During the 21st century, organizations in different economic sectors are faced by numerous challenges. Some of these challenges relate to changes within the economic environment. For example, there has been an increment in the intensity of competition amongst firms in the same economic sectors.
Other environmental changes relate economic changes such as the recent economic crisis which have presented a challenge to most organizations (Cummings & Worley 2001, 11). As a result of these changes, most organizations are experiencing a decline in their economic growth. In an effort to survive in the dynamic business environment as going concern entity, organizations’ are increasingly incorporating the concept of downsizing in their human resource management practices (DeLuca 1988, 49).
According to Lurie (1998, 19), downsizing is one of the human resource management practices used by organizations in an effort to cut the cost of operation. Additionally, downsizing is also used by organizations to increase the shareholders value (Lurie, 1998, 19). Lurie defines downsizing as the process through which organizations reduce the size of their human resource base by various methods such as undertaking organizational restructuring, retrenchment, and re-engineering amongst other methods (Lurie, 1998, 16).
According to DeMeuse and Marks (2004, 19), ensuring that an organization has the right size of human capital should be integrated in the firm strategic management practices.
According to Appelbaum, Evarard and Hung (2001, 631) downsizing is a strategic management plan designed to improve the financial position of a firm by reducing and changing the structure of the workforce so as to improve its operational results. Downsizing has become very popular among organizations seeking to demonstrate flexibility, increase efficiency, reduce bureaucratic structures as regards decision-making, improve communication and cultivate entrepreneurship.
One of the strategies that explain how organizations can implement the concept of downsizing effectively is the stable core and flexible ring idea. This strategy states that firms should develop a stable core personnel category. The human resource manager should ensure that job security is ensured to this category of employees. On the other hand, flexible ring strategy entails contracting additional employees depending on the situation (Appelbaum, Evarard & Hung 2001, 638).
A downsizing survey that was conducted by the American Management Association in 1990 indicated that the major cause of employee cuts was an anticipated or actual business downturn Appelbaum, Evarard & Hung 2001, 638). Findings of the survey conducted by AMA revealed that the firms considered in the study experienced a reduction in the size of its workforce with a margin of 10.7%. Forty two per cent of those who lost their jobs were in managerial positions.
The results of the survey proved that downsizing has become a popular and an effective method of coping with the increasing economic challenges in the business environment. Most companies including corporate organizations have at some point adopted employee cutbacks as a way of responding to market competition and recession.
The dominant approaches adopted by companies in achieving cutbacks have either been voluntary or involuntary retrenchments or both (Beatty, McCune & Montagno, 1988, 147). Voluntary entrenchments involve financial inducements for voluntary separation as well as retirement incentive packages. However, this practice usually costs to the company.
It is believed that a leaner workforce carefully organized could help compensate for the loss of personnel with specific functional competence (Laberge 1991, 47). In contrast, those who remain may not be productive as expected since they are faced with the problem of more work as well as fears of further retrenchment.
Despite incorporating the concept of downsizing, organizations are not guaranteed that the employees who remain in the firm are the most productive (Fisher, 1988, 48). This implies that downsizing should be accompanied by measures of mitigating the impacts on employees who remain to achieve long-term productivity.
If organizations do not implement employee cutbacks effectively, it could result into the organization experiencing conflict with the employees (De Cieri & Kramar 2008, 123). Additionally, ineffective implementation of the concept of downsizing could have negative effects on the firm operations.
For example, it can result into weakening product quality, reduce productivity and alienate customers. To minimize such risks of misconceptions of underlying rationale for transformation, responsible negotiations should be made with the employees or their representatives. It is also important to provide reasonable notice to employees who are leaving and those remaining to adapt with the change.
Severance pay has to be accompanied by appropriate and fair treatment of the retrenched employees, along with outplacement services (Belohlav & La Van 1989, 25). Communicating the anticipated change requires that meaningful information be provided through different levels of the organization (Champy & Michael, 2004).
Downsizing is considered to be the most common practice adopted by firms experiencing or anticipating economic challenges. If a firm faced with economic challenges does not consider downsizing as one of the strategies to implement, it can be affected negatively. This means that human resource managers have to establish a balance with regard to the right size of human resource base (Tomasko 1987, 27).
Regional Bank, one of Australia’s financial institutions is experiencing economic challenges which have majorly resulted from the global financial crisis. Being a small bank, access to finances had become expensive for the bank. In addition, reduction in lending which includes residential and commercial had led to serious reductions in the bank’s gross profits.
Other than the global financial crisis, hazards such as floods and cyclones had badly affected the bank’s customers and its business operations, thereby further deteriorating its financial position. This has created the need for the bank to change its strategic management to survive in the Australian financial market.
The bank’s executives believe that by reducing the cost of its human resource, it will be better placed to compete favorably in the market. Its present human resource, in particular, the back office staff, do not meet the changing trends of the bank’s operations. The skills and experience of workers in the information systems and the customer service operations departments are not up-to-date, thus, their technical inefficiency has cost the bank by increasing the cost of the workforce.
The bank therefore requires more flexible and lean staff to help it reduce its costs of operations. The bank’s CFO, Claudio Vida, says that the back office staff performs tightly defined jobs, have non-competitive salaries, and have guaranteed job security. The staff’s guaranteed job security makes the restructuring more complicated. It even creates dilemma as to whether other alternatives to employee cutbacks should be considered to better save the situation or to layoff some employees.
The firm’s top executives charged with the responsibility of implementing the downsizing decisions are faced with a challenging task. The human resource manager, Susan Cramer, believes that the bank’s management needs to appreciate the value of the back office staff, and therefore concentrate on other strategies that could help reduce the cost of operations in times of economic depressions without creating more human resource related problems in the institution.
She recognizes retrenchment could cause a tussle with the employees and their representative, the union. Retrenchments if not done properly could create could instigate conflicts and industrial unrests (Mandel 2004, 38). Susan recognizes that some of the economic problems being experienced by the bank do not entirely come from high cost of the workforce, but from other poor decisions and strategic plans made by some of the bank’s executives.
Regional Bank is still struggling to establish its authority in the market and therefore it is very important that it explores possible strategies that would help it operate at a lower cost. Its major reasons for considering employee cutbacks had been to cut operating costs, maximize efficiency, achieve higher revenue and to align the business to the current economic depression to allow it compete favorably with other financial institutions.
In addition to being a method of cost reduction, downsizing as a human resource management practice can play a vital role in eliminating bureaucracy within organizations. For example, upon implementing the concept of downsizing, organisations can consider outsourcing as one of the strategies to undertake some of its non-core business functions.
Additionally, organizations can also consider using part-time workers as a strategy to cut cost. The managers believe that outsourcing of employees would help stabilize the bank’s dwindling profits. However, this option could lead to serious risks and challenges which is likely to affect its core capabilities. Most firms that have done downsizing have not realized significant increase in revenue.
In implementing downsizing strategy, organisations should first identify business functions that are not core component of revenue-generation. The challenges range from providing adequate training and development, achieving motivation and morale among the workforce, conducting non-biased retrenchment, increased staff turnover, providing outplacement services, avoiding legal and reputational risks and communicating layoff plans to employees.
The staff’s unionization poses a great challenge to the more immediate restructuring option, which is through rightsizing. Susan believes that the bank should first consider freezing recruitments, and instead, begin to employ contingent workers. Again, she advises that the bank should begin to investigate the possibility of enforcing early retirement programs to help reduce the number of employees. This would enable the bank achieve greater flexibility in its operations.
The managing director, Kelly O’Brien, seems to understand the possible risks raised by the human resource manager and agrees that the bank’s executives need to come up with strategic management plans which could help reduce the cost of operations of the bank, and therefore make it more competitive in the market.
The bank’s human resource manager believes that retrenching some of the bank’s staff to replace them with overseas employees who are more technically efficient and flexible could create legal and reputational risks to the bank considering that back office staffs are unionized. Conflict between the banks stakeholders who include its top management against its workers and their representatives, the union, will become inevitable if the top management decide to retrench some of the workers.
Most employees who go to court to solve layoff disputes are normally encouraged by their unions, while another significant percentage go to court due to unclear retrenchment procedures leading to biasness and discrimination in retrenchment or failure to pay severance pay, which include agreed termination benefits, payments in lieu of notice, gratuity benefits, pension benefits, unused earned leave as well as payment of salaries or wages in arrears.
Legal risks increase the costs of retrenchment for organizations and could also lead to reputational damage if not carefully handled. Unions may damage the reputation of the organization as they try to oppose the retrenchment plans or fight for the rights of their members whose rights have been violated.
Such damages to the bank’s reputation could have impact on the company’s performance in the stock exchange and market. Susan stresses that the union will not let it go easily since they are in dire need of money, and will oppose any attempts to reduce its members. She believes that the union would claim that the bank’s top management is using the economic depression issue to outsource its workforce from abroad.
Another major challenge faced by Regional Bank’s top managers is how to enhance the employees’ capability to adapt to the bank’s technology and current complex operations. The back office staff has skills and experience that do not adequately match the needs of the bank. Training and developing these employees has been a challenge.
The bank’s executives believe that it will not be possible to retrain these employees to match their skills with the required flexibility in the bank’s operations. Training employees to adapt to new technology, tasks and responsibilities, and strategic directions may sometimes be expensive and difficult. Such is the problem being experienced at Regional Bank.
Besides, the bank is likely to experience similar problems incase of downsizing. Training of remaining employees is one of the greatest challenges because it takes time to look at all the attributes of those employees the organization requires to continue working with. Some of the benchmarks used by the organization’s top management to determine individual’s abilities are sometimes abused or exaggerated.
This makes training of employees complicated. Introduction of new technology in companies come with great challenges and costs of training employees to adapt to the various technologies (Zemke 1988, 44). Lower level employees who take up higher level responsibilities and tasks after downsizing take quite some time before they adapt. This makes it difficult to maximize efficiency expected to result from implementation of new technologies and reorganizations.
New employees will need some time to become familiar with the bank and its operations, which includes its organizational culture. Re-establishing organizational culture could be difficult after downsizing. Regional Bank has a long tradition of equal salaries and job security which has enhanced employee loyalty to the bank. Thus, downsizing could negatively affect the bank’s traditions as well as practices. It will be difficult to implement a new pay plan based on skills, talents and merit or a reward scheme.
Convincing workers in the back office to consider voluntary early retirement may not be easy, and therefore, what happens when just an insignificant number buys the idea? Again, the human resource manager has to explain to the specific staff why they are the only ones chosen to consider early retirement. Many employees may view the idea with contempt. Both employees and the top management will have to face the fact that the bank’s organizational culture changed, due to rightsizing.
Regional Bank’s top management are also faced with the challenge of communicating retrenchment plans as well as the new vision and goals of the organization, should they decide to settle on employee cutbacks as their major strategic plan. Retrenchment plans are usually negatively received by employees and their representatives.
Convincing employees that the layoff plans are not badly intentioned is very difficult. Poorly communicated retrenchment plans immediately affects employees’ commitment as well as their performance due to the fear of unknown, which includes the criteria to be used in the process as well as special considerations to be made (Wiele 1991, 66).
The human resource manager identified the workers unions as stumbling block, should the management decide to conduct downsizing. They normally exaggerate demands or may oppose the process. Besides, their bargains normally increase the cost of retrenchment.
Raising reduced morale and motivation among the staff is another major challenge likely to be experienced by the bank after downsizing. Downsizing creates uncertainty over workers’ job security and therefore devising strategies to ensure increased morale and motivation among them is very difficult. The human resource manager believes that most of the staff, like her, would feel that they are paying the price for mistakes made by some of the company’s executives.
Layoff in one department has an impact on employees in all the departments within the organization. In the event that the retrenchment process is poorly executed, it could lead into the employees being de-motivated. This means that their performance is adversely affected culminating into negative effects to the firm’s with regard to its economic performance.
In addition, uncertainty created by downsizing often lead to lack of commitment to the organization, which is dangerous as it could prompt some members of staff to fraud the company, due to perceived short-term stay in the company in the near future.
According to the bank’s human resource manager, retrenching employees who have been with the bank for as many as twenty years would be betraying their loyalty to the bank. Moosa (2010, p. 127) asserts that the break in unwritten contract with regard to job security between the management and staff could threaten loyalty and trust.
In the long run, organizational leadership which is dependent on the existence of trust between the management and the employees could be adversely affected. This could in turn seriously affect the management’s ability to motivate the staff. Some employees will feel that their career development and opportunities in the bank are now limited. They begin to worry more about the next round of cutbacks than performing their duties. This could affect their productivity as well as engagement levels.
Uncertainty created by retrenchment influences staff turnover. Regional Bank may also lose its most skilled and talented employees as they move to seek other employers who they believe are more stable. Such uncertainties lead to increased absenteeism as they take time out to look for employment or opportunities elsewhere.
Most employees always feel that downsizing is done by employers who are not sure of the future of the company. This could have serious immediate impacts on the bank. Whenever those who remain are not made to understand why others were retrenched, an attitude of “us-versus-them” could develop leading to lower worker productivity (Lindbeck & Snower 1990, 633).
Such attitudes could also lead to many survivors being organizationally alienated resulting into disloyalty, distraction and less commitment to the organization’s goals and values. They may also experience guilt from the loss of friends among their colleagues and even deeply rooted anger as result of any insensitivity shown during the downsizing process.
Although it aims at reducing cost, improving productivity and increasing its capacity to compete in the market, it may find it very difficult as it could be forced to hire more expensive employees. More skilled and talented individuals sometimes ask for remunerations which are higher than what the firm expects to spend on any individual in that position. Therefore filling the merged positions or the positions left vacant could prove to be more expensive.
Another major challenge that the bank faces is how to provide outplacement services should it decide to undertake downsizing. According to DeMeuse and Marks (2004, 27), some of these services include financial counseling and career development training.
Additionally, outplacement services will include finding their former employees another employer. Considering that most companies today are adopting new technologies that allow them to restructure their organizations, it will be very difficult to find them an alternative employment elsewhere.
These challenges that currently or are likely to face Regional bank can minimized or avoided if the managers decide to adopt rightsizing. Freezing new recruitments would help reduce and maintain the cost of operations. However, the management needs to adopt the voluntary retirement program recommended by its human resource manager.
This should be the initial stages of the downsizing plan. Regional Bank’s executives should also consider looking for alternatives to job losses. In its operation, the bank’s management team should consider outsourcing some of its activities. The bank’s top management should also realize that some of its back office staff only needs retraining to perfect their skills, and make them flexible. Retraining the back office staff could help Regional Bank save on the high retrenchment costs that come with process.
The bank’s top managers have to develop a retrenchment plan that takes care of all potential problems and issues, and that ensures that appropriate responses are devised and implemented (Champy & Michael 2004, 43). The plan should illustrate the best way to undertake consultations.
The plan has to consider the needs of all the stakeholders involved. Consultations should be made with all the employees, the union and representatives from the ministry of labor. It should then be adjusted to address the issues raised by employees, the union, government representatives, and other stakeholders.
It is also important to develop a good communication strategy. This will enable the consultation process to run smoothly. It should be made such that employees, their representatives and other stakeholders are allowed to suggest alternatives to the cutbacks and ways in which the impacts could be mitigated.
The management has to convince the staff that it is their best interest that the firm’s survival is addressed. It is therefore important to train first-line managers on how to respond to questions as well as concerns raised by employees in their departments.
The management needs to select the employees to be retrenched from the volunteer population (Alevras & Frigeri 1987, 30). The management can select skilled and talented part-time employees to replace those who retire through the voluntary early retirement programme. However, the organization has to provide valid reasons for adopting the criterion rather than other methods available.
Additionally, it has to ensure that only the right employees are retrenched (Nienstedt 1989, 158). To achieve this, an effective criterion should be used. It is also paramount for organizations to consider the existing legislations in order to avoid possible lawsuit from the laid off employees. Severance payments are key instruments for mitigating lawsuits and damage to organization’s reputation.
For employees who survive the layoffs, the bank’s management should improve their pay plan in order to compensate them for increased workload as well as safeguard against staff turnover. Financial incentives will be very effective in ensuring increased morale and motivation among those who survive retrenchment (Alevras & Frigeri, 1987, 29). Besides, it is important to provide counseling services to those who survive retrenchment.
This is necessary in making employees understand the motive of the organization in downsizing. It will also help assure employees of their future in the organization. The banks management team should consider offering financial advice to employees who are retrenched (Fannin & Hill, 1991, 15). The large severance payment that they receive in the retrenchment process may not be easy for them to manage to achieve long-term financial outlook.
Although downsizing appears to be the most common practice adopted by firms experiencing or anticipating economic challenges, top managers of firms charged with responsibility of making rightsizing decisions face difficult dilemmas. Despite the benefits of downsizing, there are negative effects associated with downsizing.
This means that top managers have to find the right balance between these expected outcomes. The challenges include developing a human resource plan that effectively address the human resource supply and demand while ensuring reduction in payroll costs, increase in productivity, and improved capacity of the bank to be more competitive.
Therefore the bank has to address challenges of providing adequate training and development, achieving motivation and morale among the workforce, conducting non-biased retrenchment, increased staff turnover, providing outplacement services, avoiding legal and reputational risks and communicating layoff plans to employees.
This means that the top management has to devise and adopt a downsizing plan that will enable them persuade the back office staff and other bank’s stakeholders to understand the sincere reasons for undertaking the plan, and the new strategic directions of the bank.
The management has to consider various alternatives which include retraining the back office staff, implementing voluntary early retirement program, freezing new recruitments, transferring some of their employees to third party organizations as well as looking for alternative employment for them.
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