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Monday, December 29, 2008

OP-Ed on Downsizing

Published in the Providence Journal This is no longer on their website.  Here it is:

What to do about Downsizing?

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

Rotman School of Management, University of Toronto

We are entering a period during which layoffs and downsizing are dominating the business pages. Firms that just a year ago were riding high with enormous profits (and concomitant bonuses for their top managers) are now retrenching and laying off personnel by the thousands. Many firms in Massachusetts and elsewhere have announced reductions in their workforce.

During the last round of downsizings in the early 1990's, organizational researchers such as Kim Cameron of the University of Michigan found that there were good and bad ways of managing the downsizing process. Our examination of recent reports of downsizing events suggest that we have forgotten those important lessons.
Effective Downsizing

Downsizing is only effective if it is undertaken in the context of repositioning a firm’s strategic direction. For alll  firms that face cost control issues, it is essential that if they choose the downsizing route, they have in place a clear strategic focus about where the firm is to focus its attention after the cuts have been made.

As well as the strategic link, the second most important characteristic of a successful downsizing was the fact that top management shared the pain. That is top management took compensation reductions at the same time that they asked for sacrifice from the employees. This doesn’t seem to be the pattern in the firms that I have read about recently.

Finally effective downsizing was coupled with a high level of communication between top management and both those laid off and those who survived. It is especially important that the survivors be told about the place that layoffs play in helping develop the new strategic thrust of the organization. This gives them confidence that top management knows what it is about and that they see how they personally will be making a contribution to this new direction.

Alternatives to Downsizing

In these days of retrenchment, downsizing is not the only way to deal with the problem of reducing costs. In fact, a survey in the 1990's by the Wyatt Company (Best Practices in Corporate Downsizing, 1994) found that only 20% of the firms met their cost cutting goals. It is therefore useful to suggest some alternatives

First, firms where a high proportion of compensation is achieved through bonuses can reduce costs by omitting bonuses from the paycheck. Second, in all firms, staff at all levels throughout the organization – including those at the top – can take a pay cut and a cut in hours until conditions improve. This is far less disruptive both to the firm and to the individuals involved than wholesale layoffs. If a permanent reduction in force is required it can then be achieved through attrition. This is also an economically effective strategy as it does not involve having to make large severance payments to laid off employees. Of course, when all around you are downsizing this is a good time to pick up talented employees to help the firm grow in its new strategic direction..

One thing to do; One to avoid

One other thing: during downsizing, firms will have to invest in training. With a new strategy, staff in declining segments of the business will have to be retrained to be effective in the businesses that the firm is now emphasizing. As people leave through attrition, existing staff will need to be trained to replace them.

And one thing to avoid: buyouts. That is the worst way of downsizing. The most competent people at each level will take the buyout, leaving the less effective behind. This is the last thing a firm needs when it is experiencing business losses.

As we enter another round of reductions in force, layoffs, or downsizings, let us not forget the lessons from the early 1990's: following these best practices can help the economy, the firms involved, and above all their employees. 

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