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Strategic downsizing.

Little attention has been given to the strategic aspects of downsizing or the process of planning to ensure successful downsizing

Introduction

Downsizing is one tactic within a corporate strategy for shifting the organizational structure from what it is now to what it has to be in order to sustain competitive edge and satisfy customers' needs. Little attention, however, has been given to the strategic aspects of downsizing that confront an organization, or the process of planning to ensure a successful downsize.

The main aim of this article is consequently to address those issues which should be considered when deciding to downsize, and when planning the downsizing once the decision is made. The actual implementation and evaluation of a downsizing programme then follows quite naturally from the previous two phases in the strategic downsizing model proposed in Figure 1.

We begin by distinguishing between downsizing and layoffs, and highlight the short- and long-term differences between these activities. This distinction leads naturally to an overview of the strategic reasons for downsizing, whether downsizing is usually the first or last thing management has done to retain the company's competitive edge, and which of the two it should be. Against the background of a company's overall strategy, we go on to consider all the factors that need to be taken into account when deciding whether or not to downsize and when formulating the downsizing plan. The end result is two checklists that will allow a manager to determine the overall effect of a strategic downsize. From this, he/she can:

* Gain an insight into the downsizing effects that will determine the economic welfare of the company and thus of the shareholders.

* Limit the adverse effects on those who leave and those who stay.

* Ensure that the desired strategic outcome is achieved. We also show, however, that downsizing is typically the result of a lack of strategic rightsizing -- that is, the process of continually evaluating and adapting human resource requirements for the future through better management, rather than through reactive hiring and firing

In addition, the article illustrates the effects of downsizing on the people who leave and those who remain with the organization. It provides examples of companies that have minimized the adverse effects on both groups by "accentuating the positive". Once a company has determined that its workforce must be trimmed, how should management go about it? We consider the roles played by management and employees, and the desirable effects on shareholders and customers for which firms should aim. To illustrate our case, we examine two examples from the computer industry: one a major organization, the other a small software publishing business.

Strategic downsizing versus layoffs

The difference between downsizing and layoffs is a reflection of the operating environment in which each might occur and the way in which each is handled. The common overt effect of each is a net reduction in headcount and usually a net labour cost reduction. The covert aspects are more critical to the strategic well-being of the company and will ultimately determine its long-run profitability, quality of service/product, and employee satisfaction levels. Downsizing offers a host of strategic opportunities to an organization, whereas layoffs often result in negative long-term effects. These differences and the covert aspects of headcount reduction will be discussed at each stage of the article and culminate in a strategic comparison of the two.

Strategic downsizing can happen during growth as well as decline, whereas layoffs are a function of decline[1]. Reducing headcount is one of the objectives of both functions, but the way each is achieved is distinctly different. Downsizing has the additional dimension that it plans for the future, whereas a layoff is usually an immediate remedy for an immediate problem.

Reducing labour cost need not involve reducing headcount, as shown by those organizations which have reduced work hours and pay rates (such as Ford[2]. The tools available to management for use in layoff situations are limited to those shown in Table I, while managers using well-planned strategic downsizing techniques have many more options. Downsizing is also more powerful in changing organizational culture and can be implemented as quickly as layoffs, provided the appropriate prior planning has been carried out (cited in [3]). IBM's experience has shown that proper planning in preparation for downsizing can mean flexibility with regard to the timing of its implementation. IBM UK planned to reduce staff over an 18-month period but, in fact, accelerated it to eight months in response to worsening economic performance, while still maintaining its downsizing objectives without resorting to laying off[4]. Downsizing is also a surgical elimination of redundant work processes, while layoffs are typically instigated across the board for short-term benefits. Train's example of UPC in a case analysis gives rise to this judgement through Emmanuel Kampouris' commentary. Kampouris goes on to say that, if management can downsize by "stripping away all the non-value adding activities", it will be better off than if it merely laid off across the board, as was the original directive from the CEO to his general manager[5].

[TABULAR DATA OMITTED]

Interestingly, Cameron et al. find that the most effective downsizing strategies were across the board vertically (through all levels) yet selective for the long-term benefit. They state that one of the companies in their survey even considered that downsizing could directly lead to rising employment in the company, as efficiency gains were realized when non-productive job functions were eliminated[1].

Why downsize?

We believe that the driving force in downsizing must be part of an overall strategy:

* to position the company for the long term; and

* immediately to raise and maintain the overall productivity per employee.

Our argument is that strategic downsizing will achieve this, while staccato reactive layoffs will not.

There is a natural conflict in the process of strategically downsizing: the short-term remedy versus long-term human resource planning Reactive moves by companies to ease financial pressures by laying off workers are very familiar, but are these companies thinking strategically? We recognize that these reactive moves are unavoidable when the financial pressures are so great that across-the-board cost-cutting has to include personnel reductions, but would prior strategic consideration have provided an alternative for such companies? Possible alternatives might include re-skilling and redeployment. These can be achieved only with a thorough consideration of the future position of the company, so that it can adjust or "downsize", before it has no option but to "lay off".

However, Faltermayer[2] questions whether some of the notable layoffs of recent times were even necessary (e.g Ford Motor Co. in the early 1980s). He quotes Frank Popoff, CEO of Dow Chemical, as stating "Layoffs are horribly expensive and destructive of shareholder value". Along with Dow, Ford and 3M turned in high losses in recent times, but shunned using layoffs as a tool for reducing cost, citing as their reasons: skill loss, high cost of rehire, and survivor trauma. Instead they looked to reduced pay, reduced work hours, early retirement and being lean to start with. In Ford's case, it kept recent dismissals to a minimum, having remained slim after the plant closures and redundancies of the early 1980s.

A recent report released by Deloitte Touche Tohmatsu's Human Resources Group "main 1993) shows that in New Zealand the main impetus for downsizing has been the desire to save on costs, with other motivations being changes sought in the company's direction or culture, and the need to adjust to reduced demand for products or services"[3]. The key word here is adjust, which indicates that there is advance thought leading to the downsizing decision.

Deciding to downsize

We turn now to the issues that should be taken into account before making the decision to downsize. The following checklist forms the basis of the planning phase, discussed later, but is also essential to highlight areas that influence the original decision. Issues to consider when deciding to downsize include:

* Define and analyse the company's competitive position (effect on company's strategy, culture, stakeholders).

* Determine the appropriate workforce structure to sustain competitive position.

* Conduct a skills needs analysis.

* Match existing skills of workforce to skills needed.

* Evaluate current HRM practices.

* Identify critical HR areas of concern.

* Determine alternatives to address critical HR issues (for example, training, redeployment, multiskilling, layoffs, downsizing, freezing recruitment, performance management, etc.).

* Consider positive and negative effects of the alternatives (including planning and implementation issues, and costs and benefits).

The need to downsize should be an outcome of management's planning for the optimal utilization of its human resources. Indeed, after careful consideration of ad alternatives available to achieve this objective, a company might well decide not to downsize but to opt for a more appropriate course of action.

Once a company's competitive position has been analysed and defined, the most appropriate structure for its workforce can be determined to strengthen or defend that competitive position. Once that structure is defined by management, the shift from what the structure is now, to what it needs to be, can be considered. Defining how the shift is to occur and how long it is to take must be part of the overall corporate strategy. This entails employing, not vague long-term planning, but specific targetable measures of change. As Imberman states, "...unless the starting point of this [downsizing] journey is identified with great precision, and unless things are being done right today, using a five-year plan as a map to the Promised Land will lead only to limbo"[6].

Efficiencies achieved in other corporate functions such as operations management may have changed the number of tasks required to complete a job and therefore may have reduced the number of required labour units. A more flexible, multi-skilled workforce, which the current skill base may not reflect, might be needed and could induce the need for downsizing as a complementary strategy. The need to downsize is not always obvious to those companies for whom the need is greatest. Industries with a high content of labour in their product coatings will be more thoroughly aware of the impact of low productivity on their competitive position than will those which have a lower labour content. Manufacturers build cost systems around "labour dollars" and, depending on union involvement, can remain flexible to their labour requirements by utilizing part-time workers.

However, businesses with high proportions of professional personnel and high material costs might not easily be able to identify the inefficiencies or causes of low productivity other than in terms of overall employee performance. This is especially true of young companies that have known only rapid growth. Some of these companies find it difficult to rightsize their workforce in tune with their strategic labour requirements and, in a recession, look to remain competitive through alternate means of cost reduction or productivity improvement, which may not be as strategically effective as downsizing In David Enfield's words, "Any company considering downsizing as a solution to its strategic concerns should first think through what its strategic concerns are and then fit downsizing into that context"[5].

The reasons for downsizing need to be clearly defined by management. The process must be integrated with the company's strategic plans, culture and other corporate functions: finance, operations and especially marketing (with its customer knowledge). The company's objectives and goals, both long term and short term, must determine the structure of the workforce required. The process cannot be driven by short-term cost-cutting needs, unless the existence of the company is threatened. In this case, the company is in survival mode and the most likely outcome will be expensive layoffs. Implicit in the recommended sequence is the principle that management should not allow the business to get into the position of having to defend its competitive edge through layoffs.

Using the checklist above will assist a company in its strategic endeavours. The final issue in this checklist, namely a consideration of the positive and negative effects of the alternatives identified, and particularly of downsizing, is extremely important and is discussed as follows.

The effects of downsizing good and bad

Stayers versus survivors

If the planners and implementers of the downsizing exercise have not considered the effects on morale and productivity of those who remain, then the potential positive outcomes may be negated at stage one. The survivors are truly survivors only if the human resource restructure is nothing more than a "layoff", while those who remain after strategic downsizing should be well-informed "stayers". Whereas survivors breathe a sigh of relief (one that can last for months) and assume the air of pallbearers in mourning, stayers take up their evolving roles with a sense of purpose and acknowledge that they have been chosen to "stay" rather than be asked to "leave".

Managerial survivor sickness

"As corporations restructure, they are forcing managers through one of the most harrowing stress tests in business history"[7]. The possible effects of downsizing on the remaining line managers, senior staff and other executives are commonly not considered when deciding to downsize. Recent evidence[7] clearly illustrates that surviving managers report survivor sickness symptoms as varied as lethargy, feelings of emptiness, little job satisfaction, decreasing levels of creativity, questioning the value of tasks, guilt, harder working, fatigue, resentment, moroseness, extreme cautiousness, and contempt. The result is that organizations frequently have to contend with key staff members not working at optimal levels, with negative effects not only on productivity but also on employee morale, loyalty and commitment.

Being aware of the likelihood of, and the problems accompanying, managerial survivor sickness can assist those involved in the decision-making process to plan accordingly. Indeed, the costs associated with the problems might well exceed the benefits of the downsizing strategy in the long term should appropriate programmes not be put in place to support surviving managers.

Skills analysis preventing skill loss

If the downsize includes a request for applications from those who wish to leave, then there is a threat that the organization may lose some of those skills which it should retain in the new structure. The corporate strategy that leads to a decision to downsize should include a skills needs analysis which should in turn be followed by a review of the staff who have the critical skills. Once those key personnel have been identified, they can be encouraged not to leave. Their loss to rival companies must be prevented and appropriate incentives to ensure their retention need to be in place. This reflects the need for an effective appraisal system to be able to identify those with the desired skills and those who are candidates for departure. IBM UK; had such a system and was able to identify those people who should go or stay[4] (see Case Study 1). IBM found that the effect on morale of those who were refused redundancy application was negligible, presumably because the retention compensation was negotiated to ensure satisfaction.

It is beyond the scope of this article to stipulate what an appropriate appraisal system is, but for downsizing purposes it must be one that answers the question: Which staff have the skills we require for the future structure and strategy of the company? The issue of who is in control of the process, and who should implement it, is discussed in a separate section below.

The costs of downsizing and compensation

A recent survey of some of America's largest companies, which suffered losses in 1991, showed that they all shunned layoffs because of their cost[8]. The overriding conclusion was that the companies had learned from their prior layoff experiences and were better advised to stay lean through the recovery periods. This gives strength to the view that management should not allow a company actually to get to the position of having to downsize, but should rather maintain a rightsizing strategy. In most circumstances, the cost of rightsizing will be less than the cost of downsizing

The nature of the business cycle may determine the type of human resource management practices being followed. Those companies in a prosperous phase may foster human resource policies that do not focus on productivity and efficiency. This in turn can make the company sluggish and ill-prepared to face the demands of any ensuing decline phase. This reinforces the point that downsizing can be planned for and that, if the organization is kept lean during the good times, it will be better positioned to adapt quickly to downward trends in its markets, which is preferable to having to downsize. This is the concept of rightsizing

Management had not defined long-term, or medium-term, human resource needs

Frenkel and Shaw's case analysis of the Value Hotel chain[9] showed that an uncontrolled and ad hoc recruitment policy resulted in overstaffing and the inability to control morale and productivity as a recession hit. Management had not defined long-term, or even medium-term, human resource needs, and had been operating several hotels from a stand-off corporate position with little idea of the operations or customer base of each. The result was an inefficient operation faced with financial constraints that required major surgery to the workforce. Motivation hit a low and central control was lost. Retention of skilled staff dropped and the overriding moral of the case was the necessity to combine the human resource function with both operations and finance, in considering the company's exposure in the event of the market turning sour - which it did.

Fieldman and Leana observed that treatment of blue-and white-collar workers differed on two sites they investigated. Blue-collars were given longer notice while white-collar workers received higher payouts[10]. The logic behind this was that the white-collar workers probably had access to sensitive information and therefore had to be denied further access - which limited their immediate productivity. Therefore, they went quickly but were compensated accordingly. In New Zealand, longer notice is becoming an accepted means of compensation in lieu of short notice and high payout.

This practice adds credibility to management's position and is indicative of a cost-effective and more compassionate approach to redundancy.

The following phase in our strategic downsizing model highlights the crucial importance of thorough planning to avoid the downside of the downsize.

Planning the downsize

A checklist of criteria is provided here that should be considered before strategic downsizing occurs, in order to minimize dissatisfaction among those who leave and those who remain with the organization. Issues to consider when planning the downsize include:

* What is the focus of the downsizing strategy?

* What tools should be used?

* Who should implement/manage the downsizing process?

* What compensation will leavers receive and when will they receive it?

* What supportive programmes will be put in place for leavers?

* What supportive programmes will be put in place for stayers at ALL levels?

* To what extent will employee representatives be involved in the planning process?

* What information should be divulged to stakeholders?

* When should information be divulged to stakeholders?

* How are the leavers to be identified?

* When should the leavers go?

* How and when should the leavers be advised?

* How and when will the stayers' jobs be reorganized to reflect the new structure?

* What training will be necessary and who will conduct it?

What should be appreciated during this planning phase is that the perceived fairness of the downsizing strategy and its concomitant changed work conditions are paramount in reducing negative feelings in the survivors of any layoff[11]. This precept - that the process of downsizing and the changing environment will critically affect the stayers and should deliberately be planned for is central to what follows.

Procedural justice

Not only must the process of redeployment or redundancy actually be fair, it must be seen to be fair. It is not simply a legal requirement to satisfy those who leave (be fair), but the process is also a potential source of motivation for the stayers (be seen to be fair).

Exactly how the leavers were notified has a bearing on morale following the downsize. In organizations in which continued contact between the stayers and leavers is likely, either socially or professionally, the method of advising the leavers will be known to all. Letters mailed out to all employees, following a meeting to announce layoffs, with either a "stay at home" or "come to work" notice, do nothing for morale. This method is typical of those businesses not strategically downsizing but simply taking the least effort, hard-hit approach to workforce reduction. Examples of this in New Zealand include Beaminc, with its removal of me entire corporate office, and Coverbolt Industries' wholesale downscaling of employees and management. Both these companies faced severe financial pressures, but, having created the new structures, are now moving forward in the development of their staff within these structures - taking care not to let the excesses of the past catch up with them again.

During downsizing, there should be other measures of cost reduction simultaneously in place to lend credibility to the overall cost reduction strategy. Stayers are more likely to perceive the downsize as being "fair" if they feel that the staff reduction was not the only means employed to reduce costs[8]. If the downsize is driven by technological change or changing market conditions, such as international competition in a deregulating market, then expenditure may be occurring in other areas at the apparent expense of human resources. If the reasons for the shift in expenditure and associated staff reductions are not transparent to the workforce prior to implementing the downsize, then a sense of injustice may be felt by the stayers.

Focuses and tools of a downsizing strategy

There are four key focuses of a downsizing strategy: headcount reduction, cost reduction, organizational redesign and culture change. The model set out in Table I incorporates the appropriate tools for each focus. Each focus can complement the overall strategy, depending on the characteristics of that strategy. Table I also indicates the difference between downsizing and layoff options. These focuses are not mutually exclusive, but rather dictate the process of downsizing and the strategy required. Some or all can be implemented, depending on the pressure to reform and the timeframe dictated by the corporate strategy.

Along with planning, communication and investment in retained staff, speed of implementation will greatly contribute to the effectiveness of the downsize. This, along with the evidence from companies such as IBM, implies that while clear timeframes need to be set, they must also be flexible enough to meet the short-term requirements of the company, should the process have to be hastened. With the advent of radical re-engineering and a greater focus on innovative change, while the overall strategy can dictate rapid periods of change and job elimination, it cannot sacrifice employee commitment to continuous improvement and process evolution. Cameron et al found that the most successful downsizers implemented a variety of downsizing strategies, focusing on immediate measurable changes in productivity and unmeasurable changes in the way activities were carried out[1].

There are several ways of implementing each strategy, and these are listed under "Tools" in column one of Table I. Only those within the company can make this choice, because they are the ones who know the workforce and the shape of the industry. The objective should be to reduce the headcount with the smallest number of enforced redundancies (and enforced retentions for that matter), in order to raise per head productivity.

Would should initiate and manage the downsize - HR manager or line management?

The extent of involvement of a personnel department will depend on the size of the company and where the key information is held - with line management or with the personnel department. The process needs to be owned by one of the members of the overall strategy planning team, in order to give the downsize credibility. This person should drive the process while the line managers should be accountable for implementation. Ideally, this same person would have been responsible for the skills needs analysis. With regard to layoffs in New Zealand companies, this person has typically been the CEO. Two other examples include Paul Allaire of Xerox Corporation, who pushed down the change to line management, but retained ownership himself[12], and Sir Leonard Peach, who, as HR director, drove the process but assisted line management in implementing the IBM UK downsize.

The variety of organizational structures and differing attitudes towards the role of personnel departments and HR managers indicates that there is no universal method for determining who should run and implement the process. A guiding precept, however, is that responsibility for driving the process must remain as high as possible in the organization. The implementation must be left to those line managers who have to live with the stayers and who best know the employees and their jobs.

Communication

Effective communication with all employees before, during and after the downsize will help to reduce its negative effects by fostering a sense of opportunity rather than relief. Communication should include credible notice of the need for the downsize and of the fact that it is the result of considered, far-sighted planning rather than the result of "managerial greed or incompetence"[13] - i.e. without the downsize the organization will not survive[5]. Where possible, all employees should be given considerable advance notice in order to achieve cooperative behaviour and maintain productivity[1]. Being the first in an industry to downsize does not help promote perceived fairness unless the focus of the communication is to emphasize that the initiative is aimed at maintaining or improving the organization's competitive position.

Wood describes a two-tier process in communicating the information to district managers in the National and Provincial Building Society[14]. First, the district managers were actively involved in a general discussion aimed at assessing performance, perception, consensus and consultation. The second stage was a private interview establishing buy-in for those who would remain and options for those who would leave. As discussed earlier, achieving the buy-in of employees earlier rather than later can provide constructive methods of reducing the headcount while ensuring that those who remain are motivated and productive.

The payoffs of advance notice and transparent communication are twofold. First, the stayers will feel that the leavers were given appropriate time to find new employment, and therefore they are less likely to suffer "survivor guilt". Second, the productivity of those who are leaving does not drop off as quickly as might be expected with less notice[1,13].

Market signals and advance notice

A possible downside to advance notice is that the signals sent to the market may not be beneficial to the company. Ginter et at discuss the effect of acquisition on a company and liken it to the death phase of an organization's lifecycle[15]. The restructure of an organization after a merger or acquisition will often involve a degree of downsizing because of role duplication, cost-elimination or asset stripping In these instances, the need to protect the public image of the company may forbid transparent communication to the employees in order to maximize the return (or minimize the cost) to the shareholders. While management are aware of the impending consequences for some employees, they are not able to give advance notice of those consequences, because the market will hear the "noise" created and the share value may be affected. (The reverse of this, of course, occurs when the market reacts very favourably to attempts to eliminate cost. In these cases, an early signal of the intention to downsize might well have a positive effect on share price.)

While the article by Ginter et al highlights the negative aspects of a merger without constructive advice, Marks and Mirvis provide constructive post-merger advice on how to build up new teams in an environment of some mistrust and scepticism[8]. These can be difficult circumstances but ones that typify management's paradox when confronted with shareholder/employee compromises. Senior managers' own positions may be threatened if the takeover is hostile, further magnifying their personal dilemmas. This is not to suggest that management should ever take its strategic eye off the shareholder in favour of the employee, but that it should assess the potential for damage through alienating either party, and then act accordingly.

It should be noted that there was very favourable reaction from share market investors and analysts when Telecom New Zealand's CEO, Dr Deane, announced redundancies. The National Business Review stated: "The sharemarket gave both thumbs up to the news that staff would be reduced by 5,200 to a wafer thin, highly efficient, 7,500 over four years..."[16,17]. Telecom's action and the reception from the market also serve to highlight the distinction between downsizing action and layoff effect, because Telecom:

* was in a growth phase, not a survival situation;

* had planned the downsize to flow over a four-year period, not an immediate addition of 5,200 to the dole queue;

* was using the tools available to the strategic downsizer that cannot be used in layoff situations: planned early retirement, job sharing, reduced hours;

* had recently achieved higher levels of service and profitability, to the benefit of the customer and the shareholder, respectively; and

* was using downsizing as part of its overall corporate strategy, not a "quick fix" short-term remedy.

But what if employees and management have actually been at odds over issues relating to terms of employment prior to the downsize? This is not an unusual circumstance. Examples include companies in the freezing industry in New Zealand in the late 1980s and early 1990s, when union pressure for higher wages forced layoffs in a subsequent year due to the noncompetitiveness created by higher labour costs and inflexible work classifications. Whether this could be deemed "strategic downsizing" is debatable communication ahead of the termination notices in this instance might simply have been an inducement to down tools and further reduce productivity. It may therefore not be strategic to give advance notice of redundancies to an already partially alienated workforce.

It is also interesting to note the interpretation by the media of IBM's downsizing activity in 1993. Reuters reported a US$2 billion charge against redundancies in 1993 to "...pay for slashing its workforce by almost 50,000 people". A share trader was quoted as saying: "How many times have they done this in the last year?"[18]. This underscores how critical is the communication of the process if damaging public reaction is to be avoided. This particular article did not report the pay-back period, nor the potential benefits to IBM's competitive position.

Changing work conditions

A proper analysis of the skills needed in the restructured organization will generate job specifications, against which existing employees can be matched. By way of contrast, let us consider the effects of a typical unplanned layoff scenario. In the absence of time to prepare a job needs analysis, the survivors are left carrying the workloads of their ex-colleagues. Specialist skills may have "walked out the door" and tasks that used to take short periods might now take much longer as those recently made responsible for them discover how they should be carried out.

The alternative for the overworked and undertrained employee is not to do the extra work. Before long, a frustration escalation spiral begins. If the need for the layoffs was to reduce cost in order to survive, then the objective must have been to raise the productivity of those who remained. The result, in the face of lowered morale and higher workload, is that more work is done less well by fewer staff. It is likely that the customer will be seriously affected and business could be lost unless all other competitors are facing similar circumstances[19] (the InfoLight Case Study provides an illustration).

The only potential upside in this situation is that short-term gains might be achieved if there is a threat that even the survivors' jobs are under scrutiny. Coercion then becomes the driving force. Often this is acceptable in smaller companies where management "lay it on the line" and the need for the layoffs can be credibly attributed to factors outside management's control -- including larger players entering the market or general economic decline. Not surprisingly, a little insecurity can keep a workforce on its toes. The central point, however, is that, if the influencing factors can be forecast (i.e. management can be seen to have made the best attempt rather than ignoring the signals and hoping for the best), then there is an alternative to sudden layoff -- strategic downsizing

Motivation

Changes in sources of employee motivation go hand in hand with changes in the nature of the job. If work burdens increase without relative increases in compensation, resentment towards the more for less attitude can reasonably be expected to rise. Intrinsic motivation may evaporate, especially for middle management, who may have found their autonomy reduced. This occurs when there has been an overall downgrading of positions, effecting not only a salary or wage reduction but a responsibility demotion as well. The process of bumping, whereby senior personnel are put into what was their subordinates' role, reduces incentive and affects the individual's career path. Proper skills analysis will identify those whom the organization really cannot support and develop, and who would be insulted if offered a lower position.

The temptation to offer such a position (out of perceived loyalty) in a tight labour market may be more attractive than the hard task of counselling the person who really has to go. This serves neither party well and the strategic downsizer will have considered the outplacement services needed to support such an individual. Appeasing the manager's conscience at the expense of the employee's career development is not a strategic solution. Instead it defers the departure to a later date and can seriously damage the self-esteem of the demoted employee. However, mitigating strategic circumstances might include the opportunity for the employee to learn a wider variety of tasks while taking a pay cut, with the proviso that the appropriate benefits will be gained when the business turns around, if in fact the downsize is due to market conditions.

Imberman defines three basic tasks that "need to be done" to revitalize managers after a white-collar downsizing[6]. Step 3 of the process involves retraining in order to allow the overburdened remaining managers to cope with their new roles. He emphasizes training in risk taking and accepting responsibility in the newly restructured and slimmed down organization. The primary objective is to retain and increase motivation to improve productivity. Because the downsizing strategy should be an integral part of the corporate strategy, it is possible to implement other motivation schemes at the time of the downsize. Some companies, for example, combine the downsize with quality award presentations in a "Build with pride week" activity[1].

Consistency with culture

Organizations such as Lincoln Electric have a "full employment" culture that has ensured redeployment of employees whose job functions have been eliminated. This promotes a "recruitment from within" focus which may be compromised if the current corporate strategy equates downsizing with redundancy. A company can successfully and significantly downsize in line with strategic needs, without seriously compromising a full employment culture. Forward planning allows the use of natural attrition, early retirement and voluntary redundancy (with appropriate incentives) to take care of staff reductions. Other companies see changes in numbers and skill sets as a way to change the culture, especially if it includes major changes to middle and upper management. These companies, however, may then have to deal with the survivors' stronger feelings of unfairness.

Other issues of culture influence the decision criteria used -- last in first out, seniority, across the board versus selective, or divisional based on a unit's profitability. If a company is known to be an aggressive manager of staff, primarily looking to individual profit performance as a reason for retaining staff, then it would be no surprise to employees if consistently poor performances resulted in layoffs or redeployment. An example of this might be the financial services sector, in which dealer positions require high performance to achieve good results.

Employee involvement

Employee involvement is one of the best recipes for gaining employee commitment. Cameron et al found that if employees believed that:

* the downsize was necessary for survival;

* personal employment was guaranteed for a certain period of time; and

* managers could be trusted and would be fair,

then employees were the most adept at finding ways to eliminate the fat and improve efficiency and would plan ways to implement the necessary changes[1]. The analysis process was shown to be bottom-up, while the top-down contribution was: motivation, mandate, and monitoring to help implement it. In New Zealand, the CEO of Coverbolt had shopfloor employees asking him what took so long to make the workforce reductions in non-productive areas. The employees were actively involved in advocating the staff reductions.

Implementation and evaluation

By considering all the influencing factors on the decision and plan to downsize, management should have already formed a framework for its implementation which complements the corporate strategy. In evaluating after the downsize, management must ask: "Have we achieved the structure required? Has the required structure changed since we started?" If the answer to the second question is "yes", then: "Are we flexible enough to cope with the change?" If not, then management needs to review the implementation and adapt the strategy. Downsizing is not, however, a reiterative business operation. If it has not achieved a radical change in the way a business operates, then it was not well constructed or was unnecessary in the first place. Alternatively, it may not have been radical enough. An attempt to make a downsizing process effective through a "second bite" is almost certainly doomed to failure.

Conclusion

The objective of downsizing should be to raise productivity per head. Strategic downsizing can achieve this -- layoffs cannot. It is possible to plan to reduce a workforce. In the absence of severe financial and environmental factors, which usually dictate an immediate layoff, downsizing can be carried out with the full commitment of the workforce to the long-term benefit of the company.

The key areas in the implementation are communication, employee involvement and proper preparation. If the downsize is to be successful and strengthen the company's competitive position, it must succeed first time in order to gain credibility with customers, suppliers, investors and, most importantly, the stayers.

Case Study 1: IBM UK Limited[4]

Profits had fallen owing to price reductions in hardware of 25 per cent per year, and the strategic decision was made to reduce the ratio of support workers to front-line workers from 1.22 to 0.53. Labour turnover had dropped from 10 per cent in 1972 to 2 per cent in 1991. This equates to 1,200 departures by choice in 1972 versus 340 in 1991. Headcount reductions of 2,639 (15 per cent) were achieved from a total workforce of 17,548, of which only 2.3 per cent was accounted for by natural labour turnover.

A process was undertaken of preparing generous packages for the early retirers and voluntary redundancies that were adequate enticements but did not encourage essential skill holders to apply. Communication was started early by briefing the top 159 managers and providing them with cascade materials.

Spin-off businesses were started for young employees who could then subcontract back to IBM as required, and develop their own customer base.

The personnel group provided leadership and planning, but the whole exercise was carried out by line management working in concert with finance and other support departments.

Age, sex and skill profiling were used to ensure that the company retained the desired workforce profile.

The cost averaged two years' pay per person removed, but the removal of managers earning over, Pounds 40,000, plus benefits, added another 37 per cent to the cost. The recovery period was expected to be 18-20 months.

The company maintained its image of "no redundancy" by providing appropriate incentives to encourage people to apply to leave. Only some staff with essential skills were actively denied with package.

Case Study 2: InfoLight International Limited

InfoLight grew through the 1980s from a start-up partnership of two to a company of 200. Its selling, product support and service skills were the key success factors for this company and the ones that gave it a competitive edge in a developing industry. However, as its key software product became a commodity, the company was forced to reduce price and increase service levels. Cost reduction was sought by utilizing alternative channels of distribution and forcing down production costs of the printed materials.

Throughout this period, the company maintained a "no redundancy" policy for the personnel who had been with the company the longest (an admirable policy of loyalty). The most recently recruited employees were made redundant as a last resort and existing employees assumed new and lower level tasks to fill the gaps. Strategically, this was not sound. Management subsequently admitted that they should have downsized the workforce and removed the "old faithfuls" who could not cope with the rapid growth of the company. Had they done so, InfoLight today might be in a more competitive position than its current one, which sees it suffering from the effects of previous management and proprietor actions.

Manuals are being returned when they fall apart after six months. This keeps the customer service department busy reissuing them. The company is laying off as it consolidates with its US parent. The process has been given the name of "rationalization" but in fact resembles "death throes". Morale is currently low because communication of any strategy is poor and staff do not know who will be next, but the least productive employees are now being made redundant.

In short, during its period of rapid growth, the company had not given consideration to the skills needed to position it for the future. The technology outgrew the original partners and they did not shape the workforce by taking on the right skills at the right time. InfoLight is now reduced to bundling its product with other packages in "own-name" parcels in order to remain competitive.

It is an example of a company which needed to downsize strategically at the start of the decline in its industry but which, on recognizing the warning signals, elected to cut costs rather than aim to raise productivity.

[Figure 1 ILLUSTRATION OMITTED]

References

[1.] Cameron, K.S., Freeman, S.J. and Mishra, A.K., "Best practices in white-collar downsizing: managing contradictions", Academy of Management Executive, Vol. 5 No. 3, 1991, pp. 57-73.

[2.] Faltermayer, E., "Is this layoff necessary?", Fortune, 1 June 1992, pp. 53-63.

[3.] Forsythe, S., "Report on downsizing in New Zealand", Otago Daily Times, 6 duly 1993.

[4.] Peach, L., "Parting by mutual agreement: IBM's transition to manpower cuts", Personnel Management, Vol. 24 No. 3, 1992, pp. 40-3.

[5.] Train, A.S., "The case of the downsizing decision", Harvard Business Review, Vol. 69 No. 2, 1991, pp. 14-30.

[6.] Imberman, W., "Managers and downsizing", Business Horizons, Vol. 32 No. 5, 1989, pp. 28-33.

[7.] Smith, L., "Burned-out bosses", Fortune, 25 July, 1994, pp. 108-13.

[8.] Marks, M. and Mirvis, P., "Rebuilding after the merger: dealing with survivor sickness", Organizational Dynamics, Vol. 21 No. 2, 1992, pp. 18-32.

[9.] Frenkel, S. and Shaw, M., "Employee relations and organizational growth and decline: a case study", Journal of Industrial Relations, Vol. 33, 1991, pp. 196-219.

[10.] Fieldman, D. and Leana, C., "Managing layoffs: experiences at the Challenger disaster site and the Pittsburgh steel mills", Organizational Dynamics, Vol. 18, 1989, pp. 52-64.

[11.] Brockner, J., "Managing the effects of layoffs on survivors", California Management Review, Vol. 34 No. 2, 1992, pp. 9-28.

[12.] Howard, R., "The CEO as organizational architect: an interview with Paul Allaire", Harvard Business Review, Vol. 70 No. 5, 1992, pp. 107-21.

[13.] Brockner, J., Tyler, T. and Cooper-Schneider, R., "The influence of prior commitment to an institution on reactions to perceived unfairness: the higher they are the harder they fall", Administrative Science Quarterly, Vol. 37, 1992, pp. 241-61.

[14.] Wood, J., "How organizations can survive redundancy", Personnel Management, Vol. 22, 1990, pp. 38-41.

[15.] Ginter, P.M., Duncan, W.J., Swayne, L.E. and Shelfer, A.G., "When merger means death: organizational euthanasia and strategic choice", Organizational Dynamics, Vol. 20 No. 3, 1992, pp. 21-33.

[16.] Ferdinand, F., "Telecom puts away rainy day profits as staff get drenched", National Business Review. 19 February 1993, p. 4.

[17.] Brettkelly, S., "Telecom staff cuts costly, claims clear", National Business Review, 5 March 1993, p. 3.

[18.] Otago Daily Times, 14 July 1993, p 18.

[19.] McKinley, W., "Decreasing organizational size: to untangle or not to untangle?", Academy of Management Review, Vol. 17, 1992, pp. 112-23.

Application question

(1) Differentiate between "downsizing", "rightsizing" and "layoffs".

(2) On the basis of the authors' discussions, summarize the dangers and benefits of downsizing

(3) Which areas of your organization might best respond to strategic downsizing? Use the authors' Table I as a starting point.

David C. Band is Director, and Charles M. Tustin is Senior Lecturer both at the Advanced Business Programme, University of Otago, Dunedin, New Zealand.
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Author:Band, David C.; Tustin, Charles M.
Publication:Management Decision
Date:Dec 1, 1995
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