fiscal discipline."

Within the three firms of our fieldwork, performance incentives are heavily used. As summarized by a Firm One vice president:

We have an incentive program, which is both short- and long-term incentive. All of our general managers of any size are paid on both long- and short-term [performance].

The magnitude of uncentralized compensation can also be approximated by the total number of managers with stock option grants. Our investigation of the SEC reports filed by the three firms shows a range of 900 to 1,350 participants. Although the value of these options, the restrictions placed upon them and their weight relative to salary is impossible to summarize, the number of involved individuals is much greater than many would suspect. This deep programming of corporate/individual wealth harmony is an essential element in the construction of a culture of performance. In these plans, a heavy reliance on financial accounting measures is typical across America (Dechow et al. 1994). The belief that these plans are an essential catalyst for desirable action is widespread.

Compensation and Claims to a Performance-Oriented Culture

A closer look at the three firms was possible by access to various archival materials. Overall, these firms sought to link 40-75 percent of the managers' total ex post compensation to accounting results. This suggests that managers must bear a considerable degree of risk for corporate results. Accordingly, making decisions that enhance the critical parameters of these incentive plans is essential for managers interested in preserving their lifestyle. An examination of materials pertaining to the philosophy of such compensation arrangements recited the overarching goal of creating shareholder value through increased equity valuation. Firm One is particularly clear in its beliefs that this can only be done if compensation contingencies encourage an aggressive and entrepreneurial management style.

The mechanics of the plans usually made a singular financial accounting number central in determining compensation. This could be net income per share, cumulative net income, return on sales, return on equity, or return on assists. Often, these were used in ways that could be modified by other categories such as cash flow or economic value added. Importantly, however, no plan would necessarily be mechanically applied. Plans allowed for the override of financial contingencies by the board of director's compensation committee using a wider and less numerically driven set of factors. Judging by an instance in one firm where an executive earned extra pay for "his continued focus on the company's long-term strategy," it appears clear that there is a premium for highly visible, very decisive action. Another firm's committee override goal "to fairly reflect... accomplishments and responsibilities" could not literally be invoked without unraveling the incentive plan, but could, when selectively used, save the compan y from otherwise perverse results in turbulent times. Such arrangements create new tensions between corporate headquarters and the operating managers, attested in a statement from the CFO of Firm Three:

The first reaction is, "they're gaming the system." The last four years they have come in and cried they couldn't do it, and they have always maxed out on compensation. So we're not going to give them relief. Because this is part of gaming the system and we have to counterbalance the gaming system with the tasking system. You see you've got this tension going on. Guys in the field are saying, you know, "I can only control my little island, I'm in trouble." Guys in Corporate are saying, "You've told me that the last five years and we've given you relief and you've maxed out. Tough luck fella!" And then we get into a couple of more quarters and we say, "Holy Cow, maybe there was something there."

The total impact of these conditional compensation arrangements appears to be to further the extent of downsizing occurrences. Managers are provided with a personal reason to distance themselves from activities that will erode the calculations on which their pay depends. Managers are tethered to actions that will be perceived by the equity markets as positive. Relief from the harshness of performance-linked compensation tends to be selective and bias against the actions that were not taken, even if they were more courageous than those that were. Looked at from the perspective of top management, it is the invisible hand that produces a well-oiled set of parts working together, as depicted by a Firm Three executive:

Ultimately the business units are looking at the returns, right? And they're taking a look at what's going to happen to their business when we do this. That's part of their discussions with our Corporate Policy Group as to why this makes sense....It's not something where we sit around and at the last second decide we're going to do a restructuring of the business. The Business Units are continually looking for ways of improving--that's their job.

The problem with accounting is sometimes merely a question of its distribution. Firm Three, for example, is still reeling, apparently, from instances where divisional results were insufficiently relayed on to higher levels. This delayed a downsizing that inevitably proved much more painful and disruptive than managers thought it had to be. The inadequacy of accounting information was a persistent problem for many managers, including the CFO of Firm Three, who said that his greatest concern was:

Whether or not there is an open and free exchange of information from the field to the chain of command. Whether they feel they can bring forth some of the bad news--I am not sure whether the field didn't recognize back in 199[X] that their margins were squeezed. But it's what can we do in order not to tell Corporate, and can you fix it without telling Corporate. So you have a bunch of little islands and they can't control this [multi-I billion-dollar business.

Decision makers also wanted more detail in the accounting data that they received. The difficulties of being alert to the early accounting signs of segment decline have been noted in the literature (Vollman and Brazas 1993). Informed downsizing demanded finely disaggregated information on the current magnitude of operations. As the CFO from Firm Two put it:

One of the challenges is that the level of information that we needed we do not collect on a regular basis. We basically get it once a year. We don't do that detailed--we get what selling is, we get what administrative is, what research and development is, you know, what engineering is. But we never see the components of how much of that is people cost, how much of that is travel, how much of that is consultants, etc., etc. And by the different cost categories. So we had to go back and look at just annual information for the last few years and try to project how many people there were in each of the functions....So again, I think a lesson learned is that a lot of times the information you need to run a business you don't see at this level of the organization. You need to get down further into the detail. SAP again isn't going to solve that problem.

In conversation with managers at the three firms, it became obvious that it was not necessarily the accounting per se that mattered. Power is implicit in measures that are promoted in the name of better communications and heightened accountability (Anderson and Newbury 1997). For these purposes, pressures exist to standardize management accounting measures (Granlund and Lukka 1998). even if it requires new ways of looking at the partitions among segments and operations. On this point, a divisional financial manager from Firm Three explained:

[W]e might have a seatbelt facility here and well have a steering facility a block away. And well have an electronics facility two blocks away and well have each one of our product lines in a particular city. And we're even now saying, "Gee, what if we had a building and we divided it with lean manufacturing. We'd have empty floor space. What if we had half the building with fasteners and half the building with electronics." And electronics didn't talk to fasteners. Now we're saying, "No guys, we can't do that anymore." We have to optimize each one of our assets and that is a change in culture.

In this vein, the proper accounting becomes a self-disciplining that works toward an alignment with the hierarchical authority of the corporate apex.

Some aspects of accounting have proven to be a nuisance and tend to be evaded. Restructurings trigger special charges that often would have the effect of reducing incentive payments to managers. Utilizing special committee powers, these accounting results are often reversed. This facilitates downsizing transactions by removing the sting of the "big bath" that precedes operations without the purged segment. This was done by one of the firms, even though it resulted in the tax nondeductibility of the compensation payment under Section 162(m) of the Internal Revenue Code of the United States. Their proxy statement noted:

In approving the payment of such amount in excess of $1 million, the committee considered all relevant factors, including the net cost to the company resulting from the non-deductibility of such amount, and determined that it would be consistent with the compensation philosophy and in the best interest of the company and its shareholders.

The tendency to selectively override the accounting contingencies that are in place (see also Dechow et al. 1994) illustrates that accounting is not an autonomous actor but it is, in fact, a tool in the hands of some executives who have made some purposeful choices about the progressive direction of the organization.

Accounting is not static in this context. The firms in question all were in some stage of enterprise-level program implementation. This suggests that, to some extent, the companies will change to meet the expectations of the software (Chapman and Chua 2000). Accordingly, the global accounting practices of the subunits will be homogenized to some degree. This will improve comparability across segments and may also facilitate an orderly inclusion of nonfinancial measures. However, it also induces a certain framework of inquiry that limits that which it is aimed to do. It appears that downsizing is very clearly involved in this pattern (see also Dechow 2001).

In summary, accounting seems to be a very salient part of the downsizing phenomenon. It is selectively deployed to investigate and analyze restructuring prospects. Perhaps more importantly, accounting provides managers with an institutionally sanctioned agreement on that which must be done. Accounting allows managers to transverse from the abstract to a concrete notion of governance. It provides a technical zone of control that perpetuates power relations by writing out a new script for organizational change.

The influence of accounting on downsizing is much more about process than about particular techniques or critical numbers. It is clear that the accounting numbers serve as the centerpiece in a strong rhetoric for a stylized interpretation of past events and the desirability of certain future actions. As such, its contribution to the restructuring phenomena is not unique but instead part of a broader ascendancy of financial accounting control (see Armstrong 1985; Hopwood 1987; Covaleski and Dirsmith 1986). Although accounting should never be accepted unproblematically, a focus on what accounting does (rather than what it is supposed to do) may result in a story that is less tidy and formalized than conventional study might imply.


This paper has attempted to illustrate the downsizing event, using the perspectives of key decision makers as input. An important part of this approach has been to see how the problem is defined and the general patterns that emerge in its resolution.

Three archetypes of restructuring were developed in order to support the case that downsizing was highly differentiated in its circumstances, emphases, and accomplishments. This was done with a muted sense of empirical conformity. A strong sense of contingency was intended so as to diffuse the necessity of firms being one ideal type or another. This is consistent with our fieldwork findings, which suggest a need to mitigate the belief that downsizings are both homogeneous and products of a strict economic rationality.

The downsizing event puts the very contours of the organization at issue. What the organization is becomes defined by what it no longer chooses to be. Prospective restructuring offers managers another chance to achieve a suitable sense of coherence over what they do. This requires certain understandings of how conflict is managed and how hierarchical relationships are enacted. For these purposes, information systems and accounting data confront elements of organizational culture in efforts to deliver upon missions and strategies and market positionings. The shortfalls of our understanding of downsizing must be attributed to our imperfect knowledge of organizations.

Contrary to popular impressions, downsizing is not a special event created by exceptional circumstances. This paper's attempt to get closer to these events requires the alternative view that downsizing has been regularized as a tool of day-to-day management. Rather than necessarily large and dramatic events, downsizing projects are a necessary part of financial discipline for large companies that apparently are truly motivated by maximizing shareholder value.

A unique contribution of this paper has been the focus on performance-based managerial compensation as a factor in downsizing. This social psychological turn is predicated by extrinsic reward. This paper documents how deep into the hierarchy of management these contracts have been pushed in the effort to create higher degrees of goal congruence. The construction of such market solutions reduces the need to achieve true psychic commitment to organizational objectives (Ouchi 1979). Rather than focus on the utility for purchasing power, these inducements have considerable status and mobility connotations (see Faulkner 1974). Thus, downsizing provides a drama of personal consequence within organizations.

Further research on restructuring should proceed in a variety of directions. This paper provides ideal types that require further elaboration or expansion. Determining whether their unique features dominate their commonalities would be important work. Such inquiries would need to clarify fundamental assumptions about organizations such as whether they exist as natural, rational, or open systems (Scott 1981). This would help clarify the premises of the unique environmental exchange that we call downsizing. Hopefully, future research would also attend to the use of language in the restructuring process. Language is instrumental in making such unusual events appear natural, perhaps even invoking Darwinesque metaphors (Baskerville and O'Grady 2001). A useful start might be found in Palmer et al. (1997), who studied downsizing discussions in Australian annual reports. They found nine themes enveloped in three "languages," one of which pertained to corporate strategy. This also should point out, in more detail tha n attempted here, the political dynamics and consequences of downsizing. The distribution of power is central in the ultimate fate of a restructuring proposal. The paper has assumed that managers have substantive reasons for downsizing. McKinley et al. (1995) suggest that some of this activity is institutional, with some firms adapting to the practices of industry leaders. This would require an inquiry more focused along the lines of institutional theory (see DiMaggio and Powell 1983).

The study employed an interview-intensive qualitative methodology that we argued provided a better match with the restructuring event and its antecedents. These means of study implicitly challenge the dichotomy between theory and empirical evidence, at the "cost" of requiring readers to indulge the interpretive act. It also quietly challenges more statistically intensive methods that may have furthered beliefs in homogeneity through the use of reified variables. The best future work that could be done would continue work in the field, perhaps with detailed case studies conducted at the time of a singular downsizing. Such a study would help bridge the gap between the academic and the practical by offering managers critical self-awareness.

A neutral stance on the desirability of downsizing was sought in this paper. The paper does not dwell upon the multifaceted consequences or repercussions of downsizing since this has been amply reported elsewhere (e.g., Appelbaum et al. 1987). Nonetheless, it would be disingenuous to completely ignore the sensitive and socially consequential nature of these events. The role of the corporation in society tempts the establishment of a broader definition of accountability to the extent that some might be willing to challenge the American status quo of largely unfettered managerial discretion. Downsizing imposes externalities that question the equivalency of what is good for the corporation and what is good for society that many of us may have been too quick to accept.

The paper has benefited from comments from Lee Parker and Steve Salteria, as well as the anonymous reviewers of this journal. We are thankful for the assistance provided by the various companies and their representatives whose experiences are described in this paper. We also note with gratitude the invaluable transcription and administrative support provided by the late Betty Sue Griffith.


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Recent Restructuring Experiences For Sample Firms (a)

          Firm One  Firm Two  Firm Three

1999 (b)     1.8      69.8       12.9
1998        20.8                  3.2
1997         3.6      35.7
1996        10.3      18.3      127.5
1993        21.0                  6.4
1992                  15.0       58.3
1991        38.6

(a)Restructuring charges as a percentage of income from continuing
operations before taxes.

(b)1999 charges are based upon the first three quarters of the fiscal

Archetypes of the Downsizing Decision

                      Classical             Acquisition Driven

Potential Initiators  Crisis                Merger/Acquisition
                      Financial Pressure    Consolidation

                      Technological Change  Competitive
Analytical Focus      Cost Reduction        Asset Management
                      Elimination of        Simplification
                                            Capacity Utilization
Decision Makers       Senior Management     Senior Management
                      Divisional/Group      Divisional/
                      Management            Group Management
                                            Technical Experts
                                            (Engineering and
Implementation        Short Range           Short/Medium Range
 Time Horizon


Potential Initiators  Change in

                      Long-Range Market

Analytical Focus      Key Competencies
                      Market Opportunities

                      Business Fit

Decision Makers       Senior Management

Implementation        Long Range
 Time Horizon
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Author:Radcliffe, Vaughan S.; Campbell, David R.; Fogarty, Timothy J.
Publication:Journal of Management Accounting Research
Geographic Code:1USA
Date:Jan 1, 2001
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