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The downside of downsizing.

Downsizing has become a common theme among companies seeking enhanced profitability, yet a poorly orchestrated reduction can actually do more harm than good.

The potential problems go beyond downsizing's destructive effects on displaced workers. The downsizing organization itself also changes as a result of its actions. The change management is looking for, of course, is reduced operating costs. Unfortunately, the outcome in this situation is often reduced operating efficiency.

The nature of the problem varies with the kind of downsizing method used. Three of these methods are voluntary retirement, across-the-board cuts, and also surgical reductions.

Five years ago the method of choice was voluntary separation through early retirement. Unfortunately, many companies later found they had not only moved people out but also had cut out expertise. As a result, during the past five years business has seen a proliferation of consultants. These people are hired back by the company after retirement to perform the same duties they performed before retiring.

One possible solution to this problem may be expert systems. As technology improves, companies could require that retirees leave behind a knowledge legacy as a quid pro quo for the early retirement benefit. Of course, the computer system cannot take the place of human judgment, so the application of this idea may be limited.

The loss of knowledge is one reason why the early retirement method is used less frequently today. However, the main reason is that the current wave of downsizing is caused by the recession.

The pace of downsizing in the United States increased significantly during the 12 months ending June 1991, according to the American Management Association's (AMA) fifth annual downsizing survey. It found that 55.5 percent of responding firms reported work force reductions during this period, as compared to 35.7 percent during the previous 12 months.

As might be expected, 73 percent of those organizations that downsized listed the recession as all or part of the reason for the cutbacks. In this environment, voluntary retirement is ineffective.

Organizations are looking for big, quick cuts to cope with revenue decline and profit erosion. To accomplish that goal, about one third of those responding to AMA's survey chose across-the-board cuts. But that method is by far the most dangerous in terms of its impact on the organization.

Implementation is impersonal--the cuts usually are announced by memo. In addition, work levels may be unevenly affected. The corporation, for instance, might notify each department to cut personnel by 10 percent. In the majority of cases, the number of people is reduced but the work load is not.

This indiscriminate shrinkage is fine as long as the company is bloated. As AMA's survey indicated, however, 73 percent of firms that downsized in 1991 had already cut staff in one or more of the previous five years. In other words, for many organizations there wasn't much fat left to trim. The result of across-the-board cuts in this scenario is overworked employees, plummeting morale, and work slipping between the cracks.

Most of the organizations surveyed used a more surgical approach to work force reductions. They opted to eliminate the work along with the people. Organizations decided to get along without an internal public relations department, a plant, or an entire product line.

Even these organizations, however, saw an immediate dip in productivity. Morale always suffers when people are forced to watch their friends lose their jobs. Those who remain after the downsizing become victims of the Noah's Ark effect--because it is raining terminations, they hunker down and concentrate not on the job but on looking for signs that they will be swept away by the tide.

Management's role in this situation is to ensure that the productivity dip is short-lived. Two steps should be taken immediately after a downsizing.

First, if the organization has provided additional severance, enhanced retirement, or outplacement help to terminated employees, these actions should be communicated in nonspecific terms to the remaining staff members. Employees need to be reassured that if they lose their job due to downsizing, they'll have adequate time to get back on their feet.

More importantly, however, remaining employees need to feel that the organization values them as individuals. They need to understand that the downsizing was aimed at functions, not at people. By showing that the organization valued those who were let go, the company can help restore a feeling of self-worth to those who remain.

The second step is for the company to gear up its internal communications program. Every member of the top management team needs to be out in the organization talking to small groups, explaining exactly why the downsizing was necessary. The impression created, rightly or wrongly, by a cutback is that the ship is sinking. The remaining passengers need to be reassured that the ship is sounder now than it was before and that it is still on course.

Inevitably, in one of these small group discussions, someone will ask the dreaded question: Is this the end of the downsizing? Given the volatility of business in the 1990s, no one can answer this question with the assurance that what he or she says today will be true six months or a year from now.

As in everything, honesty is the best approach. A manager should be prepared to say that he or she can't predict what will happen in the future because conditions are changing so rapidly. The manager should also point out that good managers continually ask of every activity whether it is necessary and whether there is a more efficient way to do it. He or she should emphasize that the company will provide as much notice as possible before any reductions and as much help as possible to terminated employees.

The three methods of downsizing all have a negative impact on the organization. The surgical method appears to be the least destructive. Coupled with an effective postdownsizing communications program, it can minimize the productivity dip that follows every downsizing no matter how well it is orchestrated.

David Fagiano is president and CEO of the American Management Association.
COPYRIGHT 1992 American Society for Industrial Security
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Managing
Author:Fagiano, David
Publication:Security Management
Date:Oct 1, 1992
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