Article 43

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CORPORATE DOWNSIZING AND ITS EFFECT ON THE ORGANIZATION

Derrek G. Choy

Introduction

The long term effect of corporate downsizing has affected the way organizations are managed. This research looks at the economic problems facing the downsized organization and the psychological impact affecting the retained employees and the terminated workers. Robert Half International Incorporated developed a survey showing that 51% of executives expressed concern of losing their jobs because of downsizing in comparison to burnout (24%) and being fired (incompetence on the job) (10%). (USA Today, 1998).

Downsizing equates with mergers. A recent merger proposal has been with Chrysler Motor Company and Daimler Benz. There are assurances by both Chrysler and Daimler Benz that “no jobs would be lost due to the merger”. History has shown that this is not true. “Government budget cuts alone have resulted in more than 1.1 million lost jobs in the defense industry since 1987, with another 700,000 cuts expected through 1998” (Misha, Spreitzer, Misha, 1998., p. 83). More than 3 million jobs have been eliminated each year since 1989, for a loss of 43 million jobs since 1979 (Misha, et, al, p. 82). The competitive global marketplace there seems to dictate that downsizing is here to stay. Their very survival depends on this mode of thinking. As a result, organizations have to run their businesses with efficiency and cost effectiveness. “NTT, Japans telecommunications giant, announced plans to shed 45,000 jobs, and Nissan plans to lay-off 7,000 employees” (Lee, 1997, p. 879).

Palmer, Kabanoff and Dunford (1997, p. 624) “… show evidence that organizations are changing the reasons why they use downsizing. In the United States the results of a recent survey point to a decrease in reported importance of ґgeneral economic conditions as a rationale for why downsizing has occurred, while reasons such as better staff utilization, outsourcing, plant closure, mergers, automation and the use of new technology have become important.”

Individuals are affected also. As they pass their 40’s, being re-employed becomes harder. Van Buren’s ( 1996, p. 50) research shows that being fired is likely to mean the loss not only of upward career movement, but also of economic stability and self-respect. They feel like they are being sacrificed, not because their corporations were in serious economic trouble, but rather because the profits being made were not high enough.

In addition, low morale among the employees left after the downsizing effort within the organization has to be addressed. Companies that help their workers get new jobs, and provide out placement services, end up much better positioned than companies which simply wield the ax. This is because they have a better chance of retaining the loyalty of the surviving workers. Trust is one of the most valuable yet brittle assets in any enterprise. Over the long term, itҒs far better for companies to downsize in a humane way.

“Corporations should remember that they are artificial creatures chartered by society. As such, they are subject to societys values-and societyҒs approval can be withdrawn at any time” (Van Buren III, 1996, p. 50). All the more reason to do it humanely.

This research paper will look at five aspects of downsizing:

1. The organizations determination to downsize.

2. The morale problems affecting the organization after the downsizing decision.

3. The organizationҒs commitment to help the displaced workers through counseling and job placement.

4. The development of programs for downsizing success.

5. The long term effects of the organizations downsizing efforts.

1. The organizationҒs determination to downsize.

Companies downsize to cut cost, improve efficiency and to maintain a profit level acceptable to their shareholders. Downsizing in the United States and foreign countries is, unfortunately, here to stay. Downsizing refers to a “deliberate decision to reduce the work force that is intended to improve organizational performance” (Kozlowski, Chao, Smith & Hedlund, 1993. p. 267). Lee (1997) looks at layoffs as part of a larger plan, where organizations analyze their core business and develop their business to its fullest extent. In other words, the organization often goes “back to the basics.” When downsizing does occur within an organization, Lee (1997) looks at whether downsizing is proactive, which is a restructuring strategy of an organization to obtain efficiency and market share, or reactive, where the downsizing occurs because of deep financial trouble within the organization. As Mabert and Schmenner (1997) see it, downsizing occurs because of (1) an intentional decision (2) a reduction in personnel, often disproportionately in the management ranks, (3) efficiency and/or effectiveness objectives, and (4) changes in work processes. Again, the whole theme of downsizing equates to lowering operating expenses by employee elimination to show a greater profit for the company.

The organizations prerequisite to downsizing is attributed to cost efficiency, greater control and to develop a company that is able to react to a changing market within a short period of time. Palmer, Kabanoff and DunfordҒs (1997) research shows that there is a general tendency for managers in such situations, like other people, to attribute failures to causes beyond their control.

2. The morale problems affecting the organization after the downsizing decision.

Organizations have seen the negative affects of downsizing. Morale suffers which equates to lower productivity and profits for the organization. Mabert et, al,(1997) discusses how managers complained of the morale-sapping character of most downsizing and described how low morale created anxiety and paralysis within their companies to the subsequent detriment of productivity. When an individual loses his/her job, confusion and anxiety sets in. “Many of them are thrown into unexpected transitions with extended middle periods characterized by confusion and a lack of ability to move forward” (Borgen, 1997, p. 142). Mishra, et, al, (1998) found that a 10 percent reduction in personnel resulted in only a 1.5 percent reduction in costs. Their research also found that the employee trust and empowerment were shattered after the downsizing. This caused the employees left after the downsizing to show less initiative in getting the work done. Their feeling was that they would be the ones terminated next, so their attitude is one of “Why try to do the job since I am going to be the next one laid off”.

Lee (1997) sees full employment as a key to solving the social ills of the industrialized countries and believes that it can still be attained with the right package of international and national policies. Unemployment, as a result of downsizing, does not have to have a devastating effect within an organization if proper procedures are followed. “The real question is how downsizing is done rather than whether to downsize” (Mishra, et, al, 1998, p. 84). When an organization fails to realize their actions when they have downsized, the organization creates. “...an alienated workforce devoid of commitment and unwilling to extend more than the minimum amounts of effort” (Hunt, 1986, Sanderson & Schein, 1986).

3. The organizations commitment to help the displaced workers through counseling and job placement.

Humane treatment of displaced employees sends a message to the “survivors” of the downsizing that care and compassion has been given to these workers. Having outside consultants help in the displaced workers transition also should be considered. Employees who are displaced will have a much easier time talking to individuals outside of the organization. Misha, et, al (1997) states that using outside experts in the transition may also increase survivorsҒ trust since they know management does not have all the answers in a time of high stress and turmoil.

A key factor for employees who lose their jobs is often an organizations severance package. Being displaced from a company is a devastating experience. Studies have shown that a generous severance package sends out a message to the employee kept on, that the company does care and provides for displaced workers. As Misha, et, al (1998) sees it, survivors will judge a companyҒs future interactions with them on how fairly it treats those laid off.

Developing a humane and dignified outcome for these displaced workers should be one of a companys primary goals for each displaced individual within the organization. A way to increase the morale of each displaced worker within the organization is to have them gain control of their lives. Nothing saps a person more than a feeling of “lost control” in obtaining a job. “WorkersҒ control stabilizes employment, and, hence reduced the impact of an exogenous shock which reduces employment” (Doucouliagos, 1997, p. 175). Turnley and Feldman (1998, p. 82) look at how a companys unfair actions cause low morale and a decrease in productivity. “In the case of organizations undergoing downsizing and reorganization, respondentsҒ comments highlight the negative reactions to perceived unfair layoff procedures”.

Using an organizations position to retrain, having an out placement service, and having financial counseling for the displaced employees should be a primary concern for an organization in the middle of downsizing.

Leana, Feldman and Tan (1997) hold a contrary view of severance packages to displaced workers. In their research of laid off workers, they found that corporate assistance programs may have some unintended consequences for coping behaviors. A severance package given to individuals in a downsizing is meant to lessen the blow of being without a job. With this severance package, displaced workers should have time to look for a new position. These authors note, however, that substantial severance pay reduces the respondentsҒ sense of urgency to look for a job. On the other hand, other studies cites have shown that even after a displaced employee finds a new position, the pay is substantially less than what they were making in their prior position. Quite often these individuals who do find a new position are quite often under immense economic and social pressure to accept any job even if the wages are substantially lower than what they were making. Employers know that these individuals are in dire need and will often offer less to them because of their situation. “The unemployed could be particularly vulnerable to distinct hiring discriminatory practices, as the reward for their human capital will depend on the subjective and discretionary evaluation made by the prospective employer who is typically, in a superior bargaining position” (Mavromaras & Rudolph, 1997, p. 814).

In helping employees cope with the uncertainty of losing their job, open communication is vital for the organization and the employees’ well being. “Employees who have full knowledge of the companys finances and its industry feel personally in control amid the uncertainty. Downsizing becomes less of a crisis and more an expected path. In addition, sharing sensitive financial or competitive data ensures employees that they can trust management to be open and honest” (Misha, et, al, 1998, p. 88).

4. The development of programs for downsizing success.

When an organization decides to downsize, a detailed and well-planned program has to be implemented to make it successful. Unfortunately, far too many companies downsize without looking at the negative repercussions of their effort. “Some companies increase profitability and/or productivity, but for many downsizing has been disappointing” (Mabert, et, al, 1997, p. 46). These authors identify six reasons why downsizing does not work in many firms.

1. Organizations fail to set up retraining polices and do not foresee the human resource problems that develop when downsizing takes effect.

2. As an organization downsizes, they quite often overuse consultants and third party providers. Instead of an organization retraining their retained staff in doing the work, they rely too much on the consultants and third party providers to do the work.

3. As the organization is downsized, the added burden of work is thrown to line or staff personnel with limited time to do the job and limited expertise in that field.

4. As companies become flatter, the past communications that worked well are gone. No communication link between the different levels within the organization takes place.

5. As mentioned earlier, quite often productivity and quality suffer because there is no plan on how the work is to be done with a reduced staff.

6. Downsizing has eliminated job security. When this happens, employees show no loyalty to the company and will move from firms to firms that pays them more. The mentality then, is like a “gun for hire”.

Turnley and Feldman (1998) also focus on the decreased job security caused by widespread organizational restructuring and the lower levels of commitment that employees have toward their firms as a result.

For a company to have a successful program in their downsizing efforts, various points will have to be addressed. Mabert and Schmenner (1997) discuss the issues of developing a well-detailed plan to train each retained worker to do the work. By doing this, rehire “creep” will not take place. In other words, hiring consultants or rehiring new employees to do the work once done by the laid off employees will not be mandatory. Another part of making the downsizing program a success is to keep the severance related cost to a low level. To do this, the organization should use non-voluntary programs that identify who will be affected rather than using a voluntary program (Lean, Feldman & Tan, 1997). When voluntary programs are implemented, they are often overused by people who have high severance packages. Another problem associated with voluntary layoff programs is that when key employees who are needed often leave, their departure causes a void within the organization. A replacement is often hired which causes an added burden of training the new hire (Mabert, et, al, 1997).

Of course, keeping open communications with each employee is also very important for success in the downsizing efforts. The success of the downsizing effort also involves showing compassion for the employees eliminated. Finally, a good severance package, retraining and counseling of each employee is also of vital importance in maintaining a positive image to the employees retained and also to the customers and public served (Misha, et, al, 1998).

Quite often downsizing also takes longer than anticipated (Mishra, et, al, 1998). By imposing a deadline for downsizing, management is able to lower the anxiety levels of the retained employees. Clearly, some feeling of continuity develops when an individual knows they are going to be around the next day.

Hidden costs, such as the increase of the costs of quality caused by rework, scrap, and also overtime payments to the employees retained due to an increased work load can be lowered by scheduling effectively and handling the employee related matters with openness. A final point in making the downsizing efforts effective is to be able to track your cost efficiently (Mabert, et, al, 1997). Without controls set up within the organization to track the payroll, overtime and cost overruns because of the downsizing efforts, the effort would be futile.

4. The long-term affects of the organizationҒs downsizing efforts.

Whether downsizing is successfully implemented within an organization over a long period of time depends on how the implementation takes place. “Management should never see downsizing as a short-term fix. Instead, it must integrate the decision to downsize into a well-crafted, credible vision that makes clear how downsizing will create a competitive advantage” (Mishra, et, al, 1998, p. 86). This will set the tone of the downsizing efforts as well-coordinated and planned. If downsizing takes place without a detailed plan, its success for the long term is questionable. What develops is a distrust of management and the group that remains within the organization will question the validity of the downsizing efforts. By getting a formal group together to implement the companys downsizing efforts, a smoother transition takes place. In addition, these authors state that the team has to plan and implement the downsizing to represent all membersҒ interest. It is important that employees see that management is looking carefully at everyones needs and concerns. Rousseau, (1995) noted how Xerox lost major market share in the 1980’s. The problems within the organization were, however, minimized when the executives effectively communicated the dire situation Xerox was going through. What these executives received from the employees was greater understanding and a willingness to follow management’s lead in saving the company. Without loyalty from each employee, the implementation and success of the downsizing effort becomes questionable. Turnley and Feldman (1998, p.74) interviewed individuals involved to determine their feelings of loyalty and what they expected of their employer in such situations. Some of the comments show the need for an organization to be open and honest in what will happen:

Shortly after the reorganization, we started to lose employees because someone decided we didnҒt need as many people. No one seems to know how they figured out how many employees we needed, and we simply do not have enough people to do the job that is demanded of us. This is not a good place to work anymore. When the right job comes along, and it will, Ill leave my current position.

I have experienced a series of four mergers and acquisitions during the last twelve years which has resulted in declining levels of my personal responsibility and authority. Changes in corporate culture disrupt career paths, generate concern about job security, and often result in a reduced inner sense of loyalty to the company.

It is apparent then that “Getting smaller is not enough. Downsizing, the equivalent of corporate anorexia can make a company thinner; it doesnҒt necessarily make it healthier” (Haml & Prahalad, 1994, p. 11).

Further research should look at the relationship of downsizing to productivity and organizational effectiveness. Just because the organization is leaner, does not necessarily mean it is more efficient and cost effective. Research also shows that over the long term, the financial health of many organizations diminishes with the downsizing efforts. “Some companies increased profitability and productivity, but for many downsizing has been disappointing” (Mabert, et, al, 1997, p. 46).

“The touchstone of the early 1990’s was corporate downsizing-layoffs, restructuring, recapitalizing, bankruptcy, and emerging from bankruptcy” (Wall Street Journal, 16 March 1994). As the year 2000 approaches a new millennia is emerging in corporate America. Downsizing should not be the panacea for all of an organizations ills, and perhaps this new trend is reflected in many organizationsҒ concerns about their being a limited labor supply at present. “More than half the downsizing firms cut too much of their workforce and have to rehire laid-off employees as consultants” (Mishra, et, al, p. 84).

Conclusion

All of the research on corporate downsizing shows a need for management to be proactive rather than reactive in implementation of an organizational downsizing program. A timeline has to be implemented and a sequence of events must occur before the downsizing occurs. Mishra, et, al, (1998) sees a successful downsizing process requires planning that begins long before the formal announcement. One important aspect of a companys downsizing efforts should be to exhaust all other avenues of cost savings and to use downsizing only as a last resort. One of the reasons for this is that there is distrust from the employees when they see a group of their co-workers being laid off. In addition, management needs to show compassion toward the needs of each individual within the organization. Implementing hiring freezes, salary freezes, overtime restrictions, pay cuts, elimination of bonuses, shortened workweeks, or unpaid vacation will show the employees that management is doing everything they can to save their jobs and to keep the company healthy.

Open communication with the staff is also critical. Mishra, et, al (1998) states that employees who have full knowledge of the companyҒs finances and its industry feel personally in control amid the uncertainty, resulting in less anxiety and distraction. Ideas that help keep the downsizing efforts on track include:

1. Developing a detailed plan to train each retained employee within the organization. This will give the organization a well-trained staff to keep the organization moving. If this is not done, consultants and others could be hired which would keep the fixed expenses high.

2. Do not have voluntary programs for employees leaving with large benefit package. Quite often this creates a situation where the essential employees leave, robbing the organization of its own key people.

3. A program for tracking an organization’s costs in the downsizing effort should be implemented. “Companies need to install cost controls that are appropriate to the evaluation of a downsizing program, one cannot adequately evaluate the benefits from a downsizing program when its costs cannot even be measured correctly” (Mabert et, al, 1997, p.52).

An employee needs assessment has to be developed. The needs assessment should look at :

(a) The employees presently on the job and the employees affected by the downsizing efforts. Mishra, et, al, (1997) advocate looking at the separated, survivors, corporate staff , and other facilities receiving a transfer of people, machinery, or business. This will help identify all aspects of what has to be done in getting the implementation on track.

(b) Placement and counseling from outside experts for all employees downsized.

(c) Managers should also be trained in handling retained employees and also the employees let go. “It should give the managers who execute the layoffs skills and practice in telling employees that will lose their jobs” (Mishra, et, al, 1997, p. 8).

(d) Check yourself often on how honest you are about what is happening within the organization. It is important to let all employees know what is happening. Kinicki (1985) advises that workers who are informed about what is happening within the organization will be able to devise coping mechanisms that reduce their stress levels.

Finally, the book, Executive Blues: Down and Out in Corporate America, by G.J. Meyer (1995, p. 25) sums up the feelings of an individual losing his job to downsizing, something none of us should forget:

I think I can tell you how it will happen, if its going to happen to you. The first thing theyҒll do, when theyve made their preparations, is to get you out of your office and into some other room with some geek from Human Resources...from the moment you pass through his door the HR geek will appear to be in visible pain and eager for you to see it. He wants you to understand that he too is a human being, a nice guy if also a geek, and that his mother didnҒt raise him for this kind of thing. Anyhow, when the geek has delivered his message and demonstrated the depths of his humanity, hell get up out of his chair and come around from behind his desk. YouҒll be drawn up after him by some mysterious force resembling magnetism-you dont know how itҒs happening, but all of a sudden youre on your feet and moving-and together the two of you will glide out the door and down the hall to some smaller office that you probably never noticed before, where somebody youҒve never seen (the outplacement counselor) is waiting to tell you not to worry, everything is going to be fine.

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