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Effects of Downsizing in HRM

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Table of Contents

Introduction 

Organizations always look for ways of maintaining higher profit ratios. Nevertheless, companies do not implement the various strategies used. Downsizing refers to an organization’s reduction of the total number of employees on the operating payroll. This can be done through terminations, retirements, or even spinoffs. Downsizing is different from layoff; it is meant to permanently downscale employees; layoff is temporal downscaling, where employees are rehired after a specific period. Other organizations use various techniques. These include: employees being given incentives to opt for early retirement and move to subsidiary companies. However, most companies used the standard method of terminating the employment of a given number of individuals.

When most organizations face a weak economy and low profits, executives try to solve this through cost-cutting. This includes conducting the downsizing process. Through this process, most organizations can better their earnings for a shorter period as most organizations cannot sustain these gains. This happens as organizations reduce labor costs by laying off employees. However, the hidden costs of downsizing are unbearable to most organizations. This is because the workforce is eliminated from the organization, but the work load remains intact. This can cripple an organization’s effectiveness. The resulting challenge that faces the organization’s managers is that they will be forced to review their system and add costs by introducing overtime program, casual staff, and even longer working hours to recover what has been lost. On top of incurring high financial costs, emotional costs that are immeasurable can be experienced. For the surviving employees, they will have no choice but to work harder than usual. Effectiveness and efficiency are major goals of organization’s retrenchment. Therefore, the business entities can retrench redundant workers to pave the way for mechanized production processes to speed up production and improve the quality of products or services. Gandolfi (2006 p. 2) asserted that the organization used downsizing in the 1990s as a practical measure to increase organizational efficiency and effectiveness. It is a strategic management tool that has affected thousands of organizations and the lives of millions of workers in the world. Companies experience conditions that compel them to retrench a portion of their workforce. The circumstances that cause downsizing include market reduction, economic recession, loss of significant contracts, and technological advancement (Jaques 1994p. 218). Most companies cut staff by around 25 percent. Downsizing is happening across all sectors in the economy.

Effects of Downsizing in HRM

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Downsizing Steps

According to (Kandula p. 131), the company should observe eight steps while conducting the downsizing processes. These are; the first step is the approach. Those involved in deciding who should go should regard it as a long-term approach. Those in the human resource department should be of great importance to the organization and not taken as liabilities. When an organization has opted to downsize, the choice should be viewed as an opportunity for the company and not an abrupt reaction to an emergency. Secondly, there should be proper preparation. This involves three significant events that should be considered by an organization before conducting the downsizing process. Employees should be part of the whole process instead of thinking it to be a top down exercise. The company should also recognize its stakeholders, especially the suppliers and the customers, and let them be involved in the entire process where possible. The company should also ensure everyone becomes part and parcel of the whole process and not regarded as an activity of those in the top positions only. Thirdly, there should be appropriate leadership in the organization during the entire downsizing process. During the exercise, the leaders should always remain visible, easily reached, and communicate without being biased to some of the employees. There should be a proper dialogue among those in authority and the workforce. Useful ways on how to motivate those affected in the whole exercise should be reached. Fourthly, there should be an adequate flow of communication. Employees will always be eager to find out the progress when conducting downsizing exercise. Those in authority should always ensure fast and proper information is given to the employees. Those giving out the required information should be honest. Information should be provided as it is. Fifth, there should be adequate support for all. To those who are victims of the exercise, they should be given a proper safety net. Training is also crucial to ensure the required skills in the organization’s daily operations are not interrupted. The survivors should be listened to and be given assurance of the availability of job security. The sixth step is cost-cutting. For the downsizing exercise to be successful and to have a meaning in the organization, the analysis should be done. There should be a proper analysis of the organization’s events to do away with a lack of skills, invaluable services, and existing unnecessary processes. The seventh involves the appropriate use of measurement. Proper calibrations should be put in place. This enables adequate assessment of the chain of events involved before, during, and after the downsizing process. Appropriate ways of determining various employees’ skills, which are of value and redundant, should be put in place. 

The Eighth step is implementation. Fairness should remain critical in the entire downsizing program. Transparency, the organization’s goals, and objectives for the whole process should be the guiding principles. Human resource practitioners should consider appraisal, reward, selection, development, and even communication. It is crucial to consider employee contribution when conducting the implementation phase carefully.

What Role Does HR Play in the Process?

Successful downsizing is attained when the whole process involves the right people. The plan should be well laid before the function begins. The organization’s team involved should include those in the senior positions in the organization, the human resource officers, and those appointed as the labor representatives. All of them will be of great help as they will play critical roles in the whole exercise. The organization management team will require adequate facts to plan and follow up while reducing the workforce.

On the other hand, employees’ decisions on taking action will depend on their information. The human resource officers will be relied upon extensively to provide internal information. Hence, they should get involved when the process kicks off and be active, visible, and easily reached. This will be of great help to the organization as it will be a source of communication to the entire employee’s team concerning the whole process. Several organizations are in a dilemma on how they can make the downsizing process a success. Companies try to come up with ways of determining whether downsizing is the right or wrong choice for them. The major problem in most organizations is that workers have not been taken to be full business partners. Hence, they are not involved in an early phase when planning to downsize. However, few organizations who have earlier involved the human resource team have conducted the whole exercise successfully in the planning process. Human resource plays a crucial role in helping to smoothen the downsizing process. To most organizations, downsizing is usually viewed as to be chaotic, emotional, and uncertain. To ensure company’s survival in the downsizing process, human resource managers and other personnel must have adequate skills. The human resource department should be able to undertake workforce planning, training, and skills assessment. Furthermore, they should be able to communicate well with the employees.

Human resource department assists in simplifying the whole downsizing process. Through this, companies can retain their competitive position and be able to improve its image and acceptance. When the human resource department is locked out from the entire planning stages of downsizing, the whole procedure becomes chaotic. At the time, employees who are valuable in the organization become victims of downsizing, and the company will have a shortage of good employees. The workforce who could have been given a chance to be retrained in order for them to improve their performance within the organization is also lost. Lack of appropriate information can bring up mistrust of the company’s management team and even weakens the surviving employee’s spirit to perform accordingly. It can also force the organization to call back the employees who have been laid off due to a lack of adequate planning during the downsizing process.

The human resource manager becomes of great importance in the whole procedure. Human resource managers are available for consultation for both the management and the workforce in the redundancy process. They also bring about adequate information for both the unions and the employees of the organization. During the entire process, the employees will be eager to know and even understand the principle behind downsizing. When proper consultation with the union is done concerning redundancies, the whole process is simplified. The human resource manager will play a vital role in explaining the company’s legislation regarding redundancy. Human resource managers also play a significant role in the selection exercise. They are the right officers to determine who should leave the organization and who should remain. During the entire downsizing exercise, they ensure the whole procedure remains just and fair to all. They also provide the selection process has no favoritism. Those who are absent in the organization due to illnesses should not be disadvantaged in the process. Another vital role for human resource managers is to support the entire employee team. To employees leaving the organization, they need to be provided with the post redundancy guidance. The required assistance can be provided in various ways which include: provision of adequate business set up counseling, provision of free elaborate training and loans, retraining those affected in other fields to help them secure jobs elsewhere, and offering sufficient guidance and counseling and appropriate ways of handling stress. The human resource managers are of great help in ensuring those affected are provided with severance pay. The pay is usually given in the form of a lump sum. This gives satisfaction to those who are leaving the organization.

Human resource also plays a vital role for those remaining in the organization. They might be faced with all kinds of fears, including insecurity and uncertainty in the work place. Those who had strong ties with individuals who left the organizations will find it hard to let go. They will always pity those who lost their positions while they remain well placed in the organization. The downsizing process even degrades the moral levels and result in distress among employees of the company. It also impacts negatively on employee’s performance. To tackle all this will not be easy for the organization. Still, with the great effort of those in the human resource department, the organization will manage to recover within a shorter period.

The development of proper business plans is needed from various departments in organizations. This will help determine the success of the project conduct downsizing. Through each department’s business plans, those from the top authority remain confident everyone is involved in the entire process. It also brings unity, and everyone remains optimistic about the whole process. The cooperation of the various departments simplifies the classification of work processes, which will not be of importance to the organization in the future. At the same time, vital functions to the organization are well kept for tomorrow. This way, the whole process runs smoothly. Through the assistance of the human resource officers, the organization can come up with well-planned incentives. This includes: giving employees the option of early retirement and even buyouts. Through the first retirement incentive, the workforce will retire before the usual retirement age but having the advantage of full or reduced pension benefits. On the other hand, buyouts involve employees exiting the organization voluntarily after being given a lump sum payment. When using buyouts, the human resource department helps identify employees entitled to early or regular retirement.

Examples of Downsizing and its Effects

Downsizing is real. According to Donkin (2009 p. 30) and Vucheva (2009), tides of economic crisis claimed over fifty-one million global jobs and pushed the global unemployment rate to 7.1 percent in 2009. Nearly all companies across all sectors undertook downsizing as a strategic management tool to reduce administrative costs and increase effectiveness. DBS bank slashed 900 jobs, Fujitsu Siemens cut 7000 jobs, Philips send-off 1600 employees, Arcelormittal slashed 9000 jobs, and Skanska sent home 34000 workers in recent years. Murray (2001) revealed that radical changes in staff retrenchment became real beginning in early 1980. Rapid economic changes brought about by privatization and regulation waves have rocked the telecommunication industry and caused massive job losses. In the USA alone, 93,000 employees in the telecommunication sector lost jobs between 1983 and 1992. This is because the telecommunication industry, which had been laden with staggering debt levels, was shunned by the financial markets. According to the International Labour Organization, France Telecom slashed 14,000 jobs between 1994 and 1999, Deutsche Telekom sent home 61,000 workers between 1993 and 1999, while BT reduced its workforce by 120,000 between 1991 and 1996. To illustrate the downsizing more explicitly, British Telecommunications Company is a case under scrutiny. The company had no option but to cut down the number of staff and restructure its operations to remain afloat in the rapidly changing telecommunication industry. The company sent workers home with a view of improving its financial performance. BT was established as a state monopoly in the 1980s. At that time, the telecommunication industry was not subjected to privatization and deregulation. 

Deregulation in the telecom sector in the UK in 1991 introduced cutthroat competition, increasing operation costs, and massive technological revolution in the UK telecommunication industry. Consequently, BT could not stand the forces brought about by sector deregulation. It consolidated all its operations as it tried to remain competitive and relevant to the changing telecommunication sector. The company was put pressure to cut on the overall costs, and thousands of jobs that were once secure, certain, and predictable were cut within five years. 

BT reduced its workforce from 250,000 in 1989 to 130,000 workers by the end of 1996. The company began its downsizing by calling on its employees voluntarily leave the company. The voluntary option caused 6,000 managers to leave their jobs. Also, the company froze all job recruitment. By the end of 1991, 25,000 workers had left through natural attrition and voluntary release. At one point, in the five years, 19,000 employees left the company in a single day. Downsizing at BT was accompanied by generous leave terms depending on the worker’s age, service that the worker was offering, and the amount of pension already contributed. The generous package made 46,000 employees apply for voluntary leaving, but the company permitted 30,000 workers to go. This is because the other 16,000 employees were considered vital assets to the company and could not escape.  

Effects of Downsizing

The effects of downsizing have been felt across the organization and society as a whole. Labour laws impose lengthy processes before retrenchment is implemented. However, it needs to be faster to reduce the traumatizing effects in the affected workers. The research revealed that 25 percent to 50 percent of downsizing companies did not achieve improved productivity, increased profits, or higher returns on their investment as predicted before the retrenchment exercise. Those who left the company were also offered temporary work at the company and free counseling on how they will continue living when they leave the company. Those who left the company may perceive unfairness, feel survivor guilt, lose friends, close colleagues—downsizing induced paradigm shift and culture change among employees. It generated a negative feeling to some of the existing employees. There were increased workloads and targets for the remaining employees, reduced commitment to the BT goals, loss of friends and close colleagues, lower morale, job insecurity and uncertainty, higher staff turnover, increased absenteeism, risk aversion, and poor performance. To the trade, unionists threatened to institute industrial unrest to stop the retrenchment exercise. Retrenchment also reduced productivity and increased depression at BT. 

Bibliography;
  • Anderson, V 2004, Research methods in human resource management, CIPD Publishing, London.
  • Denison, RD 2001, Managing organizational change in transition economies, Routledge, London.
  • Donkin, R 2009, The Future of Work, Palgrave Macmillan, London.
  • Ed, Schneier, C 1994, the training and development sourcebook, 2nd ed, Human Resource Development, Massachusssetes USA.
  • Gandolfi, F 2006, Corporate downsizing demystified: a scholarly analysis of a business phenomenon, ICFAI Books,
  • Jaques, E, Clement, DS & Lessem, R 1994, Executive Leadership: A Practical Guide to Managing Complexity, Wiley-Blackwell, Oxford.
  • Kandula, S 2004, Human Resource Management in Practice: With 300 Models, Techniques and Tools, PHI Learning Pvt. Ltd, New Delhi, India.
  • Sarah Murray, S 2001, More jobs are on the line as sector restructures Financial Times Sep 19 2001, viewed 6 January 2004 < http://specials.ft.com/telecoms/sept2001/FT3X1389QRC.html>.
  • VUCHEVA, E 2009, Global job losses could rise by 50 million in 2009, Euobserver.com , viewed 8 November 2010 <http://euobserver.com/9/27491>.

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