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Effects of Downsizing and Tips for a Positive Outcome

written by: Marjory Pilley•edited by: Michele McDonough•updated: 8/23/2010

Are you considering rightsizing, downsizing, or just changing directions that may require a reduction in work force? Don't be hasty with this decision. Implement a comprehensive plan that takes into consideration the effects of downsizing.

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    The Reality

    Cutting costs by downsizing has positive and negative effects. Trimming down operations by reducing the number of people employed may be a necessary step for long-term viability. Some companies are credited with success after a downsizing, such as General Motors. Other companies attribute the effects of this action for their demise, such as Scott Paper who was later purchased by Kimberly Clark after a substantial reduction in workforce.

    To be effective, downsizing should follow strategic planning and goal-setting and be one part of a well-developed plan for moving forward. It is not desirable as a repeated strategy because of the lack of trust that develops and the enormous resources necessary to manage the change. So, it must be done right the first time. Understanding the positive and negative effects of downsizing is important to setting up and managing a plan for future success.

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    Negative Effects of Downsizing

    The negative effects of downsizing are significant. Not only are the remaining employees impacted, but the owners and management team are emotionally and physically taxed as well.

    The remaining staff will:

    • Have lower confidence
    • Become risk averse
    • Question the company's future
    • See limitation in career progression
    • Miss reliable sources for information

    The owners and management team experience problems, too. This group may already be stressed about the reasons behind the need for change. The costs associated with letting people go and restructuring operations can be substantial. Overtime is often necessary to implement new procedures, training and other tasks to meet the new mission. Finally, the experience can be very emotional as tough decisions are made about who to retain, severance pay and how much notice to give. The owners and management team will have to work very, very hard under stressful conditions.

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    Positive Effects of Downsizing

    The nice thing about restructuring is that it can signal a new beginning for a company in trouble. While much of the focus is on ending relationships and disruptions, those who embrace a new beginning can be rewarded. An employee that believes a new door opens when one closes may be more inclined to succeed. To that end, consider some positive effects of downsizing:

    • Immediate financial relief
    • Reorganization as a leaner, efficient company
    • Opportunity to change the work place culture for the better
    • Opportunities for remaining employees to show initiative, perform higher level tasks and to be rewarded
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    Steps for a Successful Downsizing

    In order to experience the positive effects of downsizing and minimize the problems, perform actions that will rebuild trust and help everyone that remains recommit to the company's mission.

    • Keep lines of communication open. Make management available for questions during the layoff and afterwards. Share information and don't appear to withhold information which will result in suspicion.
    • Accept that change will be discussed around the water cooler. Don't ignore what happened. Instead create an outlet for questions so that employees can focus on work the rest of the time.
    • Try to keep some activities the same, like staff meetings and review processes.
    • Show employees other changes that have occurred to reduce costs and cut waste.
    • Revisit and reinforce the mission and goals of the company. Spend sufficient time discussing, training and rallying employees.
    • Provide quick feedback on new processes and procedures.
    • Implement reward and recognition ideas that will reinforce new processes and improve morale.
    • Maintain a positive optimistic outlook and show confidence...it will rub off.

    Image Credit: http://www.sxc.hu/photo/1176253