OVERVIEW OF DOWNSIZING
Downsizing is often described as ‘trimming the fat’ that means to reduce operating costs and making
a company leaner. The downsizing process involves reducing the size of the workforce, plant
closures, and making the firm’s departments more productive and efficient. According to Cameron
(1994, p. 192), downsizing is defined as a set of activities undertaken on the part of the
management of an organisation and designed to improve organisational efficiency, productivity,
and/or competitiveness. Cameron’s definition embraces a holistic approach in an attempt to increase
a firm's overall performance.  On the other hand, Cascio (1993, p 95) asserts that downsizing is
essentially ‘the planned elimination of positions or jobs’. In other words, the primary purpose of
downsizing is not increased organizational performance, but the reduction of the workforce.

CAUSES OF DOWNSIZING

Economic crisis:The economic crisis is the biggest cause of downsizing a business. The recent
economic recession triggered a number of layoffs in many reputed and popular organizations around
the world. According to the survey, most companies (big or small) consisting of a higher percentage
of staff downsize due to efficiency (Shook and Roth, 2011).

Automation: in this technical world, most manual work can be done by a machine with a much better
and cost effective way. That is why, in these organizations, the work process is extremely fast and
easily meets the requirements of the market. Hence, it results in the reduction in the number of
employees (Nidumolu, Prahalad, and Rongaswami, 2009).

Change in Strategy: Some companies may reduce certain areas of operation and focus on other areas.
For example, if a company is working on a project in which there are no assured returns, it may
downsize its employees working on that particular project. It will focus its resources on specific
projects which could be profitable ventures (Cameron, 1994).

Merger and Acquisition of companies: These are also common reasons for business downsizing. In
order to stay in profit or to expand market reach, some firms/ companies merge their operations
with another firm and operate as a single entity. Also, when an organisation purchases another,
there is a definite change in the management, and the staff of the acquired company has to face the
prospect of unemployment. Usually, in such cases, a company cuts staff to eliminate redundancy in
work (Cash, Earl, and Morison, 2008).

Excessive workforce: as we hired excess staff to meet the needs of growing business at the time of
higher demand. Similarly, in times of economic crisis, companies downsize the employees when the
demand is low or in less growth. In that case, some companies stop hiring new staff and only
believe to retain their existing (Cascio, 1993).
POSITIVE EFFECTS OF DOWNSIZING

Financial stability: Downsizing can help companies in meeting its financial obligations to survive
during competition and downturn. Employers may be able to perform a smooth layoff process if
downsizing is performed during economic downturns because it has higher relevance to the situation
(Datta et al., 2009).
Competent performance culture: Companies can set an example and create a competitive environment by
terminating the employees with consistent low performance and behaviour issues. It eliminates the
incompetent and unwilling employees and replaces the position with better suitable candidates who
could be more talented and knowledgeable (Datta et al., 2009).
Restructure workforce and expansion: Downsizing can be used to restructure the workforce within the
organisation. Money saved and generated through downsizing can be invested elsewhere such as sales,
innovation, product line extension and etc. to gain competitive edge in the market including in
downturn situations. It makes management and operations effective and easily manageable due to less
count of employees (Coucke et al., 2007).

NEGATIVE EFFECTS OF DOWNSIZING

Reputational loss: Downsizing is one of the strongest reasons to easily bring down the reputation
of employers in the market. A bad reputation can cause serious issues in terms of existing employee
relationships, re-hiring or recruitment, trust factor amongst employees and attracting talent and
knowledge. It is difficult and takes ages to earn and maintain reputation in the market again
(Flanagan & O’Shaughnessy, 2005).

Loss of Talent and Knowledge: Time and resources invested for developing the talent and knowledge
of departed employees goes in vain, especially from the tenured ones. Another
investment is needed for fulfilling the same talent and knowledge position in the organisation
(Kammeyer-Mueller et al., 2001).

Reduction in service standards due to Psychological impact: Reduction in number of hours, change in
shift patterns, cut down on compensation and benefits and influence from departed employees may
bring dissatisfaction, demotivation, low commitment and loyalty, hatred towards employers, work
pressure, job insecurity and low morale on survivor employees. Such Psychological impacts can
deviate the performance and produce poor quality standards of service (Dlouhy & Casper, 2019).
Legal issues: Some companies may experience legal backlash brought by employees who have been laid
off. Employers may face lawsuits due to performing biased layoffs, inaccurate and incomplete
communication on legal requirements for employment, issues created by labour unions, not abiding by
the corporate governing laws (Gee & Kleiner, 1996).

SOLUTIONS TO DOWNSIZING

Reduction in number of working hours: HR managers can cut labour costs by eliminating overtime
costs of existing employees. Overtime should be treated as an exception instead of a rule and thus
elimination of overtime costs creates a substantial saving.Reducing labour hours - This can be done
by using the KPI (Key Performance Indicator) or any other historical data which will allow to break
down sales per hour and employee. By following such indications, the company can decide that during
what time of the day the employees can work most efficiently thus reducing overall hours.(Cascio,
1993)

Job sharing: By using part time labor, we do not need to pay for benefits, contributions, bonuses
and other perks such as prerequisite and foreign trips, paid vacation that a full-time employee is
receiving.  Similar to this job sharing where typically two people are retained on a part-time or
reduced time basis to perform a job normally fulfilled by one person working full-time. Since all
positions are shared, this leads to net reduction in per-employee income.(Cascio, 1993)

Retaining / re-training talents: Downsizing impacts a company's workforce capability and might
think of expanding its workforce again. In such cases, it is better to retain, retrain or reassign
someone already in the company than hiring a new employee because the latter is more costly, and it
also embodies many uncertainties. Rehiring laid-off workers can reduce the expenditures for
severance payments and unemployment benefits. (Trevor & Nyberg, 2008)

Early Retirement incentives: Companies can implement Early Retirement Incentives strategy (ERI) to
employees by offering them benefits to leave earlier in the future which is a clear and quick way
to reduce labor cost in the short terme. (Appelbaum, Patton & Shapiro, 2003)
Mandatory Furloughs: Company can release some employees, but intend to bring some back when
business improves. It reduces the harm caused to workers by preventing layoffs. As a result,this
helps in maintaining relationships with individuals affected while they are on furloughs
("Furloughs: An Alternative to Layoffs for Economic Downturns", 2020).

Boosting confidence in remaining workforce: In the post-layoff environment, a tailored
communication plan must be implemented to realign the existing workforce with the current business
condition. The fundamental task in this period is to explain to the remaining employees the urgency
and necessity of layoffs and also convince them that layoffs were appropriate, legal, fair and were
conducted to make the organization stronger. The communication must be conducted in a way to
convince them the company needs them and value their skill, knowledge and abilities. (Pfeil,
Setterberg & O’Rourke, 2004)

CONCLUSION

Downsizing plays an integral part to improve performance by scaling down the workforce and sustain
during unfavorable economic and financial conditions, which may have some consequences. Management
can adopt several alternatives to create a win-win situation for effective employee relations and
achieve organizational objectives.


REFERENCES:

Cameron, K. S. (1994). Strategies for successful organizational downsizing. Human Resource
Management, 33(2), 189–211.
Cascio, W. F. (1993). Downsizing: What do we know? What have we learned? Academy of Management
Executive, 7(1), 95–104.


Cash, Jr., J., Earl, M., & Morison, R. (2008). Teaming Up to Crack Innovation & Enterprise
Integration. Harvard Business Review, 86(11), 90 – 100.


Nidumolu, R. Prahalad, C., Rangaswami, M. (2009). Why Sustainability is Now the Key Driver of
Innovation, Harvard Business Review, 87(9), pp. 56-64.


Shook, L. & Roth, G. (2011). Downsizings, mergers and acquisitions: Perspectives of human resource
development practitioners. Journal of European Industrial Training, 35(2), 135-153.

Datta, D., Guthrie, J., Basuil, D., & Pandey, A. (2009). Causes and Effects of Employee Downsizing:
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restructuring: exit, downsizing or relocation. Industrial And Corporate Change, 16(2), 161-182.
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Management, 31(3), 445-463.
Gee, G., & Kleiner, B. (1996). How to Downsize Legally. Managerial Law, 38(4), 22-31.
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Dlouhy, K., & Casper, A. (2019). The Effects of Downsizing on Employee Health and Turnover:
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Pfeil, M., Setterberg, A., & O’Rourke, J. (2004). The art of downsizing: Communicating lay‐offs to
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Trevor, C., & Nyberg, A. (2008). Keeping Your Headcount When All About You Are Losing Theirs:
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2020, from https://www.hbs.edu/faculty/Pages/item.aspx?num=46365.