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What is Downsizing?
Downsizing has to do with the reduction of the workforce so as to cut down the total operational costs of a company. According to Karake-Shalhoub and Karake (1999), downsizing is the act of reducing an organization’s total size of human labor with the intention of maintaining a smaller number of employees and streamlining the organization. Downsizing may be done either voluntarily or involuntarily (Karake-Shalhoub & Karake, 1999).
To survive in a very competitive business environment and to respond to consumer demands in the market, firms have had no choice but to change their approach to doing business. Companies are no longer as rigid as they used to be and are more willing to try out different strategies. Richbell notes that many organizations are now using a flexible way when it comes to sourcing for labor and hence the use of downsizing and outsourcing as options (Richbell, 2001).
The advancements that have rocked the technological sector are seen to be the greatest influence behind the idea and have to a great extent contributed to the popularity of downsizing. With sophisticated machines becoming available almost everywhere, companies are now able and are constantly looking for ways to completely replace employees by machines. Tasks that earlier had to be done by human beings are now left for machines.
Genesis of Downsizing
In a study done by Allan, he associates the birth of downsizing with the events that took place in the United States in the 1980s and 1990s when the American economy witnessed massive reductions in workforce (Allan, 1997). Whilst some people gladly welcomed the move to downsize, some employers strongly resisted the temptation to cut down operational costs by terminating employee services.
These employers were strongly convinced of that retaining their employees had more advantages than asking them to leave in whichever manner. Using various strategies, these employers were able to either minimize or even prevent employee layoffs (Allan, 1997). Some employers opposed the process supported their stand by purporting that downsizing had the negative effect of bringing down company share prices instead of causing them to go up (Baumol, Blinder & Wolff, 2005).
The people most affected by downsizing and massive jobs loss were the employees who most likely had no other sources of income. The very unfortunate employees lost their jobs but those left behind were in no way better as among them, there was constant fear of losing their jobs not knowing how long they would still remain relevant to the operations of the companies (Baumol, Blinder & Wolff, 2005).
Other strategies adopted by some organizations to control business expenses included engaging the services of foreigners or using temporary staff with reduced benefits and with little or no attachment to the organization (Baumol, Blinder & Wolff, 2005).
To Downsize or Not to Downsize
Whether or not to downsize has been an issue of concern for many stakeholders; academicians as well as practitioners. Some have tried to show that there is a big link between downsizing and a company’s corporate social responsibility and one is therefore made to wonder what the effect downsizing on a company’s image may be in the end (Karake-Shalhoub & Karake, 1999).
Apparently, Karake-Shalhoub and Karake argue that corporate social responsibility has a major part to play in as far as advancing an organization’s agenda is concerned and should therefore be at the heart of every single employer (1999).
Although the need for downsizing may appear quite clear to many companies, the problems caused by downsizing are quite complex and have far reaching effects than most people know. The action by one organization to downsize may cause other companies to do the same especially where some organizations have relationships that make them depend on each other to exist (Garber, 2008).
Garber (2008) argues that the whole motivation behind downsizing is survival. During difficult economic times, an organization that fails to keep a tight control on its expenses may just be setting itself up for failure. Both the future of the organization and that of its employees will be at stake (Garber, 2008).
Although painful and unfavorable to some people, downsizing is nevertheless seen as a great solution for any firm that has to continue its business operations. In light of the financial challenges faced by organizations time and again, Garber explains that downsizing is actually necessary though some of its repercussions are not pleasant at all and many get hurt in the process.
Consequently, he advises that where the decision to downsize must happen, the process should be done with a lot of dignity. The affected employees must be treated with utmost respect and it is important to ensure that they receive great support and encouragement (Garber, 2008).
What Causes Downsizing?
Even though technology has made it easier to perform business functions, it has for the most part been blamed for facilitating downsizing (Baumol, Blinder & Wolff, 2005). Among things that have been introduced by technology are such as speed, efficiency, flexibility as well as customization. Certainly, these are very crucial for the growth of an organization (Baumol, Blinder & Wolff, 2005).
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The onset of downsizing has also been linked to the unexpected drop in economic growth. Tough economic times have forced companies to figure out tactics meant to enable them continue to exist in a business environment so full of competition (Garber, 2008).
A similar explanation is provided by Rowland (2011) who also argues that economic meltdown is responsible for the business re-evaluation undertakings globally. Rowland, however also points out that according to research, organizations that retain their most talented staff are likely to reap positive returns in the end (Rowland, 2011).
According to Garber (2008) mergers or acquisitions also have the eventual effect of leading a company to downsize. Often times, when two or more companies come together and become one, the unfortunate thing is that the services of some of the employees in any of the organizations participating in the merger or acquisition may become absolutely unnecessary. The new organizational structure may have no place for them and in most cases the only option has been to terminate the services of these employees.
Other causes of downsizing are market changes and the ever present dramatic political events across the world (Garber, 2008).
Positive and Negative Consequences of Downsizing
In their study, Yu and Park have endeavored to show that if well implemented, downsizing could increase a company’s profits (Yu & Park, 2006).
One may think of this as being true considering that after downsizing, most companies will have to keep only a smaller number of staff and this has the effect of reduced expenses on salaries as well as employee benefits. It is also possible that a firm may resort to the use of technology and in some areas of the business, get even better output from machines than could be realized where humans were used.
According to Karake-Shalhoub and Karake (1999), one of the undesirable consequences of downsizing is decreased employee morale. Faced with the risk of job loss, stress levels among employees are bound to increase and with fear of future survival creeping in, performance slumps down.
Employees end up thinking less about their jobs and concentrate more on their personal interests. Studies have also indicated that restructuring undertaken by companies when downsizing have in no way made these companies better. Before the public, it seems like the management is not quite competent to deal with the business challenges and this eventually creates room for people to mistrust the management of the companies (Karake-Shalhoub & Karake, 1999).
Karake-Shalhoub and Karake (1999) have also argued that with the inception of downsizing, the healthy relationship that once existed between employers and their staff is now a thing of the past. Although, for a very long time, various companies have been in the habit of rewarding loyal employees with job security, this is currently a nightmare as it is no longer possible to assure anyone of prolonged employment periods.
This creates a suspicion among employees who spend most of their time worrying instead of working and in the process, company man hours are lost. Employees no longer work for the common goal of the organization as expected. Subsequently, the level of production and efficiency suffer tremendously (Karake-Shalhoub & Karake, 1999).
According to Smith, Oczkowski, Noble and Macklin, reengineering business processes also demands the use of skilled workforce. It therefore follows that the retained staff may need to undergo some form of training to equip them for the new job challenges. While some people may be excited at this, it is likely that others could end up frustrated and may not fully cooperate with the implementers (Smith, Oczkowski, Noble & Macklin, 2003).
Downsizing with Dignity
According to Garber (2008), when one keeps in mind the fact that people’s lives will get affected by downsizing, this may completely change the way they carry out the downsizing process. As explained elsewhere in this paper, a company that takes time to think about its corporate social responsibility stands a better chance of existence unlike that which does not.
How a company treats its employees when downsizing speaks volumes about the concern or lack of it that the company has for its workforce (Garber, 2008). Even though many employees may understand why a company has no choice but to downsize and will not even question the decision, they may not be able to accommodate any insensitive actions and carelessness that could result due to downsizing.
However, if the downsizing is done with a lot of caution proving to the employees that the company does really understand and cares about them, the company will end up with a very strong foundation for bouncing back. The employee’s future perception of the company in is greatly influenced by how the downsizing is carried out and in a way, this is critical for the organization’s success (Garber, 2008).
Although it is quite obvious that downsizing will never be pleasant at any time, there are various approaches that can be adopted by employers to ensure that everything is done is such a way that the reputation of the organization is not ruined. Maintaining high respect for affected employees is very important in the whole downsizing process and they must be treated with dignity (Garber, 2008).
Implementing a Workforce Reduction
When thinking about downsizing, it is important for an organization to consider a number of things. One of the main concerns has to do with how to take care of those to be affected by the process. Whereas, there are some people who will be directly affected, others may be affected indirectly. It is important that all these are catered for. For example, when a bread winner in a home looses his or her job, all dependants seriously get to suffer.
One of the key things that implementers must ensure is strict confidentiality. As much as possible, the matter must be kept a secret and not let out to the public domain (Garber, 2008). Garber highlights many other things that must be put into perspective such as, the availability of financial resources to support the implementation process, the amount of time that will be necessary to allow for full implementation, and the legal implications involved in the process (Garber, 2008).
In a study by Dolan, Belout and Balkin (2000), they noted that positive results were obtained in cases where companies had well planned and clear downsizing implementation strategies. The successful companies ensured that they had proper schedules to be followed and well defined operational arrangement. The strategies helped a great deal to protect not only those dismissed but their survivors too. Good downsizing plans also gave the retained staff confidence to continue working without any form of fear.
On the contrary, companies that chose a reactive move towards the process of downsizing ended up hurting both the affected individuals, survivors and the company (Dolan, Belout & Balkin, 2000). A similar claim is made by Yu and Park (2006) who also argued that downsizing tends to bear positive results when implemented in a proactive manner rather than as a solution to fix a company’s financial crisis (Yu & Park, 2006).
Yu and Park further noted that those companies that implemented downsizing suffered greater financial challenges than those that did not. Although downsizing had the positive outcome of improving a company’s level of profitability as well as efficiency, it did not have any positive impact on the output by the employees (Yu & Park, 2006).
With increased competition and the newer inventions coming up to support business operations, downsizing is surely here to stay. As has been highlighted in this paper, downsizing has its strengths and weaknesses and any company or organization that wishes to downsize, must do so in a manner that will not put the company and the affected employees at risk.
Without proper implementation, the individual employees will greatly suffer but in the long run, the downsizing companies get affected. Obviously, downsizing does not automatically imply that a company’s operation costs will reduce. As a matter of fact, there are cases where upsizing has given better results than downsizing.
It is therefore very important for companies wishing to downsize to explore all available options before going on with the implementation. However, if after careful assessment, a company is convinced that downsizing is the way to go, the process must be done in the right way.
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Dolan, S., Belout, A. & Balkin, D. B., 2000. Downsizing Without Downgrading: Learning how Firms Manage their Survivors. International Journal of Manpower, 21 (1), 34 – 47.
Garber, P., 2008. Downsizing. Amherst, MA: HRD Press, Inc.
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