Downsizing

Downsizing

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Abstract

With the constantly changing economic scene, companies are left with the task of staying relevant and being sustainable. This has been one of the major reasons of the increase in popularity of downsizing. This involves relieving some employees of their jobs in an attempt to gain profits from operations. As is expressed by Farell and Mavondo, (2004, p. 34),

“Managers resort to downsizing because it is simple, generates considerable “noise and attention” in the organization, and may be viewed by some managers as tangible evidence of their “strong leadership.” However, managers that pursue a reorientation strategy must necessarily engage in the much more difficult intellectual task of deciding how to reorient the organization, combined with the associated challenges of building support, generating commitment and developing a shared vision.”

This method of management has its advantages, as well as some drawbacks, as will be discussed in this paper. For the benefits of downsizing to be realized, a company needs to be fully prepared, and this report touches on what should be included in a post-downsizing plan to ensure that long-term benefits are gained from downsizing. The risks involved in downsizing are also discussed as well as ideas on the measures a company can take in order to evade such risks.

Downsizing

Downsizing is part of the restructuring process of a company in low economic periods where some employees are permanently laid off in a bid to improve the company’s efficiency (Budros, 1999). This is mainly done where a company’s operational costs are high compared to the revenue. Therefore, some personnel cuts are made to reduce the amount of capital used in payment of salaries and wages lowering the operational costs. Downsizing is mostly employed as a last resort as it has the risk of breaking employees’ morale or trust in the company leading to lowered effectiveness. The downsizing process should be planned to ensure that the company maintains its intellectual assets enabling the performance level to remain at its optimum.

How to control the lay off process as a leader

In the layoff of employees, proper planning is vital as layoffs have a potentially fatal effect on the lives of employees who are laid off. Planning is also important as it will determine how the performance of the company will proceed after the process is over. A plan should be put in place determining the criteria to be used in deciding which employees will be laid off, the notice period that will be given and the level of follow up to be done on them. A smooth uncontroversial process will lead to quicker recovery of company productivity.

The legal issues surrounding downsizing should be well understood to prevent lawsuits from employees laid off. For example, a suitable notice time should be given to the employees being fired allowing them to be prepared before leaving the job. The compensation requirements set by the state should be understood and the employees fully compensated before being dismissed. The process to be followed on the day of the lay off should also be well prepared. For instance, on the day of dismissal one should have information ready on the benefits that the employee will receive and if possible, a list of contacts from which the employee can try to seek employment.

Developing an action plan to reduce costs and maintain quality

An action plan will be necessary in the process of downsizing. It ensures that there is a clear vision of how the company will be after the layoff process is complete. It identifies the manner in which the extra work will be re-allocated, the roles that will be eliminated and the new remuneration system that will be implemented. The plan clearly outlines how the new workforce will be managed in order to gain the most benefit from them as the whole idea behind downsizing is to increase efficiency. The action plan should ensure that the entire process results in reduced running costs. It should lead to better management of the remaining workforce that will lead to increased efficiency resulting to increased revenue.

In order to maintain quality in the work of the retained employees, it is crucial to introduce training. Some of the duties of the downsized employees will be transferred to the remaining employees who may be skilled in them. By training them, the quality of the output will be maintained at a high level. Training will also lead to benefit in that it will show the retained employees that they are an essential part of the company boosting their morale to perform and increasing their loyalty. It will lead to long term benefits as the skills gained will ensure retention of the employees eliminating the need for future recruitments (Evans & Lindsay, 1996).

The re-allocation of duties should be done based on the employee’s performance history. Employees who show an ability to acquire skills faster and those who can bring about results at a faster rate have the main roles allocated to them. However, as much as there is a distribution of work based on an individual’s performance, the workload should be well distributed to prevent overworking some employees based on the good performance. Redistribution of the work will ensure that as much as the retained employees’ salary will be increased according to each person’s role, the overall operational cost share for salaries is lower than the initial cost.

Possible options and considerations

Before resorting to downsizing, all possible options should be considered. One option that can be considered is work sharing. In this program, the number of hours worked by employees can be reduced by a determined number of hours. This will lead to the employees sharing the work allocated according to their work period, where each employee’s salary will be based by the work hours. The running costs in terms of salary will be effectively reduced without having to lay off any employee. This option has its drawback as it will lead to reduced morale of the entire workforce because all their salaries will be reduced leading to lower work output. Hence, it is not a viable option.

Another option that can be explored would be to outline the current positions in the department based on their importance, and the overall benefits they have to the department and consequently the company. They can be arranged based on their importance, where those with the least benefit are eliminated, and their roles nullified. This can also be done to positions whose work can be integrated with others in another position of more seniority in terms of returns. The less beneficial position can be eliminated with the roles being re-assigned to the other position.

Downsizing should only be implemented where there is no other workable solution to the predicament at hand. This is because it has been seen to erode employee loyalty and eventually it leads to distrust from customers (Pfeffer, 1998). For downsizing to achieve its long-term goals, human resource needs to be extensively involved in communication with the employees and maintain respectful treatment of the employees (Chadwick, Hunter and Walton, 2004).

Rationale for selecting employees to be laid off

In planning for the layoff process, each individual’s performance should be analyzed. This should be measured in terms of his or her ability to deliver excellent quality based on the set standards, and the creativity in his or her work leading to growth of the company. It should also be based on his or her relations with other department members determining whether they are team players, their ability to meet deadlines and whether they keep time. These considerations will ensure that employees with the best qualities are retained while those who do perform according to the company expectations are dismissed.

This means that the company needs to have a proper performance management system to keep track of the performance of each employee, each department and each position. As the department leader, an effort should be made to know each employee and the benefit they add to the work of the department. For a company’s human resource to be sustainable, the company has to recognize the value and capabilities of its employees and appreciate them (Gollan, 2000). In this manner, the problematic employees will be identified and be short-listed when need for downsizing arises.

This will lead to fairness during downsizing as employees’ work history will determine their performance as compared to other employees. Short-listing for employees to be layoff will also be dependent on their skills in relation to the positions being retained. It would be unfair to retain an employee with exceptional performance in his position if the position is not of much benefit to the company while another employee is more skilled in a job that is being retained. The cost of retaining the employee would be lower than the cost of training the other excellent employee.

Effect of lay-offs on budget

Re-allocation of the funds

According to Farell and Mavondo, lay-offs are preferred by many companies as they offer an easy way to attain a short-term profit increase (2004) and with proper management, it can translate into a long-term gain. This is because the capital that would be used in paying the retrenched employees is diverted for use in other processes that increase productivity. This will have more capital allocated to production processes in the budget translating to an increase in the profit levels while costs on employee salaries will be reduced as the number of employees will be lower. However, the new remuneration system suggested for the employees after re-allocation of duties must be satisfactory for them to take on more work and still maintain a high level of performance. The increased revenue will enable better payment structures as the number of employees will be reduced.

Re-allocating work to retained employees

When employees are laid off, their work is re-allocated according to the predetermined plan. Re-allocation takes place based on skills of the retained employees. In cases where two positions perform functions that are almost similar in nature, one may be laid off and his duties re-assigned to the other. In such a case, retrenchment will be based on the individual performance of the employees. It is also done according to the current duties of the employee. When an employee’s position already has too many obligations, more duties cannot be added to him but are distributed among those with less work in their hand. The employees to whom the work is re-allocated must have some knowledge on the work being allocated to them in order not to compromise the quality of the work done, in a bid to cut costs. In order for this system to work, adequate training must be incorporated into the work program to ensure that the employees acquire the necessary skills in order to better the output level and quality (Evans & Lindsay, 1996).

Communication to employees

To employees lay off

The manner in which communication to employees laid off is handled is as crucial as communication to employees maintained. Each employee’s dignity should be maintained, and each should be informed of the layoff decision early on for psychological preparation. It is also vital to treat all employees with respect, as the employee being laid off may in future be a client to the company. Maintaining a healthy relation with the employees laid off could also help avoid future embarrassments since if they are treated with the respect they might be willing to transact with the company as business associates in future if such a situation arises.

In the current digital society, employees laid off may share their experiences on social media; for example twitter, Facebook or blogging. If the experiences are negative, this will have an impact on the company as the reputation of its management in decision-making and personnel relations will be tainted. It will lead to reduced ability to attract new clients. This will also affect it ability to get new employees as no one will be willing to work in a setting where they are not respected (Redman and Wilkinson, 2001).

To employees retained

Communication is vital as it influences the kind of relationship that management will have with the existing employees. It is essential to have open communication channels so that the remaining employees do not feel left out as this will only increase tension. Open forum staff-meetings can be organized to have the employees ask questions on areas they need clarification. Honest and informative answers should be given, which should be kept on a need-to-know basis to avoid legal matters that may arise. How employee lay offs are handled, has a direct influence on the morale and productivity level of the remaining employees.

Without proper communication of the reason and the plan leading to the layoffs, there will be constant fear in the remaining employees of being laid off leading to constrained relations between employees and the leaders (Brockner, Grover, Reed, DeWitt & O’Malley, 1987). This will affect the quality of work by the employees. It will also show a weakness in the management system as the employees will view the layoffs as a sign of poor management of resources by the leaders, and lack of concern of their welfare. This will lead to the employees losing their respect for their leaders leading to lack of cooperation, which will affect the boss’ ability to have his decisions implemented.

Communication with remaining employees throughout the whole process will be extremely crucial since the jobs done by the employees laid off will have to be re-assigned. With proper communication of the system to be implemented early in the retrenchment process, there will be minimal resistance (Hunter, 2000). The plan put in place should put into consideration the opinions of the employees as this will lead to more responsiveness from them.

As much as downsizing may seem attractive to companies, it should be used only when it is necessary as maintaining a loyal employee base is essential to a company, and it can be achieved by assuring employment stability. Downsizing has an effect of creating tension between employees and the leaders leading to the retained employees, who are the more valuable employees, seeking employment elsewhere. When carried out, downsizing should be done in a sustainable manner to ensure that client trust is not lost and the benefits gained are both short-term and long-term.

References

Brockner, J., Grover S., Reed, T., DeWitt, R., & O’Malley, M. (1987). Survivors Reactions to Lay-Offs: We Get By With a Little Help from Our Friends. Administrative Science Quarterly, 32(4), 526-541.

Budros, A. (1999). A Conceptual Framework for Analyzing Why Organizations Downsize. Organization Science, 10(1), 69-82.

Chadwick, C., Hunter, L., & Walton, S. (2004). Effects of downsizing Practices on the Performance of Hospitals. Strategic Management Journal, 25(5), 405–427.

Evans, J., & Lindsay, W. (1996). The Management and Control of Quality (3rd ed.). New York, NY: West Publishing Company.

Farrell, M., & Mavondo, F. (2004). The Effect of Downsizing Strategy and Reorientation Strategy on a Learning Orientation. Personnel Review, 33(4), 383 – 402.

Gollan, P. (2000). Human Resources, Capabilities and Sustainability. In D. Dunphy, J. Beneveniste, A. Griffiths & P. Sutton (Eds.), Sustainability: The Corporate Challenge of the 21st Century (pp. 55-77). Sydney: Allen Unwin.

Hunter, L. (2000). Myths and Methods of Downsizing. In J. Pickford (Ed.), Mastering People Management (pp. 149-154). London: Prentice Hall/Financial Times.

Pfeffer, J. (1998). The Human Equation. New York, NY: Harvard Business School Press.

Redman, T., & Wilkinson, A. (2001). Downsizing: The Dark Side of HRM. In T. Redman & A. Wilkinson (Eds.), Contemporary Human Resource Management (pp. 356-381), London: Financial Times/Prentice Hall.