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Downsizing- Is Recession the only reason?

December 18, 2012

Post the global recession (2008), Lay-off or firing has become the worst nightmare of an employee. From organizational prospective, the term is  Downsizing, a tool to rescue organizations  from the adverse economic situations.

 Lay-off

It refers to temporary suspension or permanent termination of an employee or a group of employees when certain positions are no-longer necessary or when business slow down occurs.

Downsizing

In an attempt to improve efficiency, organizations often have to streamline their operations, combined with lay-offs ,in order to reduce labor cost by reducing the size of the company.

 Types of Downsizing

1.Reactive Downsizing – Some major changes in market conditions and demands often force organizations to reduce their manpower. Companies follow reactive downsizing strategy in order to survive the effects of economic or financial crises.

2. Proactive Downsizing – Proactive downsizing is planned in advance with aim to improve efficiency and is integrated with wider business objectives such as – gaining competitive advantage, taking advantage of new technological development, to meet the need of different workforce skills etc.

Reasons of downsizing

  1. A major reason of downsizing is to reduce operational cost in unfavorable market conditions.
  2. Sometimes, mergers and acquisitions lead to duplication of support staff. In order to eliminate the workforce with no work, companies downsize workforce.
  3. Companies often respond to reduce sales by eliminating certain job roles and positions. The reduced payroll outflow often helps in securing profits.
  4. Technological advancement and automation often force organizations to restructure their operations and eliminate obsolete job roles.
  5. Outsourcing of certain business processes is also a reason for downsizing.

While downsizing, companies often follow one of these approaches:

 Performance based approach A fresh performance appraisal review preceding downsizing is often taken as the base of making the downsizing decision. Top performers stay while the non performers have to go.

 Added value by employee approach Often, some employees and positions lose their relevance with growing technological advancements. Companies have to to let go such employees irrespective of their performance.

First-In , Last-Out approach – Under this approach, the one who joined the last is the first one to leave. Companies follow seniority approach as they have invested lesser time and resources training newer employees compared to older employees. Also, older employees are believed to be more loyal and committed.

Disadvantages associated with Downsizing

  1. It leads to loss of skilled and efficient employees.
  2. It often causes distress among remaining workforce which might now loose commitment and loyalty.
  3. Prospective employees become skeptical about joining the company.
  4. Loss of jobs creates greater unemployment leading to a negative economic situation.

Some alternatives to downsizing

  1. Including cost cutting measures like pay freezes, reduced working hours, reduced wages and mandatory holidays.
  2. Making an offer of voluntary retirement package for specific employee categories.
  3. Redeployment of employees in different departments and roles within the organization.
  4.  Employee buyouts – Some organizations allow employees to buy the operation that was slated for closing and set up their own business.

Whether Downsizing is a curse for employee or a necessary evil for organization, the debate is never ending. Though a company might justify downsizing by citing well framed business objectives, it’s a well observed fact that downsizing decisions have not always resulted in increased profits. Measures like hiring linked to vision*, succession planning, cross training etc can protect employees and  organizations from ill-effects of downsizing.

 

*Hiring linked to vision – Recruiting and hiring people who can meet organization’s future challenges and requirements.

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