HAS DOWNSIZING GONE TOO FAR?

(A review of the history and results of downsizing)


by Jane Atwood, Ethel Coke, Christine Cooper and Kendra Loria
University of North Florida, Jacksonville, Florida, USA, December, 1995.


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Table of Contents
Introduction History of Downsizing Prevalence of Downsizing General Stategies for Downsizing Common Outcomes of Downsizing Downsizing and Quality Improvement Charecteristics of Effective Downsizing Surviving Downsizing Conclusions To Return to I-O Psychology Home Page
Has downsizing gone too far? To answer this question the process of downsizing must be defined, the origin of downsizing analyzed and the results of implementation examined. A definition of downsizing by Huber & Glick, (1993) is "a set of activities ... undertaken on the part of management, designed to improve organizational efficiency, productivity, and/or competitiveness. It represents a strategy that affects the size of the firm's workforce and its work processes"(p.24).

Key attributes of downsizing per Huber & Glick (1993): (1) down- sizing is intentional; (2) downsizing usually involves, although is not limited to, reductions in personnel; (3) downsizing is focused on improving the efficiency of the organization; and (4) downsizing affects work processes knowingly or unknowingly. For example, when a workforce decreases, fewer employees are left to do the same amount of work, and this impacts how work gets done and what work gets done. Possible consequences are overload, burnout, inefficiency, conflict, and low morale. Positive outcomes may occur such as improved productivity or speed. Return to Table of Contents

History of Downsizing

In order to fully understand the concept of "downsizing" and why it is now so prevalent, the history of the American organization must be examined. The roots of the crisis for restructuring evolved over the history of America. By examining the forces that drove the formation of large institutional structures as well as the need for reevaluation of those structures, a more comprehensive understanding may be gained. Initially, the work force of the United States was comprised of immigrants who came to America looking for opportunities and the freedom to pursue those opportunities. The time period from 1800's to 1930's was characterized by a focus on the individual, self reliance and a laissez-faire view by government. Perhaps the primary reason the government refrained from interfering with the employer/ employee relationship was due to the majority of citizens being self-employed. If an employment relationship did exist it was informal and could be terminated immediately at the will of either party. The dawn of the industrial era shifted the emphasis from the individual to the employer. The prevalence of mass production diminished the importance of the individual worker. The laissez-faire view of government toward business continued until the 1930's New Deal legislation, designed to regulate the increasingly employer dominated workplace, was passed. The New Deal and legislation that followed provided for a kind of safety net of unemployment compensation, welfare and social security legislation to provide a minimum level of subsistence to all citizens. At the same time many improvements were made in the standards of the workplace. The era that ensued from this legislation was focused on the success of the institution and encouraged the spread of the welfare web. "The age of Welfare America was now well under way by a culmination of events external to the Corporation- the Federal Child Labor Law of 1916; the Railway Labor Act of 1926; the Norris-La Guardia Act of 1932; the National Labor Relations and the Fair Labor Standards Act of 1938. Beyond these reforms, real change was internal. A more detached manager would replace a very impassioned and dictatorial founder. Because of externally imposed reform, corporations could become more friendly places at which to work-inventing personnel management." (Hendricks, 1992, p.21) The organization gained importance, the employer-employee relationship implied a more long term commitment. Strong corporate cultures encouraged loyalty and commitment to the organization. In exchange, the organization removed many of the employees' financial risks by providing insurance, disability and retirement plans. Much of the success of the institution was fueled by a healthy post World War II economy. Institutional employees viewed the future optimistically and took on long term financial commitments such as thirty year mortgages, even though the employment relationship was terminable at any time, trusting that their organizations would thrive. Benefits such as worker's compensation, retirement plans and health benefits promoted the institutional structure and made competition by small firms difficult due to the disproportionate amount of welfare costs they would have to absorb. "By 1980, over 90 percent of the nation's work force were counted as employees; a complete reversal from the early 1900's when over 80 percent were self-employed." (Hendricks, 1992, p.23) Events such as Korea, Vietnam, the Middle East Oil Embargo, the 1987 stock market crash, and the savings and loan debacle marked the end of the prosperous post war era. Organizations began to reflect this change in the 1980's. Several basic assumptions regarding organizational performance and change were transformed from the beginning of the 1980's to the end of the 1980's. In the beginning of the 1980's, assumptions were that (1) bigger organizations meant better organizations, (2) unceasing growth was desirable and good; (3) organizational flexibility was linked to loose coupling, slack resources and redundancy, and (4) consistency and compatibility were traits of effective organizations. By the end of the 1980's, these assumptions were replaced with (1) smaller can mean better, (2) downsizing and slowed growth can be natural, desirable phases of the life-cycle process, (3) tight coupling and nonredundancy are also associated with adaptability and flexibility, and (4) conflict and inconsistency point to organizational effectiveness and can minimize the dangers of "group think". Ratios of managers to workers increased from 19% in 1950 to 32% in 1987 (Huber & Glick, 1993). Conditions in the 1980's made this expansion of managerial ranks and overhead costs unacceptable. These conditions were: recession, entry into U.S. markets of low-cost competitors from other countries, mergers leading to inefficient clusters of businesses, onset of new technologies replacing humans, and international events such as the reunification of Germany and the formation of a European common market in 1992 (Glock & Huber, 1993). Therefore, many U.S. organizations turned to downsizing as a solution. Return to Table of Contents

Prevalence of Downsizing

A recent survey by the American Management Association (AMA) found between one third and one half of medium and large-sized firms in the U.S. had downsized every year since 1988 (Cole, 1995). An attempt to analyze the reasons behind downsizing was made with these results with a new survey by the AMA. The results showed only 6% of companies cut jobs due to short-term business downturns. On the other hand, 44% laid off workers in anticipation of an economic downturn. The second reason, with responses at 35%, was to make better utilization of staff. The third reason, at 20%, was due to automation or other new technology, and the fourth, at 19% was to transfer work to other plants or abroad (Berry, 1995). Unskilled or hourly workers continue to be the group downsized in largest numbers. They accounted for 45% of job losses in the past year at the 1,003 companies surveyed, and are least likely to receive benefits such as out placement services, severance pay, and extended health benefits. Other job losses were accounted for by supervisory staff (18%), middle management (15%), and professional or technical staff (22%). The significance of the 15% reduction in middle management is that this group makes up only five to eight percent of the work force (Berry, 1995). The number of corporations currently undergoing the downsizing process abound. One such company is Colgate-Palmolive Company. Their effort is aimed at improving global competitiveness through cutting costs and improving efficiencies. Over the next two years, 24 of Colgate's 112 global factories will be closed or reconfigured. Some 3,000 workers worldwide, which is 8.5 percent of their 36,000 workforce, will lose their jobs. For these restructuring and administrative changes, Colgate will take a $369 million after tax charge in the third quarter. Colgate's last restructuring effort took place in 1991. The main reasons for Colgate's recent restructuring are (1) reduced trade barriers in Europe and Latin America; (2) The need for new technology in manufacturing to improve competitiveness; (3) the trend toward more concentrated products such as laundry detergent, which requires less production; and (4) acquisitions that result in adding more plants. Restructuring is being pursued by region and by function. Functional changes involve "focused factories." These are plants designed to manufacture one type product. For example, in the future, oral care items such as toothpaste will be made for western Europe at facilities in Britain. Soap products are to be made in Italy, and household products in France (Levaux, 1995). These restructuring efforts are aimed at improving Colgate's position worldwide, and according to analysts, may allow the company to catch up with rivals, Proctor & Gamble Company, in particular. Analysts claim Colgate should have moved earlier. It will take three years for Colgate to recoup the expenses of the restructuring, which will do little to help the company overcome the short-term problems it faces, especially in Mexico. After the fall of the peso last December, annual sales have dropped to $550 million for 1995 from approximately $800 million in 1994. Original projections for this year's sales were $900 million. Colgate's situation indicates a need for more frequent evaluations and change. This would help the company become less effected by market shifts, and better prepared to protect its market shares and margins in the short-term.(Levaux, 1995). Ford Motor Company also has announced a new downsizing measure called Global 2000. This project aims to cut prices from parts makers an average of 5% a year for the next four years. That could save Ford several billion dollars annually. Executive Vice President Jac Nasser leads the charge and has earned the nickname "Jac the Knife," as he attempts to slash costs and jobs. Ford is taking steps to streamline operations. Car design and engineering operations have been divided up among five separate Vehicle Program Centers, or VPCs. Each center is focused on a particular market segment, such as small cars... This is a change from the old way of handing off all vehicle designs between functions, such as design, engineering, and manufacturing. To further reduce costs, Ford is standardizing components, especially those customers don't see, such as windshield wipers and window motors. Additionally, Ford is reducing the number of vehicle platforms from 25 to 16. This means Ford will be able to build more models on a single assembly line, giving it greater flexibility to respond to market changes. Criticism is coming from Ford's top 100 suppliers. Many said they would rather lose Ford's business than continue under the current circumstances. Concern is also felt within Ford itself. Many mid- and upper-level executives have rushed to accept early buyouts since the project started. Insiders say there will be another early-out program announced within the next few months (Eisenstein, 1995). Return to Table of Contents

General Strategies for Downsizing

Cameron and Associates found three implementation strategies: workforce reduction, organizational redesign, and a systematic strategy focused on changing the attitudes, values, and culture of the organization (Huber & Glick, 1993). Workforce Reduction The focus is mainly on headcount reduction and employs such tactics as early retirement, transfers and out-placement, buy-out packages, golden parachutes, attrition, job banks, and layoffs or firings. It is most often done by top-down directives, and almost always implemented across-the-board since the goal is to reduce headcount numbers quickly. The disadvantages of this method are it is difficult to predict who will be eliminated and who will remain, and impossible to determine what knowledge and critical skills will be lost to the organization. The advantages are it provides immediate reduction, captures the attention of members of the organization to the seriousness of conditions, motivates cost savings, and creates readiness in the organization for further change (Cole, 1995). Organizational Redesign This approach aims at cutting out work in addition to or in place of eliminating workers. Strategies include eliminating functions, hierarchical levels, divisions, or products; consolidatingand merging units; and reducing work hours. These are medium-term strategies that require advanced analysis of the areas that should be consolidated or redesigned. The focus is on work reduction over manpower reduction (Cole, 1995). Systemic Strategies This approach focuses on changing the organization's systems, culture and attitudes of employees, not just the size of the workforce, configuration of the structure, or the magnitude of the work. It focuses on systems in two ways. First, on internal systems, values, communication, etc. and on external systems, i.e. the production chain including upstream suppliers and downstream customers. This strategy involves redefining downsizing as a way of life, as an ongoing process, as a basis for continuous improvement instead of a program or target. Downsizing is equated with simplification of all aspects of the organization. Instead of being the first target for elimination, employees are defined as resources to help generate and implement downsizing ideas in other areas. All employees are held accountable for reducing costs and finding improvements. Serving customers, meeting their needs, and exceeding their expectations remain a core goal of downsizing activity, not just size reduction. This strategy is the most compatible with principles of Total Quality Management (Cole, 1995). Return to Table of Contents

Common Outcomes of Downsizing

Positive Outcomes
Downsizing announcements usually lead to positive reactions from Wall Street. The following table shows the change in several well-known firms' stock prices the day after a major downsizing announcement was made. Almost universally favorable reactions occurred because of a promise of cost savings, reduced expenses, and increased competitiveness. Stockholders and analysts continue to assume that downsizing produces desirable financial results. Effects of Downsizing on Stock Market Value

Company

Announced Cut

Percent of First Day Stock Change

IBM

60,000

up 7.7

Sears

50,000

up 3.6

Xerox

10,000

up 7.0

USWest

9,000

up 4.6

McDonnell Douglass

8,700

up 7.9

RJR Nabisco

6,000

up 4.0

DuPont

4,500

up 3.4

Source: U.S. News and World Report, 12/20/93 (Cole, 1995, p.95)

It should be noted that this positive outcome of downsizing, increase in stock value, does not always occur at least in the short-term. "The Times Mirror Co. reported a $299 million third-quarter loss in October, 1995, and predicted a fourth-quarter loss, blaming the cost of huge layoffs, down- sizings and closures aimed at saving money in the long run" (Investor's Business Daily, October 25, 1995). Since the hiring of new CEO Mark H. Willes, the cuts have included elimination of 700 jobs at the flagship Los Angeles Times and closing New York Newsday. The changes will reduce yearly expenses by $115 million and cost at least 2,200 jobs company-wide. Restructuring charges reduced after-tax profits by $360 million, or $3.22 per share in the third quarter. Additional charges could decrease fourth- quarter net income by as much as $180 million. Most of the expense is from severance pay. Savings are projected to be realized beginning in the 1995 fourth quarter and almost all will be realized in 1996 (Investor Business Daily, October 25, 1995). A recent study by Right Associates (1995) shows the impact of re- structuring on companies in Florida. Of 186 companies responding, almost three-quarters reported some type of reorganization between 1992 and mid- 1995. Results of restructuring in Florida businesses appear more positive than results of a recent study of downsizing by the American Management Association (AMA): (1) 70 percent of restructured Florida businesses versus 44% in the AMA study said profits are higher since reorganization, (2) 60 percent of respondents reported improved productivity after restructuring - again higher than the 25.5 percent in the AMA's national study, (3) 57 percent reported improved revenues, (4) 53 percent reported a sizable decrease in internal hierarchy, and (5) 48 per-cent reported workforce qualifications improved. In this study, 43 percent restructured due to financial conditions, while 57 percent had other reasons, a main one being competition. Making better use of employees through redeployment and retraining was common, indicating that companies are trying to find ways to work smarter. Percent of the workforce separated was shallow with a majority terminating 10 percent of the workforce or less:

Percent of Workforce Separated |

Percent of Companies

None

18%

1 to 10%

51%

10 to 25%

22%

Over 25%

9%


Most of these companies felt they did a good job handling the change process (88 percent rated their performance average or better) and sufficiently attended to the needs of the remaining employees (72 percent responded average or better). Many also thought they did a good job in communicating with employees - 88 percent rated themselves average or above average in this area. However, in open-ended questions, commun- ication was cited again and again as the greatest challenge during reorganization. (Right Associates, 1995). Team-oriented approaches in work are a result of restructuring and downsizing. A majority (81 percent) report work has shifted across traditional organization boundaries to improve performance. There is a strong trend toward building self-directed work teams instead of traditional, hierarchical departments. Along with the team approach is a focus on assigning processes instead of individual tasks. Corporate hierarchies have shrunk considerably, resulting in shorter communication channels that allow greater responsiveness to customer needs. This flattening typically increases the managerial span of control (reported by 66%). A point is reached, however, at which companies approach an upper limit where managers are stretched too far and productivity begins to suffer (Right Associates, 1995). Negative Outcomes Nearly 68% of all downsizing, restructuring, and reengineering efforts are not very successful (Clark & Koonce, 1995). In many cases, companies that downsized and restructured to become more profitable and efficient have not achieved either. Instead they have experienced tremendous fallout, especially in the areas of decreasing employee productivity and morale, and increasing levels of absenteeism, cynicism, and turnover. A look at the reasons for diminished productivity and morale in downsized organizations reveals a changing corporate machine. Traditional thinking said people who survived downsizing would be grateful to have jobs, and would therefore be more productive (Clark & Koonce, 1995). To get the most from the survivors, you must pay attention to what's going on inside people's minds following a downsizing. Most are worried about long-term job security, even when upper management assures them their jobs are safe. Credibility of senior management is estimated to drop 35% after a restructuring, according to a 1990 study by the American Society for Training and Development (Clark & Koonce, 1995). Additionally, survivors are concerned about future chances for promotion and advancement, especially if they saw their bosses or mentors laid off. Survivors are also worried about their ability to function in a new environment, and their jobs may have been redesigned. Some people experience intense feelings of loss, grief, depression, and inadequacy as a result of changes in the work environment. The trauma may go unnoticed by managers, coworkers, and even family members. As an organization reinvents itself, it needs to keep in mind the survivors' emotional turmoil. That connection is key to realizing the productivity and profitability gains that downsizing and restructuring were intended to bring about in the first place. The following summary of surveys points to the negative results of downsizing: A 1990 survey by Right Associates (an out-placement firm) found that 74% of senior managers in downsized companies said morale, trust, and productivity suffered after downsizing (see Henkoff, 1990). A survey by the Society for Human Resource Management reported more than half of the 1,468 firms that downsized indicated that productivity deter- iorated from downsizing (Henkoff, 1990). Wyatt Associates surveyed 1,005 firms that had downsized between 1986 and 1991 and found the majority failed to achieve desired results: that only 46% actually reduced expenses, only 32% actually increased profits, only 22 percent actually increased productivity, and only 17 percent actually reduced bureaucracy (see Bennett, 1991).(Huber & Glick, 1993, p. 22-23). Survey results pointing to the failure of many firms to achieve desired objectives with downsizing follow: Effects of Downsizing on Desired Outcomes

Desired Outcome

Percent of Firms That Achieved Desired Results

Reduced Expenses

46%

Increased Profits

32%

Improved Cash Flow

24%

Increased Productivity

22%

Increased ROI

21%

Increased Competitive Advantage

19%

Reduced Bureaucracy

17%

Improved Decision Making

14%

Increased Customer Satisfaction

14%

Increased Sales

13%

Increased Market Share

12%

Improved Product Quality

9%

Technological Advances

9%

Increased Innovation

7%

Avoidance of a Takeover

6%

Source: Wall Street Journal, 6/6/91 (Cole, 1995, p. 96)

Problems associated with job loss from traditional downsizing are (1) loss of personal relationships between employees and customers; (2) destruction of employee and customer trust and loyalty; (3) disruption of smooth, predictable routines in the firm; (4) increase in employee reliance on rules; (5) loss of cross-unit knowledge that results from longevity and interactions over time; (6) loss of knowledge of how to respond to nonroutine occurrences in the firm; (7) decrease in documentation and concomitant reduction in sharing of information about changes; (8) loss of employee productivity; and (9) loss of a common organizational culture (Cole, 1995). Cameron, Whetten, and Kim (1987) identified 12 negative attributes of organizations that emerge along with the decline that occurs with shrink- ing markets and increased competition (an unintentional reduction in size). These negative attributes have been labeled the "Dirty Dozen," and are in the table below (Huber & Glick, 1993, p. 29). Huber & Glick questioned whether the same attributes occur in firms that are intentionally reducing size through downsizing.

Negative Attributes Associated with Downsizing (The "Dirty Dozen")

Attribute

Explanation

Centralization

Decision making is pulled toward the top of the organization. Less power is shared.

Short-term, Crisis Mentality

Long-term planning is neglected. The focus is on immediacy.

Loss of Innovativeness

Trial-and-error learning is curtailed. Less tolerance for risk and failure associated with creative activity.

Resistance to Change

Conservatism and the threat-rigidity responses lead to "hunkering down" and a protectionist stance.

Decreasing Morale

Infighting and a "mean mood" permeate the organization.

Politicized Special Interest Groups

Special interest groups organize and become more vocal. The climate becomes politicized.

Non-Prioritized Cutbacks

Across-the-board cutbacks are used to alleviate conflict. Priorities are not obvious.

Loss of Trust

Leaders lose confidence of subordinates, and distrust among organization members increases.

Increasing Conflict

Fewer resources result in internal competition and fighting for a smaller pie.

Restricted Communication

Only good news is passed upward. Information is not widely shared because of fear and mistrust.

Lack of Teamwork

Individualism and disconnections make teamwork difficult. Individuals are not inclined to form teams.

Lack of Leadership

Leadership anemia occurs as leaders are scapegoated, priorities are unclear, and a siege mentality prevails.


Cameron, Freeman, and Mishra in a 1991 study, addressed the organiza- tional effects of downsizing (Hubert & Glick, 1993). Their analysis suggested that across-the-board "grenade-type" approaches are linked with organizational dysfunction. Organizational ineffectiveness, lack of improvement, and high scores on the dirty dozen attributes all are present when workforce reduction strategies such as layoffs, attrition, and buy out packages are used alone. The lack of development of an advanced quality culture combined with stagnant quality improvement are associated with the negative organizational performance indicators listed in the "dirty dozen." On the other hand, firms whose performance was improving, effective, and absent the negative attributes are those that prepared for downsizing by using systematic analyses, involved employees, increased communication, and implemented strategies gradually over time. High Human Costs Self-esteem is sometimes shattered; the only performance mistake many former employees feel they made was to look after the company's welfare more than their own. The disappointment of losing a job and the bleak prospects some people feel they have can lead to depression, drinking and drug problems, family difficulties, and other damaging emotional and physical disorders. Financial consequences can be devastating. For many laid-off managers, severance payments run out before they find new jobs. One study by the American Society for Training and Development indicated that a third of the displaced managers over 35 years old find jobs that pay less than they previously earned; these laid-off managers often needed five years to get back to their former pay level (Tomasko, 1987). Missing Real Problems Cutbacks do not always address the appropriate problems. Weak compet- itive performance can be a result of high management overhead being built into product prices. But it can also be caused by inferior quality, lack of a differentiated product line, poor market positioning, an attempt to sell outdated technology, inadequate logistics and customer support, and a fail- ure to negotiate the best prices for raw materials - to list a few possibil- ities. The false sense of security that downsizing provides can be a danger. Valuable time may be lost if top management feels declines in earnings will be arrested by early retirements and reorganization, when the real future problems will result from a lack of new products in the development pipeline. Competitors may steal much of that company's market share by introducing new products while the company is recovering from downsizing (Tomasko, 1987), and by hiring the experienced personnel recently laid off. Revolving Door Syndrome As fast as managers are laid off, new ones seem to be needed. As people are laid off, the work they did usually remains. It happens when the focus of downsizing is on body-count reduction, assuming the organization and the work will somehow take care of themselves. They seldom do, and companies that approach downsizing this way find it hard to stay lean after the immediate economic pressure lets up. The other revolving door results from using un- targeted early retirement and job buy-out plans. These offers must be made to groups of employees, not individuals. Therefore companies may have diff- iculty predicting how many will accept (Tomasko, 1987). Squashing Innovation Innovation thrives in settings relatively free of excessive management layers. It requires an organization quick to take action and test new ideas, not one that overanalyzes them with a large bureaucracy. Many recent down- sizing efforts try to deliver such an environment, but streamlining alone is not enough to promote innovation. Encouraging innovation requires corpora- tions tolerate diversity and nurture mavericks. Downsizing programs can leave companies with an atmosphere of mistrust and insecurity, not conduc- ive to employees deviating from the straight and narrow. Downsizing may unclutter the organization chart, but may also eliminate segments that held creative contributors (Tomasko, 1987). "While many stock-market analysts have praised the cost-cutting efforts of Eastman Kodak's downsizing program ..., at least one has warned that saving money will not be enough to restore the company to its earlier growth pattern. He feels Kodak will need a better flow of new and innovative prod- ucts. An analyst who follows the chemical industry felt that the Celanese Corporation had gone as far as it could go in downsizing . While several years of reducing capital spending, cutting its work force by almost half, trimming R&D, and selling off businesses based on innovative technologies have helped the company's income and stock price to soar, these actions may also have cut short its life as an independent business. Most innovations originate in one form or another with customers. But companies with cost-cutting myopia are likely to miss these. Apple Computer is a company that went through a severe downsizing, shedding a fifth of its work force and a co-founder, without crippling its ability to innovate. By reorganizing to balance its focus on creative product development, with close attention to the uses its customers make of the products, Apple was able to strengthen the market position of its Macintosh personal computer." (Tomasko, 1987, p.48-49) As large companies expand operations and cut jobs at the same time, employees are expected to perform two or three jobs for approximately the same pay. The result is higher profits for corporations and increased demand for training and education. "These ‘multi-specialists' are part of the radical restructuring of corporate America. They may even explain why stagnant incomes and sluggish consumer spending have made a more robust economic recovery harder to achieve", (Berry, 1995, p. A4). There is con- sensus among managers and economists that jobs of the future will require more skills with the emphasis on information technology. The result is a return to education. "The only skill that has gained increasing acceptance in the past 40 years among workers is a college degree", (Berry, 1995, p. A4). One thing is clear: with the continuation of downsizing and changes in technology, workers with the ability to adapt to change will become more valuable, (Berry, 1995). Other Problems Reduced morale occurs among survivors of downsizing. Some companies have programs in place to help these employees. If these groups are not planned for, there is the risk of building feelings of permanent insecurity among middle-level managers. Fear and apprehension occur as managers spend time anticipating layoffs before they occur. Morale and initiative-taking are weakened long before top management finalizes any layoff plans (Tomasko, 1987). Down- sizing often has been based on a need to make major reductions in salary costs. Therefore, across-the-board cutbacks can leave some strong managers with undeserved doubts about their abilities. A second result is remaining good performers are unsure that continued hard work is the way to survive and advance. People adjust to a realization that good performance, long service, and corporate loyalty no longer ensure job security. Legal Risks Involved in Downsizing If it has been determined that an organization must be downsized to increase the ability to survive the long term, acknowledgment of the legal risks involved with the implementation of this method must be defined. The following are some of the risks in employer litigation a corporation often encounters when downsizing. 1. Age discrimination. The federal Age Discrimination in Employment Act prohibits discrimination against employees over the age of 40. 2. Race and gender discrimination. Title VII of the Civil Rights Act prohibits discrimination based upon an employee's race, color, religion, sex(including pregnancy) or national origin in hiring and job retention. 3. Handicap and disability discrimination. This falls under the Americans with Disabilities Act. 4. Breach of contract. While employers and employees in the absence of a contract generally are free to terminate the employment relationship at any time, over downsizing the courts, and legislatures have devel- oped numerous exceptions to this so-called ‘at will'doctrine. 5. The lack of advance termination notice. The Worker Adjustment and Retraining Notification Act requires advance notice of large-scale workforce reductions. 6. Employee benefits. The Employment Retirement Income Security Act may support claims that an employee's benefits were improperly term- inated or withheld. 7. Tort claims. This includes assertions of intentional infliction of emotional distress, defamation, interference with contract, invasion of privacy and fraud. (Ruses Bantam, 1995, p. 23) A common mistake made by many corporations is the underestimation of the cost of litigation arising from these sources. Return to Table of Contents

Downsizing and Quality Improvement

Downsizing and quality many times appear to be dichotomous concepts. Cost concerns take priority to quality concerns, customer satisfaction, and employee empowerment, responsibility, and loyalty. This negative relation- ship occurs because most firms use a seat-of-the-pants approach to downsizing (Cole, 1995). An increase in the "Dirty Dozen" attributes that are likely to result from a reduction in workforce is associated with a decrease in total qual- ity in organizations. The negative attributes inhibit participation, team- work, empowerment, suggestions for improvement, innovation, and a focus on customers (Cole, 1995). Conclusions regarding downsizing and Total Quality Management (TQM): (1) most organizations downsize in a way that works against the principles of TQM and stands in the way of positive organiza- tional performance; (2) quality outcomes and enhanced organizational per- formance are associated with a certain type downsizing strategy - systemic downsizing that is most in line with TQM principles; (3) downsizing's success is enhanced when an advanced quality culture has been developed in the organization. In summary, (Cole, 1995) " after seven years' research on downsizing and quality, ... believe that successful downsizing implies a successful quality program and a successful quality program implies successful downsizing". (P. 111) An example where concerns with the relationship between downsizing and quality may be demonstrated is at Alta Bates Medical Center, Berkeley, CA. After hospital executives presented unions with plans to redesign staffing on patient care units, the hospital was hit with a lawsuit. The basis of the allegations are that hospital officials knew their redesign would harm patient care, but proceeded anyway (Lumsdon, 1995). Hospital executives disputed the union's claims, and despite the pending lawsuit began piloting the redesign on two patient units earlier in the year. Union groups accuse hospitals of cutting labor costs blindly and rolling out re- designs without first assessing the effects on patients. Before changing the mix of skills and duties on nursing units, they said executives needed evidence that the changes wouldn't jeopardize quality. Reengineering consultants were blasted for selling "cookie cutter approaches" focused on cutting dollars, and not matching skills with the needs of patients, (Lumsdon, 1995). The bottom line was that layoffs and changes in staff would occur whether Alta Bates reengineered or not. With fewer patients in the hospital, the need for staff would continue to shrink. Return to Table of Contents

Characteristics of Effective Downsizing

Characteristics of firms that have effectively downsized are: (1) involvement of all employees in improvement and participation in down- sizing; (2) downsizing viewed as an opportunity instead of a threat; (3) individuals defined as resources to create organizational improvement instead of costs that dragged down bottom-line financial performance; (4) advanced quality culture. Most effective organizations had dynamic, competent, knowledgeable leaders who voiced clear, motivating visions of the future. Personal behavior of the top manager includes the ability to excite and motivate employees, praise them, use symbolic ways to provide a vision of future possibilities for them, and remain accessible and visible. Six "best practices" for downsizing are identified as follows, (Huber & Glick, 1993): First, implement downsizing from the top down, but also from the bottom up. Allow employeesto analyze job-by-job and task-by-task oper- ations of the firm, and identify redundant jobs and ways to eliminate org- anizational fat and improve efficiency. Downsizing from the top down provided consistency, vision, and clear direction; downsizing from the bottom up fosters innovation and improvements. Second, universal, across-the-board downsizing processes were used, as well as selective, particular downsizing processes. Implementing across the board cutbacks captures employees' attention, mobilizes the energy of all the organization's members, and overcomes resistance to change by high- lighting the seriousness of conditions faced by the firm. This makes it clear that the status quo is no longer acceptable. On the other hand, this approach produces negative characteristics that can be overcome by a selective strategy. Third, successful downsizing involved managing the transition for employees who lost their jobs, as well as the transition for survivors. The most effective organizations provided out-placement services. Those employees who remain with the firm were likely to experience guilt feelings, management burnout due to being required to manage larger numbers of employees, maintain accountability for multiple and new functions). The most successful downsizing firms paid attention to the transition exper- ienced by employees remaining with the organization as well as those who exited. The ways companies achieved this were through communication, sharing of information, and changes in the human resource management system. One example is the initiation of training and development activities months before implementation of downsizing. Fourth, successful downsizing targeted elements inside the organization as well as the system relationships outside the organization. The most effective processes involved working on any processes that stood in the way of internal efficiency. Redundancies, excess costs, and surpluses were targeted directly. The best downsizing practices also included the entire system of suppliers, customers, and distributors in planning and implement- ing downsizing. Fifth, successful downsizing created small, semiautonomous organiza- tions, as well as large integrated organizations. The most effective down- sizing was associated with the advantages of both small and large organiza- tions. Unit leaders were given the responsibility to manage functions prev- iously centralized at headquarters. At the same time, effective downsizing produced efficiencies by centralizing functions and creating large organizations. Sixth, the best downsizing practices emphasized downsizing as a means to an end, as well as the end in itself. On one hand, the most effective organizations targeted downsizing as a central critical outcome, but also expanded their alternatives to achieve effectiveness. "Improving product- ivity" and "enhancing competitiveness" were labels that helped position downsizing as just one in a portfolio of strategies that could improve firm performance, (Huber & Glick, 1993, p. 56). Return to Table of Contents

Surviving Downsizing

An organization can reduce the pain of restructuring. Efforts should be systematic and should include clear, consistent communication with employees about transition plans. (Clark and Koonce, 1995). Effective communication is important during organizational change; too often, change is heard through the grapevine. The communication should be proactive, not reactive. There should be a plan which ensures communication is shared early on. A well-designed communication plan breaks down barriers to change and helps people to accept the change. Insufficient communication from top management can result in middle managers not supporting and even killing new initiatives (Galpin, 1995). As cited in the Right Associates' survey, 65 percent of the organizations ranked "gaps in communication channels" as the number one negative factor experienced when surveyed after restructuring. Compared to reduced productivity, increased absenteeism, and less responsive employees, which were mentioned by only 1 percent, this is an especially strong response. Communication problems were (1) rumor control: beating the grapevine and getting accurate information to employ- ees at every level, (2) dificulty stopping the leaks of confidential infor- mation, and (3) problems convincing the remaining workers their jobs were secure (Right Associates, 1995). In addition to setting in motion a communication plan, it is important to address the following needs during downsizing: (1) a program to help managers and employees deal with change, (2) guidance for employees in planning and managing their careers, and (3) assistance for managers in coaching and mentoring employees. These programs serve as models of a new contract between employer and survivors: "the new contract is one which emphasizes mutual responsibility for skill development and professional growth. It fosters the employability of an individual, both inside and outside the present organization", (Clark and Koonce, 1995, p. 25). Survivor programs can align employees' commitment to new company prior- ities. They can energize employees to become fully engaged in the new mission and vision of the restructured organization. Last, they can give employees a feeling of enhanced professional competence and self-confidence, as well as making workers more employable. It is unlikely that many people will have a single employer for the duration of their working lives. "Self-confidence is boosted in employees when we encourage them to take responsibility for their own professional development - by keeping their skills current, by remaining flexible regard- ing future job goals and career paths, and by cultivating a portable ‘suit- case' of skills that they can take from one job or employer to another. Such employees are exactly what companies need in the highly interactive, team-based workplace of the 1990's.", (Clark & Koonce, 1995, p. 30). Another reason for emphasizing employability is that this focus creates employees who are more multi-faceted and well-rounded than the people devel- oped strictly for the internal use of their companies. Many employers seek what is called "deep generalists" by leadership expert Warren Bennis (Clark & Koonce, 1995). This is the person who can quickly respond to shifting work demands, changing customer needs, evolving job circumstances, and volatile market conditions, but who is also grounded in some specialty that allows them to bring value-added skill and experience to the organization. Focus by individuals on the new reality that careers are made in markets, not hierarchies will assist in the transition. Return to Table of Contents

Conclusions

As illustrated previously, the majority of downsized organizations fail- ed to achieve their desired results. This failure may be attributed to a number of causes. In some instances there was a lack of need to implement downsizing in the first place. Downsizing and reengineering have become buzzwords of the 1990's and have been entered into without proper consider- ation of long-term costs, both economic and human. Most disturbing about this trend is that downsizing has been viewed as a panacea for problems better addressed otherwise. In some cases downsizing has obscured, even exacerbated the true root causes of the financial difficulties. Unfortun- ately, downsizing many times appears to be an easy target for a Chief Exec- utive Officer, under pressure to increase earnings, to downsize in return for a short-term increase in stock prices. Another major roadblock to successful implementation has been a failure to "sell" the concept of downsizing to employees. The term has a justly deserved negative connotation to employees, and their natural reaction is one of fear and mistrust. It is the opinion of the authors that downsizing has indeed gone too far. While it may be an effective strategy in a bloated, hierarchical organization, or in an organization which is under competitive pressure that cannot be addressed otherwise, it is put into practice far too often and with an underestimation of the costs both tangible and intangible. Any organization considering this strategy would be well advised to examine other alternatives, to examine the results of their predecessors and to proceed with great caution.
Last update: 10/18/96
This review was originally prepared in 1995 for Project 6056 as part of the MBA program at the University of North Florida in Jacksonville, Florida. It was initially in text format and did not include a reference list for the sources cited. However, due to general interest in the article and the references the original text was recently (10/13/96) converted to HTML format and an annotated bibliography was prepared by Mahiuddin Laskar. Those interested in imeadiately obtaining the references are therefore refered to the link for the new HTML file: Article with Annotated Biblography. All other inquiries should be sent to M. Laskar, that site's developer at his e-mail address: mlaska@unf6.unf.edu .

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