Some Comments On Downsizing

There is a misconception that downsizing is a one-off strategy to solve some immediate crisis, and leads to stability and growth by improving efficiency and production through cost-cutting

Since 1991, organisations that have downsized around 50% have had to replace staff, and 80% of these organisations have experienced increased job stress and symptoms of "burn out" amongst the employees who remain

Around 1/3 of Australian and New Zealand organisations that have downsized have reported some benefit, 1/3 had no benefit and 1/3 had negative effects

A study in Australia and New Zealand of the firms employing over 100 staff shows that:

- most organisations that had downsized got sucked into a downsize syndrome ie 71% do it more than once, and 44% do it more than 3 times

- only 24% of those that downsized had started to grow, and 48% ceased to exist, ie closed, taken over or merged

- downsized organisations often ended up with a higher ratio of managers to workers, ie more expensive labour costs

- organisations which had downsized employed casual labour and contractors at the same rate as growth-orientated organisations

- downsizing is expensive, ie costs include benefit payments, out-placement, damaged trust and credibility, and loss of knowledge. On top of this is the cost of re-hiring people once the recovery comes. This has been estimated (Fiona Smith 2009j) to cost around 2.5 times the salary for a middle level professional manager; this includes recruitment costs, loss of productivity, time to settle into new position and missed opportunities. Furthermore, around 50% of new staff fail within the first 2 years. This all adds up to around 5 times the annual salary. In other words, keeping people (and even training them) is a much cheaper option than retrenchment.

- downsizing reduces

i) employees' loyalty to an organisation

ii) trust in an organisation

iii) job satisfaction

iv) staff motivation

v) morale amongst the staff

- while downsizing increases concern about security (job and organisation)

Thus downsizing

"...can often cost a company more than it will save in payroll costs. The loss of corporate knowledge, the attack on staff morale and a plunge in customer confidence can be devastating..."

Wayne Cascio as quoted by Fiona Smith 2009

Another negative effect of downsizing is "survivor sickness". Downsizing survivors go through the kind of psychological journey associated with traumas such as plane crashes. They often feel guilty for their good fortune and wonder why they have survived while their colleagues have not. They don't feel worthier, just luckier, and concerned that their luck may run out!!!!

Research (Fiona Smith 2009i) has shown that the stock market punishes firms that sacked a lot of staff. For example, firms that have laid off more than 10 percent of staff have had a negative price movement of around 40% while the average S & P 500 gained 4%. This has been explained by the market seeing downsizing as a symptom of failed strategy.

Downsizing is an example of the pressures for short-term results that can lead managers to sacrifice capabilities vital for sustaining long-term performance

The main aim of downsizing is to reduce costs. On the other hand, globalisation means that organisations in Australia can never be the lowest cost producer as some-one else will always have lower costs.

Downsizing has been described as an "instead of" policy. It is done instead of

- re-envisioning organisational goals

- anticipating customers' needs (present and future)

- finding more efficient and cheaper ways to provide goods and services

- offering a superior product

- reinventing the organisation

The best predictor of whether a firm is going to downsize this year is whether it did so last year!

(sources: Craig Littler et al, 1996; Aust. Financial Review, 1997; Robert Kriegel et al, 1996; Fiona Smith 2009i)


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