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Strategic Human Resource Management

What is Downsizing? A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance. A reduction of the workforce is one of only several possible ways of improving profitability or reducing costs.

Why do Firms Downsize? Reduce costs Reduce layers of management to increase decision making speed and get closer to the customer Sharpen focus on core competencies of the firm, and outsource peripheral activities Generate positive reactions from shareholders in order to improve valuation of stock price Increase productivity

Alternatives to Downsizing
Employment Policies Attrition Hiring freeze Cut PT employees Cut interns Cut temps Voluntary time off Reduced work hours Changes in Job Design Transfers Relocation Job Sharing Demotions Pay/Benefits Training Policies Pay freeze Retraining Cut overtime pay Use vacation & leave days Pay cuts Profit sharing or variable pay

Need to reduce costs
Alternatives To Layoffs Voluntary Quits Voluntary Workforce Reductions Involuntary Separations

Early Retirements



Downsizing Effects: Overall

Mixed effects on firm performance: some shortterm costs savings, but long-term profitability & valuation not strongly affected. Firms reputation as a good employer suffers. Example: Apple Computers reputation as good employer declined after several layoffs in 1990s. Downsizing forces re-thinking of Employment Strategy. Lifelong employment policies not credible after a downsizing. Example: IBM abandoned lifelong policy after several layoffs in early 1990s.

Downsizing Effects: Employee Morale

Employee motivation disrupted: increase in political behaviors, anger, fear - which is likely to negatively impact quality of customer service Violation of psychological contract, leads to cynicism, lowered work commitment, fewer random acts of good will Survivors experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings

Downsizing Effects: Workforce Quality

Many senior employees leave due to application of early retirement incentives: result is loss of institutional memory. The use of voluntary workforce reductions (buyouts) results in the most marketable employees leaving (stars) -- difficult to control since all employees must be legally eligible to qualify. Early retirements & voluntary reductions often result in too many people quitting, and some are hired back as consultants at higher cost to firm.

Downsizing Effects
Downsizing Works Best When: Changes in Strategy, Organization structure and Culture accompany job cuts of downsizing Weak business units and plant closures are used as basis of reductions, rather than across the board cuts affecting all units (including healthy ones)

Downsizing and other HR Systems

Loss of training investment from turnover

Reputation effects on recruitment

Employee Relations
Morale of survivors


Performance Management

Severance pay & benefits

Reward Systems
Performance evaluation as layoff criteria



Downsizing is a commonly used euphemism which refers to reducing the overall size and operating costs of a company, most directly through a reduction in the total number of employees. For employees, downsizing can be very unnerving and upsetting.

Outsourcing is the process of contracting a business function to someone else. Two organizations may enter into a contractual agreement involving an exchange of services and payments. Outsourcing thereby helps the firms to perform well in their core competencies and thus mitigating rise of skill or expertise shortage in the areas where they want to outsource.

Critical Thinking Questions 1. Which is a better criteria to use as the basis for downsizing employees: seniority or performance? State your reason. 2. Is there a set of best practices to let an employee know she/he has been downsized? 3. Under what circumstances might a companys managers prefer to use layoffs instead of early retirements or voluntary severance plans as a way to downsize the workforce?