The benefits of downsizing are that it allows companies to cut costs and improve efficiency, contributing to a “leaner and meaner" organization. But, like anything else, the process has to be closely managed in order to reap these benefits.
Downsizing, also known as restructuring, rightsizing, reengineering, or reorganizing refers to a permanent reduction of workforce through layoffs and other means, and comes with changes that affect the workforce, such as changes in job descriptions, department consolidations, office closures, and the like.
Downsizing as a strategic option started in the 1980s and its unpopularity notwithstanding, continues largely unabated and is even growing. Many of the largest corporations such as General Motors, AT&T, Delta Airlines, Eastman Kodak, IBM, and Sears, Roebuck and Company have all downsized.
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The most apparent benefit of downsizing for organizations is that it helps cut costs.
Downsizing is usually a direct reaction to poor economic conditions. Companies respond to reduced sales, either due to recession or by competitors gaining market share, by eliminating jobs wherein they reduce their payroll outflow and maintain or achieve specific levels of profitability.
Downsizing, however, need not depend on poor economic conditions alone. Mergers and acquisitions lead to duplication of support staff. Changes in technology lead to obsolesce of product or service lines. All these things create excess workforce with no work, and downsizing allows organizations to respond to such changes and protect profitability.
A major advantage of downsizing is that it cuts flab and improves all round efficiency. The jobs that contribute least to an organization's profits and those which affect the core operations least usually become the first targets for downsizing.
The ways by which downsizing contributes to efficiency include:
- The need to reduce the workforce forces the organization to undertake an honest appraisal to separate performers from non-performers, and to eliminate non-performers.
- The loss of personnel forces a re-look at the job descriptions of retained employees, allowing for greater responsibilities, job enrichment, and enhanced performance standards for employees, usually with pay for performance deals.
- The relative scarcity of personnel compared to the past forces the remaining workforce to direct their efforts towards core organization activities, eliminating redundant and unnecessary tasks.
- The reduction of workforce helps eliminate corporate bureaucracy and hierarchy, and contributes to the organization restructuring itself as a flat organization with improved communications and responsiveness.
An indirect benefit of downsizing is that it forces the workforce to keep abreast of the latest skills and technology, and encourages mobility that benefits the economy.
Downsizing forces a shift of workers from moribund and obsolete industries to emerging and growing industries that require workers. Skilled but displaced workers usually find new jobs in such emerging sectors relatively easily, and failure to find new jobs requires the laid off workers to enhance their skill set or take up a new career in more demand to become employable.
For all the advantages downsizing brings about, it does come with some major disadvantages.
- Downsizing leads to loss of skilled and reliable workers. The difficulty in finding new suitable workers makes the company ill-equipped and ill-prepared to take advantages of new opportunities and sudden turnarounds.
- Regardless of the merits of the lay-off, downsizing results in disruption of interpersonal relationships at work, both formal and informal that have taken root over the years.
- When downsizing workers primarily due to them no longer being necessary to the organization rather than due to their actual performance, the workers may feel like victims of injustice. The workers who remain feel insecure and disoriented when facing the new realities.
The success of downsizing depends on adopting the correct methodology and a strong leadership to manage the aftermath. Absence of strong leadership causes employee confusion and the inability to adjust to new demanding roles, which can lead to a loss of the benefits associated with downsizing.
A major criticism levied against downsizing is that organizations layoff permanent employees and outsource their jobs, or take in temporary workers at low wages with little benefits. This loss of permanent jobs creates negative economic repercussions, leading to greater unemployment, lesser income levels, and forcing governments to spend more on helping displaced workers. Some economists however suggest that the increasing operating efficiencies of organizations using such practices leads to more profits, and consequently more growth, allowing them to hire higher skilled and high wage employees.
Advocates of downsizing hold that downsizing has helped the United States maintain its position as one of the world's leading economies. Without downsizing, organizations can go bankrupt, which harms the economy the most, and causes the loss of even more jobs.
A review of the pros and cons of downsizing suggests that although downsizing causes temporary disruption for the workforce, it has not caused an overall reduction in standards of living or productivity.