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Downsizing

HR Management MBAO 6030

MBAO 6030 Human Resource Management

Downsizing
What is Downsizing? A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance (Robbins & Pearce, 1992). A reduction of the workforce is one of only several possible ways of improving profitability or reducing costs.

MBAO 6030 Human Resource Management

Downsizing
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
MBAO 6030 Human Resource Management

Downsizing
(Gomez-Mejia, Balkin & Cardy, 2001)

Need to reduce costs


Alternatives To Layoffs

MBAO 6030 Human Resource Management

Alternatives to Downsizing (Gomez-Mejia, Balkin & Cardy, 2001)


Employment Changes in Pay/Benefits Training Policies Job Design Policies Attrition Hiring freeze Cut PT employees Cut interns Cut temps Voluntary time off Reduced work hours Transfers Pay freeze Retraining Relocation Cut overtime Job Sharing pay Demotions Use vacation & leave days Pay cuts Profit sharing or variable pay
MBAO 6030 Human Resource Management

Downsizing
(Gomez-Mejia, Balkin & Cardy, 2001)

Need to reduce costs


Alternatives To Layoffs Early Retirements Voluntary Quits Voluntary Workforce Reductions Involuntary Separations

Layoffs

Outplacement
MBAO 6030 Human Resource Management

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.
MBAO 6030 Human Resource Management

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
MBAO 6030 Human Resource Management

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.
MBAO 6030 Human Resource Management

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)
Source: Cascio et al. 1997

MBAO 6030 Human Resource Management

Downsizing and other HR Systems


Loss of training investment from turnover

Training
Reputation effects on recruitment

Employee Relations
Morale of survivors

Employment

Downsizing
Performance Management Reward Systems

Severance pay & benefits

Performance evaluation as layoff criteria


MBAO 6030 Human Resource Management

Downsizing
Critical Thinking Questions 1. Which is a better criteria to use as the basis for downsizing employees: seniority or performance? State your reason. 2. Should employers give future notice to downsized employees, or tell them on the day they are expected to leave the firm? 3. Separation pay is voluntary. What benefits do firms get when they give separation pay to employees in a downsizing?
MBAO 6030 Human Resource Management

Downsizing
Critical Thinking Questions 4. Is there a set of best practices to let an employee know she/he has been downsized? 5. 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?

MBAO 6030 Human Resource Management