Pros and Cons of Downsizing

Pros and cons of downsizing for employers and employees
Pros:
Employers
1. Keep up with competition on a global scale
2. Increase adaptability: speed up decision making, foster
entrepreneurship, ease adaptation to the business cycle etc.
3. Increase productivity
4. Outsourcing to get new knowledge and skills transferred from
outside to inside the organization
5. Improve shareholder equity
6. Firms that combined job cuts with asset restructuring
(divestitures, plant closures, etc.) displayed higher returns on
assets and higher stock market returns over the subsequent
two years than typical firms in the same industries.
7. Experience superior performance (reflected in operating
performance and excess stock market returns both in short
and long run over periods of several years after the layoff)
only when job cuts are combined with significant
restructuring, strategic changes, or changes in organizational
structure.
Employees:
1. To motivate employees to leave voluntarily, severance pay is
offered and outplacement services are provided, in this case,
employees who believe they can get a better job elsewhere
will have the perfect opportunity to quit.
2. For employees who are not told to leave, they are reminded of
company restructuring and can start looking for job offers
elsewhere before they get fired.
Cons:
Employers
1. According to research and surveys, only a third of companied
that had downsize saw profits increase after the layoff as
much as expected; and only a small minority reported
satisfactory increase in shareholder investment as a result of
the layoff. (AKA things hardly go as planned and cutting of
jobs does not lead to more $)
2. Companies that eliminated jobs in the 1990s were slightly
more likely than other firms to report short term profit
increases, but were somewhat more likely to report profit
declines afterward. (AKA cutting of jobs only had temporary
effects ~not v good because the cutting of jobs according to
research, is not attaining the effects its supposed to, most of
the time)
3. Page 425 : “although some econometric studies have
uncovered modest positive effects of white-collar downsizing

on financial performance, in general the studies suggest the
financial effects of downsizing in the short- and longer-term
are negative”
4. Page 426: “effects of downsizing on employee morale and
attitudes are largely negative. Effects being, distrust,
demotivation, stress and overwork by stayers” (Lowers
remaining employees morale and attitudes)
5. Page 426 “all the %s” (shows downsizing leads to increased
resignations and voluntary departures, increased employee
turnover and increased disability claims showing that it might
lead to the company’s valuable employees leaving the
company instead of just the useless idiots)
6. As for the employees who stay, anxiety from not knowing
when they will be fired may translate into disability claims for
illnesses which are difficult to diagnose and treat; such as
chronic fatigue syndrome, fibromyalgia, stress… (LEADING TO
MORE MONEY SPENT UNNECESSARILY)
7. For work environments that thrive on creativity, this leads to
decreased creativeness and risk taking, diminishing the
stability of workgroups and their speed and effectiveness in
communicating which are important for the success of
creative work. (highlights importance of interdependent work
settings and loss of working relations built between
employees and coworkers)
Employees
1. Employees will face larger workloads and longer work hours.
2. Increased feelings of demoralization and stress from being
overwhelmed by the new tasks they’re not trained to do.
3. Anxiety from not knowing when they will be fired may
translate into disability claims for illnesses that are difficult to
diagnose and treat; such as chronic fatigue syndrome,
fibromyalgia, stress…
4. Bonds built in the workplace to establish effective
communication might be disrupted, SO LESS EFFICIENT.
5. Employees who do not get fired in the first round of
downsizing will still face a risk of losing their jobs because
downsizing usually comes in waves.
6.
DOWNSIZING AND SOCIETY
Advantages:
1. Social impacts are apparently in the long run, positive.
2. Layoffs promote superior matching of workers to jobs and
increased dynamism and risk taking in the economy, thereby
fueling job growth.

3. New job creation arguably also more than compensated for jobs
lost through layoffs.
4. Increases competitiveness.
Disadvantages:
1. Job loss has profound negative consequences for the displaced
employees and their families, consequences that add to the
social costs of downsizing.
2. Research shows that unemployment and job loss are empirically
not only to long-term wage loss and employment insecurity, but
also to a wide range of other outcomes, including criminality,
drug and alcohol abuse, domestic violence (of spouse and
children), separation and divorce, declines in objective and
subjective health, depression, suicide, children’s well-being (e.g.
self-esteem, mental health and school performance)
DOWNSIZING
- works better when it is part of a well conceived strategy of
restructuring the firm and its workforce
- this is because while firms might be bloated with unnecessary
employees, this is not evenly distributed among the firm,
therefore, a general firing of staff is not going to target the
problem areas, and even worse, if competent workers voluntarily
resign, the company will be filled with fewer workers who are
incompetent. (SO MORE PLANNING NEEDS TO BE INVOLVED FOR
A POSITIVE OUTCOME, focused firing and restructuring helps to
focus on the REAL problems or successfully exploit the real
opportunities)
- offer a rationale to the employees
o when there is a rationale that can be offered and accepted
by the employees, there is a much better chance of
downsizing not being as disruptive or poisoning, the
employees will accept the fact and adjust.
o If the employees see management that responds to
increased competition or changed conditions with nothing
more intelligent than to just fire and stuff they will not
respond well, especially when the management is
unaffected by the downsizing, AKA non of the middle
managers or bosses get fired.
Different Approaches to Downsizing
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To attenuate (reduce ‘just in case you don’t know what that
means :P”) the psychological costs for the workers and the
company’s reputation. Give the workforce a sensible and credible
reason for why this pain must be inflicted, a vision of what sort of
better future beckons after the suffering is over, and a broader
purpose around which the survivors can rally

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o There should be extensive communication before, during
and after the process. [impersonal approaches like leaving
notes were easier for senior managers, but ineffective at
addressing concerns of the employees]
o Make it clear to employees that due consideration to
alternatives were given
o Process should be perceived as embodying distributive and
procedural justice. (means that everyone’s input into the
decision is important, like employees being incorporated
into the planning process to decide on a criteria on who
should be fired. This will help in the fair decision on who
should be let go. And those people fired can appeal the
decision)
o The process should be kind to people leaving the company
(this also depends on the type of company it is, and not
being OVERLY kind is impt too cause you don’t want the
competent workers to leave. Find middle ground -.- [the
people writing this thing… ARE SO LONG WINDED AND
CONFUSED -.- moving on…)
 maximum advance notification has to be given
 generous buyout/severance pay
 outplacement benefits
Massacre (FIRE all at once, dramatic swift cut)
o Advantages
 Faster and easier for the company, the number of
dislocative effects associated with layoff – such as
increases in disability claims, post-downsizing
turnover; declines in morale, productivity and quality
of customer relations – abate considerably after the
first year of downsizing.
 Beneficial effects such as increases in quality and
productivity do not manifest themselves for some
time following the layoffs. Suggesting that it is more
difficult for employees to identify a discernible end to
the layoffs and associated structural changes may
just delay or prolong the adjustment period to a year
or more. SO, by moving rapidly and firing all at one
go, companies reduce the psychological damage,
achieve a more pronounced and rapid increase in
shareholder equity, as well as prevent kept workers
from constantly thinking they’ll get fired, improving
quality of work.
o Disadvantages

Fired workers will flood the market, affecting the
economy and community, as well as making it harder
for the fired staff to find jobs.
 Too many workers might be fired than necessary.
 Traumatizing for those who lose their jobs.
Drip-drip-drip (gradual, less wrenching approach)
o Advantages
 Firm may be unsure of how deeply to cut jobs, a one
time massacre risks cutting too much.
 Psychological costs may be attenuated with this
approach
 Labour market can better absorb the discharged
workers
 Reduces adverse impact on local economy and
community
o Disadvantages
 Employees in the company will stay in constant
uncertainty of their position in the company for an
extended period of time, affecting their productivity
and quality of work.
 More time consuming for the company
Across the Board firing (implement cuts across the board,
with every unit shedding a fixed percentage of its
employees)
o Advantages
 Easier. Cuts of pain of hard and painful decisions that
will lead to internal political activity aimed at
redirecting the ax to some other target. Especially
when the firm’s culture and technology emphasize
cooperation and collegiality.
o Disadvantages
 Injustice for units of the company that are performing
exceptionally and DO NOT or CAN NOT need/use the
cut. This will also demotivate them leading to low
scores on procedural justice, inviting political and
internal competition that the across the board
shedding is supposed to prevent.
 May lead unit leaders to increase their payrolls in
anticipation of future across the board cuts.
 There is also the psychological downside of losing
emotional bonds as well as task interdependencies
within and across units. Everyone will feel intense
loss of friends and colleagues as opposed to a
concentrated pain in a few units.


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Signals to workers that the management does not
have a well thought out plan for the future
Targeted Layoffs (concentrate on cuts in specific units)
o Advantages
 (ADVANTAGES OF THIS = AVOIDING THE
DISADVANTAGES OF ACROSS THE BOARD FIRING^)
o Disadvantages
 Lead to internal political activity aimed at redirecting
the ax to some other target. Especially when the
firm’s culture and technology emphasize cooperation
and collegiality.
Layoffs, Seniority, Age(firing seniors in the company)
o Advantages
 Firms get more value for money by firing seniors in
the company since they have the higher pay.
Especially in firms where recent hires may be more in
tune with new developments.
o Disadvantages
 Claims of age discrimination
 Layoffs will unlikely look procedurally or distributively
just. Especially for firms with cultures that emphasize
loyalty and organizations that depend on slowly
developed firm-specific human capital.
o Firing the Younger Workers
 Advantages
 Don’t have to bother with disadvantages
above^
 Disadvantages
 Especially in the United States, women and
people of colour are concentrated in the lowertenure ranks. By firing them, firms can also
face lawsuits that protect these people who will
sue for discrimination.


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Documenting and Rationalizing Layoff Decisions (Reasons why
companies downsize and possible alternatives)
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Starting point of any downsizing campaign needs to be a careful
assessment of its appropriateness and the dimensions along
which layoffs should be structured.
o 5 Factors and complementary considerations as good
organizing principles.
 What is the role of seniority in the organization’s
past, present, and future, given the enterprise’s
strategy, technology, environment, culture,

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workforce and the array of HR practices and policies
in place.
 Will impending developments make seniority more of
an asset or liability?
 To what extent can the organization use layoffs as
one tool within a broader organizational change
initiative?
o If such an analysis leads management to decide that
layoffs are appropriate, whether seniority-based or
otherwise, then lawyers will want the homework and paper
trail to be earnest.
 Convince relevant outsiders of the business necessity
of layoffs in situations like this, the management will
want to have the following information and
documentation
 How the organization’s wage structure,
seniority distribution, and staffing ratios
compare with relevant benchmarks (including
before downsizing)
 Empirical relationships between the company’s
hiring, compensation, and career development
practices on the one hand, and important
business outcomes on the other (e.g. if layoffs
are to be concentrated disproportionately
among more sernior employees, evidence of
demonstrable negative relationships between
seniority and important outcomes)
 Where layoffs are done selectively within a
business unit, evidence that demonstrates that
the company’s performance management
system is valid and provides a defensible and
legitimate basis for ranking employees in terms
of layoffs
 Documentation of having fully explored the
feasibility of reassigning workers or lowering
the compensation of employees who would
otherwise be laid off
companies downsize mostly because
o it is an admission of previous mismanagement
 cost cutting
 part of organizational politics
o it is acknowledging that something – in the environment,
the organization’s strategy, its technology- has changed
 increased flexibility and adaptability
 enhanced focus

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


enhanced productivity
broaden skill bases (by using outsourced labor)
in hopes of improving shareholder equity

REVIEW *
X

Firms downsize for a variety of reasons, including cost rutting,
increased flexibility and adaptabihty, enhanced focus, enhanced
productivity, as pan of organizational politics, to broaden skill bases
(by using outsourced labor). and in hopes of improving shareholder
equity.

X

Recent upsurges in downsizing are often attributed [intensified
competition, decreased product life cycles. escalating costs and legal
liabilities associated with employees. falling costs of substitutes
(Including outsourced labor), and increased discipline from capital
markets, which seem to endorse downsizing.
Existing evidence about the effects of downsizing suggests the
following conclusions:


The impact on the firm's bottom line (in terms of both
operating profits and financial market performance) is mixed
and largely transitory
 Employee morale and attitudes suffer, which can be especially
costly in environments that emphasize creativity,
 It may not be the least able employees who leave. Instead,
some downsizing programs unwittingly encourage the more
able and valuable employees to depart.
Downsizing can have a substantial negative effect on the local
community, although some commentators argue that these
effects are temporary and, if avoided, lead to far worse
consequences down the road,
The overall moral from these data is that downsizing works best when
tied to sensible restructuring of the organization’s work practices,
because:



Organizations that restructure are more likely to be
addressing the real problems and opportunities they face
Morale among those left behind is likely to be higher if
management projects a clear vision of what the problem
has been and how things will get better, than if they
merely downsize reactively to "cut fat."

- Organizations that contemplate downsizing should first contemplate

alternatives.
- If you must downsize. Process considerations become very important.
There are no easy answers in how to downsize, but the following
should be kept in mind:

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Communication with employees is critical.
Employees should be coopted into the process as much as
possible, and it should be made clear that alternatives were
considered.
Distributive and procedural justice should be carefully attended
to,
Both the leavers and the survivors should be supported, the
former with "services" and the latter with training and a sense of
where the downsized organization is headed.
On balance, one large round of terminations is probably better
than wave after wave.
On balance, targeted layoffs seem a better bet than uniform.
Across- the-board layoffs.Layoffs that target (or that favor) more
senior workers have advantages and disadvantages on both legal
and organizational grounds.
Consider thoroughly the interests of the communities involved
what you can do to mitigate the impact of the Layoffs, and
whether it isn’t in your organization’s interest to be a "good
citizen- of the affected locales (to protect your reputation as
such).
Legal considerations should be attended to carefully, though
they cannot and should not be determinative. Careful planning,
rationalization, and documentation may be an important "cover"
in the face of lawsuits.