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Saturday, July 29, 1995

Avoiding the Perils of Downsizing

Avoiding the Perils of Downsizing

Martin G. Evans, Hugh P. Gunz, R. Michael Jalland

Faculty of Management, University of Toronto

Financial Post July 29, 1995
Mr Gordon Thiessen and his senior colleagues at the Bank of Canada have demonstrated very clearly the perils of organizational downsizing. Recent research that compares successful with unsuccessful downsizing strategies shows the importance of maintaining consistency throughout the process; consistency of strategy and consistency of treatment of the people involved. The experience at the Bank of Canada was somewhat different.
A 1994 restructuring of top management resulted in one fewer deputy governor, and concomitant increases in responsibility for those remaining. Mr Thiessen reallocated part of the missing deputy governor's salary to the remaining four. Then on July 6, 1995 it was announced that a further 600 jobs are to vanish from the Bank. It is unclear whether the affected employees will enjoy a pay increase, but this seems unlikely as public pressure has forced Mr Thiessen to rescind the previously announced gubernatorial pay increases.
This is not the right way to go about it. The research of Kim Cameron and his associates at the University of Michigan has shown that failure to share the pain is one of the major reasons that downsizing fails to return the expected economic benefit. In other words, downsizing often fails because top management do experienced by those lower in the organization. Investigators (e.g., The Wyatt Company, 1994, Best Practices in Corporate Restructuring) have found that the economic gains from downsizing for the firm are below expectations .
Why are the gains expected by top management unrealized? One important reason is that downsizing is usually not undertaken as part of a broader strategic repositioning of the firm. Positioning downsizing within a strategic context is essential to ensure that the firm cuts in the right places and reinforces its most promising activities. This also serves to maintain a clear direction to the surviving employees. Without the strategic focus, the motivational opportunities in a new definition of organizational purpose are lost and survivors look to their own interests. Employees who have been demoralized by their colleagues' layoff may also reduce their effort. Alternatively, they may systematically soldier on in the job to make the work last as long as possible.
A second major reason is that, despite their best intentions, some firms risk cutting muscle instead of fat. They can lose key competencies or the tacit knowledge required to do the job. The success of most organizations depends as much on the knowledge and discretion of employees as it does on the rules and regulations formalized in organization procedure manuals (which tend to run well behind current practice anyway) as demonstrated by Kim Cameron's most dramatic example:
"... a purchasing agent was offered an incentive to retire early. ... over the years, modifications in the types of steel and alloys being ordered had been made. ... changes in the written specifications had not kept pace.... an order placed for steel following the precise written specifications... produced a $2 million loss for the organization in downtime, rework, and repair. The organizational memory, as well as the expertise needed to do the work, left with the purchasing agent ... because of the non-prioritized method used in downsizing."
At the senior level one study (by Richard D'Aveni of Dartmouth College) has shown that declining firms lose the voice of important functions, Production and R&D, in the senior councils of the organization.
Are all corporate downsizings stories of failure? Some succeed, or at least, do not fail as badly as others. Kim Cameron and his co-authors note that effective downsizing requires a paradoxical mix of activities:
1. Implementation from the top (by example), but with input from knowledgeable people at the lower levels.
Top level commitment to the program has to be clearly demonstrated, not only in what people say but also in what they do. A successful downsizing is usually preceded by the rigorous cutting of unnecessary cost items. Employee cuts have to be matched by cuts at the senior level.In addition, top management is responsible for ensuring consistency of implementation across the organization (or the targeted units). Since top management does not know what cuts should be made at the lowest levels, employee input is essential.
2. Short term across the board reductions coupled with a long term focused, strategy-based follow-up. A short sharp shock seems necessary to draw attention to the severity of the problems in order to mobilize energy for the future. But successful downsizers followed this immediately with a set of strategy-based actions: examining, through employee groups, which tasks should be performed; examining the firms' functions and product or service lines to see which could be kept and which not; and then making the appropriate precision cuts.
3. Attention to BOTH the people laid off AND to the surviving employees:
a) Firms undertook the downsizing with scrupulous attention to the principles of procedural justice which include: employee influence, consistency, fact-based decisions, understanding of the process, right of appeal, and integrity. Organizations that followed these procedures were able to minimize, though not remove entirely, the distress felt by those laid off.
b) There was stepped-up communication with employees to ensure they knew what was happening in the company. They signaled when the downsizing episode was over and that growth had resumed.
c) Coupling the downsizing with strategic change also has motivational effects. Employees are challenged to learning the new things rather than dwell on the stress induced by overwork.
4. Offset internal cuts by simplifying external relationships. Focus on both the internal operations of the firm as well as its relations with other firms. When cuts are made in parts of the organization that deal with suppliers, distributors and customers, there are fewer resources available for purchasing, marketing, and sales. This can be offset by dealing with, for example a couple of suppliers for a component rather than a dozen.
5. Increase the autonomy of operating units, and at the same time increase centralization of critical company wide functions.
Here again, the nature of the business greatly affects what is best centralized and what is best decentralized. These decisions, in the successfully downsized companies, were made through careful analysis by employee teams in the organization. Some situations call for an organization wide sales team (when all products are sold to similar customers); in others, it makes sense for sales to be attached to an autonomous business unit.
There is one thing more, which emerges from our own research: downsizing has an important impact on the career systems of the organization. Most organizations, over time, develop a career logic that exemplifies the route to the top. When there is a major downsizing, the route becomes less clear: there may be fewer layers or fewer lateral positions to traverse. As a result people do not understand what is expected of them if they are to have the opportunity to rise in the organization. This should be explicitly addressed after downsizing.
The key seems to be to treat downsizing like any other major change and to remember the words of Machiavelli on the difficulty of initiating "a new order of things." Because it is so difficult, it may be better to consider other solutions (such as temporarily cutting working hours and salaries across the board, bringing contracted-out work into the firm, redeployment or secondment of employees) rather than risk the perils of downsizing. Indeed when the current job drought ends, many firms will regret that they downsized so arbitrarily. Those firms that maintained their commitment to their employees will benefit, as they always have, in the coming upturn. Still, presumably there will always be a Bank of Canada.