Human Resource Management on Downsizing

Downsizing is the permanent reduction of a company's labor force by removing unproductive workers or divisions. It is the restructuring of an organization which may include layoffs, or it is a term for termination which is not prompted by the employee behavior but instead is a business decision made to cut costs. While it is generally implemented during times of stress and a decline in revenues, downsizing can also be used to create leaner and more efficient businesses. 

Reasons to Downsize 

Downsizing occurs for several reasons, like a slump in profits, plant closure, or business acquisition and most often to save money. This typically has nothing to do with employees’ performance. Rather, it’s a strategic business move to cut operational costs, maximize production, and increase profit. Companies downsize for a variety of reasons such as to reduce costs and including less than stellar economic conditions, a company merger or acquisition, or when a product or service is cut.

Reduce Costs. One the primary reasons for employee downsizing is to reduce costs. Employee payroll counts as a liability on the company balance sheet and, therefore, reduces the owners' equity. The retained earnings of a company are affected by the amount it pays out in payroll, and removing this obligation is one way to cut costs. 

Tough Economic Conditions. When economic conditions are poor, sales and profitability can suffer. When sales and profitability are down, some companies may need to make drastic cuts in order to stay in the green. 

Merger or Acquisition. When two companies merge together, the companies need to restructure in order to meet their new needs. Restructuring may include eliminating certain roles altogether or reducing the workforce in certain departments. Companies that acquire another company may also downsize in order to meet the new needs of the company. 

The End of a Product or Service. If a company is well staffed for a particular product or service that is then discontinued, they may need to downsize since there is no longer a need for such a large staff. 

Human Resource Role in an Effective Downsizing 

Basic steps that HR professionals can take to make a downsizing work. These steps include:

1. Communicate. There’s no such thing as too much communication during a downsizing.“The work force almost has an insatiable appetite for news and information,” says Mitchell Marks, director of Delta Consulting Group in New York City. Employers who fail to keep major constituents informed of their plans risk alienating groups critical to the future of the organizations, writes Helen Axel, author of The Conference Board’s HR Executive Review: Downsizing, a 1993 report that thoroughly examined the issue. 

2. Educate. A work force has to learn that restructuring a company isn’t a single event, says Bob Marshall, president of The Marshall Group, a Scottsdale, Arizona-based consulting firm. “There’s never going to be an all-clear. Today, it’s an ongoing process that involves virtually everyone.” 

3. Collect data. No matter how a company goes about downsizing, HR can mitigate problems and assist top management by collecting data to show that there may or may not be a consensus. “Fractured visions lead to battles over resources,” says Marks. “You wind up with managers protecting their own fiefdoms and losing sight of the ‘bigger picture.’ 

4. Provide visible and accessible leadership. Nobody is more suited to lead a downsizing effort and communicate the message than the CEO and top executives. Short of that, top HR personnel should make themselves available to answer questions and take some of the heat. During a downsizing, there’s an almost unquenchable thirst for knowledge, as well as feelings of anger, fear and uncertainty. “If you don’t provide a feeling of leadership, productivity and morale are going to become abysmal,” says Bill Ryan, vice president of human resources for Liberty Corner, New Jersey-based Sea-Land Service. 

5. Ensure equity and fairness. The equal application of rules is mandatory in an era of litigation, says Joe Meissner, president of Power Marketing, a San Francisco-based outplacement firm. Moreover, perceptions do count. If executives are emerging from a downsizing unscathed while line workers are being laid off, it’s going to have a damaging effect on morale and productivity. 

6. Maintain a managed approach. Own up to the fact there will be a significant impact on the workplace,” says Marks. Human resources needs someone who is responsible for keeping an eye on things, whether it’s conducting a survey to gauge employee response or making sure management is doing things according to the criteria it has set down. “Perceptions are just as important as reality. What the workforce is thinking is as real as what’s actually happening.

Is Downsizing Effective? 

Do you believe downsizing is effective? Do you think the short-term benefits of downsizing are worth the long-lasting impact it can have on an organization? While the financial benefits of cutting costs is clear, the impact large layoffs have on the workforce is sometimes less than desirable. Some argue that downsizing has more negative consequences than positive ones. In fact, researchers from Auburn University, Baylor University, and the University of Tennessee, Chattanooga conducted research to determine if there was a correlation between companies that downsized and companies that filed for bankruptcy. Their research found that downsizing firms were twice as likely to declare bankruptcy than those who did not downsize. This study confirms how important it is to weigh all the options before making a decision. It is vital for companies to compare possible short-term consequences with possible long-term consequences before deciding whether or not to downsize. Unfortunately, there is no easy answer or black and white solution. Each organization is unique and needs to consider downsizing within the perimeters of their current situation. 

Today layoffs have become companies’ default response to the challenges created by advances in technology and global competition. Yet research shows that job cuts rarely help senior leaders achieve their goals. Too often, they’re done for short-term gain, but the cost savings are overshadowed by bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation, which hurt profits in the long run. This looks at better ways to handle changing workforce needs that make sparing use of staff reductions and ensure that if they do happen, the process feels fair and the affected parties have a soft landing. Most successful approaches begin with a philosophy that spells out a firm’s commitments and priorities, establish methods for exploring layoff alternatives (such as furloughs, retraining, and reassignments), and determine options for three scenarios: a healthy present, short-term volatility, and an uncertain future. 

Human resource professionals have been known to say that adults should never discuss downsizing in polite company unless they're flattering someone's weight loss. This is because downsizing is often associated with a different kind of loss – namely, employees and profitability. While there is no doubt that downsizing can be fraught with anxiety and uncertainty, the savviest HR professionals marshal their best management skills and prepare for the steps in downsizing employees in an organization. 

This brings us to an important question: How should HR handle downsizing while maintaining a strong image and making the process as stress-free as possible for displaced employees? 

The way we see things is that downsizing is just another part of business. And when it does happen, it’s up to the Human Resource to pick up the slack. So it is important Human Resource teams are prepared to properly plan, manage, and execute workforce reductions when the time comes.

References:

Doyle, Alison. “What Is Downsizing?” The Balance Careers. The Balance Careers, June 25, 2019. 

Samuel Greengard, “HR's Role in an Effective Downsizing?”, Personnel Journal, November 1993

Sucher, Sandra J., and Shalene Gupta. "Layoffs That Don't Break Your Company: Better Approaches to Workforce Transition." Harvard Business Review 96, no. 3 (May–June 2018): 122–129. 

M.T. Wroblewski, “How does downsizing Impact the Role of Human Resource Management?” ,July 28, 2020

Clay Halton, "Downsizing", July 30, 2021