Downsizing

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Downsizing

• HR Management
• MBAO 6030

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Downsizing

• What is Downsizing?
• A downsizing strategy reduces the scale (size)
  and scope of a business to improve its financial
  performance (Robbins Pearce, 1992).
• A reduction of the workforce is one of only
  several possible ways of improving profitability
  or reducing costs.

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Downsizing

• Why do Firms Downsize?
• Reduce costs
• Reduce layers of management to increase decision
  making speed and get closer to the customer
• Sharpen focus on core competencies of the firm,
  and outsource peripheral activities
• Generate positive reactions from shareholders in
  order to improve valuation of stock price
• Increase productivity

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Downsizing(Gomez-Mejia, Balkin Cardy, 2001)
Need to reduce costs
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Alternatives to Downsizing (Gomez-Mejia, Balkin
Cardy, 2001)

• Employment Changes in Pay/Benefits Training
  
• Policies Job Design Policies
  
• Attrition Transfers Pay freeze
  Retraining
• Hiring freeze Relocation Cut overtime
• Cut PT employees Job Sharing pay
• Cut interns Demotions Use vacation
• Cut temps leave days
• Voluntary Pay cuts
• time off Profit sharing
• Reduced work or variable pay
• hours

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Downsizing(Gomez-Mejia, Balkin Cardy, 2001)
Need to reduce costs
Alternatives To Layoffs
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Downsizing Effects Overall

• Mixed effects on firm performance some
  short-term costs savings, but long-term
  profitability valuation not strongly affected.
• Firms reputation as a good employer suffers.
  Example Apple Computers reputation as good
  employer declined after several layoffs in 1990s.
• Downsizing forces re-thinking of Employment
  Strategy. Lifelong employment policies not
  credible after a downsizing. Example IBM
  abandoned lifelong policy after several layoffs
  in early 1990s.

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Downsizing Effects Employee Morale

• Employee motivation disrupted increase in
  political behaviors, anger, fear - which is
  likely to negatively impact quality of customer
  service
• Violation of psychological contract, leads to
  cynicism, lowered work commitment, fewer random
  acts of good will
• Survivors experience more stress due to longer
  work hours with re-designed jobs, and increased
  uncertainty regarding future downsizings

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Downsizing Effects Workforce Quality

• Many senior employees leave due to application of
  early retirement incentives result is loss of
  institutional memory.
• The use of voluntary workforce reductions
  (buyouts) results in the most marketable
  employees leaving (stars) -- difficult to
  control since all employees must be legally
  eligible to qualify.
• Early retirements voluntary reductions often
  result in too many people quitting, and some are
  hired back as consultants at higher cost to firm.

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Downsizing Effects

• Downsizing Works Best When
• Changes in Strategy, Organization structure and
  Culture accompany job cuts of downsizing
• Weak business units and plant closures are used
  as basis of reductions, rather than across the
  board cuts affecting all units (including healthy
  ones)
• Source Cascio et al. 1997

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Downsizing and other HR Systems
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Downsizing

• Critical Thinking Questions
• 1. Which is a better criteria to use as the
  basis for downsizing employees seniority or
  performance? State your reason.
• 2. Should employers give future notice to
  downsized employees, or tell them on the day they
  are expected to leave the firm?
• 3. Separation pay is voluntary. What benefits do
  firms get when they give separation pay to
  employees in a downsizing?

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Downsizing

• Critical Thinking Questions
• 4. Is there a set of best practices to let an
  employee know she/he has been downsized?
• 5. Under what circumstances might a companys
  managers prefer to use layoffs instead of early
  retirements or voluntary severance plans as a way
  to downsize the workforce?