Government Downsizing

 Cambridge Day February 2025

When will they ever learn: Downsizing?

In the 1990’s there was a major wave of downsizing in North America. Students of organization studied this process in some detail and came up with a series of recommendations about whether to downsize and the best way of doing so.

Downsizing alone was rarely successful in terms of achieving an organization’s long-term goals of competitiveness and profitability, though short-term cost savings were sometimes achieved.

There were two bedrock principles that were found to be essential if downsizing were to be pursued effectively. First, downsizing must be guided by a clear strategic plan that refocuses the organization on its core activities. Secondly, there must be a sharing of the pain by the senior management of the organization.

The call by Elon Musk, supported by the so–called President, Donald Trump, is the worst possible way of implementing layoffs.

They called for millions of employees to resign their offices in exchange for a few months extra salary. Any one can take it: no analysis of which parts of government needed to contract or which need to be reinforced. There was little constraint on who might or might not take the buyout. And, in the background, there was the implicit threat that people might be fired in the future; hopefully after an analysis of where the needs were. 

In this form of reducing payroll, the people who are going to take up the offer are the best and the brightest. They are the people who have deep connections with the environment in which they work and with the clients that their departments work. They are the people that can immediately move into decent jobs.

Departments will be hollowed out. The tacit knowledge based on their experience in the agency will be lost. The remaining officials will be handicapped in performing the work that needs to be done.

I would have expected Mr Musk, an experienced business man, and his advisors would have known this. Mr. Trump not so much.

It is time to pause, to engage in sensible analysis, and not to ride rough-shod over the Congress, and the laws, and the Constitution of the United States.

Oh, and I do not see Mr. Musk and Mr. Trump sharing the pain.

Conditions for successful downsizing

 

Downsizing is only successful in the long run if two conditions are met:

• that the layoffs are structured according to a well-defined strategy, and
• top management shares the pain though significant salary reductions.

GBH has met the first condition through its strategy of cutting local news television. I regret the loss of those programs but, unlike WBUR, GBH has a strategy. However, GBH's failure to cut top managements' salaries is a severe impediment. Remaining employees will be resentful, and this may reduce commitment to the new strategy.

DOWNSIZING: WHEN WILL THEY EVER LEARN.

 My latest on the process at WBUR is on Medium

Downsizing at WBUR

Downsizing 2022 style.

 You can find it here: Boston Business Journal: Downsizing.2022 style</p>

In case you are blocked by the firewall, here is what I wrote:

It is never a good time to get laid-off, the shock of being fired is traumatic. It is probably not assuaged by knowing that 10,000 others are being laid off at the same time, though it may be comforting to know that you are being forced into a labor market with a 3.5% unemployment rate as opposed to the 6%  rate of the early 1990's when downsizing became the managerial fad of the day. For those laid off by firms in the high technology industries (Amazon, Facebook (META), Microsoft.  It is also good to know that there is great demand for high technology workers in low technology firms as they adjust to the new realities of an on-line economy

In the 1990's when the first waves of downsizing occurred, it was clear that not many firms enjoyed the long term cost reductions that motivated lay-off in the first place – one estimate (Wyatt Company, now Watson-Wyatt) suggested that about 25% of downsizing forms benefitted. This because firms went about it by across the board cuts which are less effective than targeted cuts and by failing to consult employees which led to a failure to understand where the flab in the company ended and where bone and muscle began.

With such a low success rate, firms should consider alternatives before choosing layoffs: reduce or eliminate bonuses; in these post-pandemic days, reduce facilities costs by moving to at home work; and temporarily cut hours and cut wages and allow permanent downsizing to occur over time through attrition. This is much less disruptive to the firm which might otherwise suffer loss of important tacit knowledge, as seemed to happen in the disastrous, chaotic Twitter reorganization after the Musk takeover.

In undertaking downsizing, I think some firms may have learned the lessons proposed by organizational scholars, Wayne Cascio and Kim Cameron, for successful downsizing that they discovered after the downsizing events of the 1990's.  There were two major findings:

$                                  Downsizing should be undertaken in the service of a strategic shift; units compatible with the new strategy should be reinforced, units lacking such compatibility should be downsized.

$                                  Top management should share the pain by taking significant salary reductions for the year(s) layoffs were occurring. 

When we look at the downsizing decisions of the major technology companies, we find that the first lesson has been incorporated – at least in what the CEO’s say to their employees and the public.

At Microsoft, CEO, Satya Nadlia, announced the layoff of 10,000 employees (about 5% of the workforce). She explicitly said “we will continue to invest in strategic areas for the future, meaning we are allocating both our capital and talent to areas of secular growth and long term competitiveness for the company while divesting in other areas.” She did not explain which areas would grow and which would shrink.

At Facebook, CEO, Mark Zuckerberg, announced a layoff of 13% of the employees (about 11,000 employees). Again he is explicit: “We’ve shifted more of our resources onto a smaller number of high priority growth areas - like our AI discovery engine, our ads and business platforms, and our long term for the metaverse.”                                                                    

At Amazon, CEO, Andy Jassy, announced a layoff of 18,000 people (about 1% of the workforce). . He was much less explicit about a new strategic direction, but he did say where the cuts would be focused: initially in the Devices and Books businesses (with a voluntary buyout program in Human Resources; voluntary buyout programs are the worst way of downsizing; the most effective employees are those most likely to take the buyout) followed by a second required round in Stores and Human Resources (PTX).

None of these downsizing companies announced that members of the top management team would share the pain by taking salary reductions.

Goldman-Sachs seems to have partially learned both lessons. Although it did not announce areas which it would reinforce, it did target its cuts in the investment management and global markets divisions.  The CEO, David Solomon ,shared the pain by taking a pay cut from about $37 million to $25 million. In addition, they minimized the number of layoffs by cutting bonuses to junior employees from $95,000 to about $12,500.

So 30 years on from the coining of the term downsizing, some firms have learned from the efforts of management researchers. They have improved how they carry out downsizing, but they have not learned the bigger lesson: it is better not to downsize at all.

Layoffs

Scroll down for my letter on layoffs

https://www.bostonglobe.com/2020/03/14/opinion/preparing-bumps-ahead/

Outsourcing Plans at the MBTA

Wishful Thinking at the MBTA

For over 15 years, the MBTA has subcontracted its Commuter Raile Service to private companies. It is generally viewed that the Commuter rail has not been well run.

Now, the T -- relying on hope over experience -- plans to outsource its maintenance activities to the private sector. This is madness. Managing a contrattor is at least as difficult as managin in-house employees. In house, you have diorect influence over employees' behavior. With contractors you don't. All you can do in the face of poor performace is abrogate the contract and then suffer the disruption of trying to find a replacement.

It is an embarrassment that in a city with half a dozen world class business schools full of Operations Managemnt faculty memebers that the T cannot manage its maintenance operations effectively. This is not rocket science; this is a well undertood process. 

The T should not outsource this problem. It should work hard to get its house in order and improve its operations.

Sent to Boston Globe

Downsizing in the Commonwealth

OPED in Metrowest Daily News

Avoid Layoffs

Op Ed in Providence Journal.

Furloughs, but Paydays for the Brass

Your story about the management excesses at Gannett at a time when the firm was laying off staff and insisting that the survivors take furloughs shows the disconnect between the executive suite and the ordinary worker in America today (Furloughs, but Paydays for the Brass, New York Times, April 11th., 2011: B1, B3).

But it is a disconnect that will come at a price. All the research on downsizing, except that following a merger, shows that the economic benefits of downsizing are unlikely to occur unless a firm's top management share the pain -- something that Gannett claimed would happen but then failed to implement (with top team bonuses totaling $3 million). We can therefore expect that Gannett will continue its inexorable financial decline.

There is one simple way to change the situation. Let differential responsibility be reflected in basic compensation. But let every employee share the same percentage bonus (based on overall firm performance) as that of top management.

Lessons on cost cutting from the 1990's

Op-ed National Post

Lessons on cuts from the 1990's

Op-ed National Post

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. 

Alternatives to Downsizing

Alternatives to Downsizing

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

Rotman School of Management, University of Toronto

Financial Post April 27 1996 Downsizing has been a pervasive managerial practice for the past ten years. It has been the unquestioning norm that, if a company finds itself in financial difficulties, THE way out is to downsize by cutting personnel. Yet concern is growing about the human costs that accompany downsizing, and questions are being asked about its impact on the macro-economy: as more people are downsized out of jobs, who is there to buy the downsized companies' products? Furthermore we now know that downsizing rarely returns the benefits expected of it: a downsized firm is often worse placed, not better, to compete.
Does that mean that downsizing is always to be avoided? Clearly not; sometimes it is unavoidable, and in previous articles (Financial Post July 19, 1995; February 24, 1996) we discussed some of the best practice procedures that firms can use to accomplish downsizing effectively. But there are alternatives which it may well be wise to consider first, before taking the risk of joining the 80% of firms dissatisfied with the outcome of their downsizing activities, and we list some of them in this article.

Alternatives to downsizing

Over the past decade, a number of companies have resisted the downsizing fad and made alternative arrangements. These alternatives typically exploit the skills and expertise of their employees rather than losing them and expertise can be lost just as surely in "survivors" as it is in those who leave. The central paradox of downsizing is that the very people who are likely to suffer the job cuts are expected to be the source of accurate information about what to cut. But anyone fearful that their is job at stake is sure to develop rationalizations and good rationalizations about why their jobs should be safe in the coming organizational decimation.
Although alternatives to downsizing do exist, managers, especially in the public sector, need reminding of them as the siren call to downsize dominates the political agenda.
1. Adopt a compensation system similar to that used by many large Japanese firms: a base salary coupled with a bonus based upon profitability and exceeding performance standards. If the bonus in the most profitable year is about 20% to 25% of base salary, then in years that the firm is not profitable, a major cost saving can be achieved without layoff. This tactic requires a proactive stance by the organization. The new compensation scheme has the best chance of adoption when the firm is fairly profitable, not when cost reductions are imminent. In situations where employees are unionized, the scheme can be negotiated as a way of securing job security -- a priority item with today's unions. Unfortunately, for obvious reasons, this tactic is unavailable to public sector managers.
2. Share the cuts across the organization. Rather than firing 10% of the workforce, all members of the organization can take a 10% cut in both hours of work and pay. Perhaps surprisingly, this is the alternative for which employees often vote given the chance. It attracts a number of objections:
If coupled with a reduction in the number of functions performed, or in the services and product lines delivered, it may be necessary to reassign and retrain employees from the discontinued work areas.
Fringe benefit costs will not be proportionately reduced (they represent semi-fixed costs) so that a larger percentage of salary cut may be required. However these costs are, in the short run, likely to be less severe than the costs of downsizing.
Reducing wages renders the firm uncompetitive in the labour market. There are three responses. First, if the firm is considering downsizing then allowing some people to be attracted away helps achieve that aim; although it is the good people who have the most mobility, these are the same people who typically leave when the firm downsizes anyway. Second, it is often better to retrain some of the existing workforce than to go through the expensive and risky process of hiring . Third, the compensation cut is temporary: it can be restored when the firm recovers from the current crisis. Such an action can enhance the attractiveness of the firm in the external labour market.
3. Adopt the "hour bank", a strategy recently adopted by BMW in Germany. A variant of flexitime (also first introduced at BMW), employees who are asked to work overtime probably when the economy is booming can, instead of receiving overtime pay, bank those hours. Then, if the firm has to go to a shorter work week, the employees can draw on their banked hours and receive full pay for working a partial work week.
4. Instead of contracting work out, the organizations can reduce the amount of work contracted out and bring the work "in house." For example components usually bought can be manufactured, services bought outside can be performed in-house. The feasibility of this approach will depend upon the skills and competencies of the current work force as well as the status of existing contracts with suppliers.
5. Services or products currently provided to in-house departments can be sold to outside customers. For example, the cash management services provided by banks, or internal consultants in MIS selling their services externally.
6. Use staff more flexibly. As some parts of the business expand and other parts decline, employees can be transferred from one to the other. This, of course, requires additional training to ensure that the transferees have the knowledge and skills to do the new tasks. Skilled employees can be assigned as trainers to keep training costs down. This may also require the geographical relocation of employees. The strategy followed by IBM for forty years (but which it has recently abandoned), it is still used by companies such as Hallmark Cards, Hewlett Packard, and Federal Express. Often, the firm benefits if it breaks out of the conventional narrow concept of the degree of flexibility that is possible. In some case (e.g., Hallmark Cards) factory employees are retrained for office jobs. This ability to escape conventional views of which person is suitable for which job enables the firm to develop creative solutions to the cost containment problem. In addition, the payoff to the organization from retaining and retraining workers, in terms of increased loyalty from employees, is incalculable. If people believe that there will still be a job for them in the organization, they will be more likely to develop innovative cost cutting ideas. Absent that belief in the ultimate security of their position, such suggestions are unlikely to be broached.
7. Make more use of Part-timers, Sabbaticals and Leaves of Absence. Not every employee wants to work full time. Employees can be polled for the kinds of flexible arrangements they prefer. Some full time employees who are later in their career can welcome the chance of a part-time, part pay schedule. Others might opt to take a leave of absence for a year. Yet others might prefer a deferred compensation arrangement in which they work full time at 80% salary for a number of years and then take a full pay sabbatical. Freeze hiring. Again this means reassigning people to new positions with concomitant retraining costs.
Paradoxically, there are even advantages to hiring when the rest of the world is downsizing:
a. When firms are downsizing and jobs hard to find, the quality of applicants is much higher than at other times in the economic cycle. This is manifested in two ways: first, in the skills and competencies of the employee; secondly in their commitment to work. By comparison, at the peak of the economic cycle good people are harder to find, more expensive, and more readily lured away by better offers elsewhere.
b. The demographic mixture of the organizational "survivors" is not skewed severely. Under most downsizing scenarios, older people leave the organization taking their experience with them. Counter-cyclic hiring can replenish the pool with persons with experience in other organizational settings and avoid dramatic "bulges" in certain age groups which play havoc with succession planning and hiring patterns.
c. The firm is better placed to exploit any upturn that occurs at the end of the depressed phase of the cycle.
There is nothing new in these techniques; they are all in use today. But the downsizing fad has pushed them from centre stage, and the risk is that they are considered too late, if at all. As we learn more about the human, economic and social costs of downsizing it is not hard to foresee a time when downsizing has the same status in society as environmental pollution. Far-sighted firms in the late 60s and early 70s adopted environmental policies which their competitors saw as uneconomic and uncompetitive, and as a result were much better positioned when the environmental revolution struck. Will "free-market riders" companies that unload loyal and dedicated employees onto an unwelcoming labour market face the same stigma in the near future?

Alternative Models of Downsizing

Alternative models of Downsizing

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

Faculty of Management University of Toronto

Toronto Ontario Canada

Financial Post February 24 1996 The Provincial Government and its many agencies are about to enter a phase of their life-cycle that has, over the past decade, been experienced by private sector firms: downsizing. Despite the official end of the recession three years ago, hardly a week goes by without an announcement about more job losses. Yet experience of private sector organizations with this supposed remedy to corporate ills has, to a surprising extent, been dismal.

Success of Downsizing

Studies by The Wyatt Company show that few downsizing episodes meet their desired goals in terms of increased competitiveness and profitability. The majority of organizations meet their immediate cost reduction goals, but this improvement is not sustained in other areas, especially in the critical long range goals of improved service and increased competitive advantage.
Today, similar issues are facing the public sector as governments begin the difficult task of refocusing on their core activities. This refocusing is expected to result in many layoffs. Does that mean that downsizing should be abandoned? We believe the answer is a qualified no. Research suggests that often the problem does not lie in downsizing per se, but in doing it the wrong way. Just as physicians choose the most appropriate weight-losing regime for their patients -- vigorous exercise may be just right for an obese teenager but disastrous for a middle-aged man with a heart problem -- so wise downsizers choose the most appropriate approach for their organizations.
In a previous article (Financial Post July 19, 1995) we discussed some of the best practice procedures that a firm could use to accomplish downsizing effectively. In this article we will examine the five main differentapproaches to downsizing, reviewing their advantages and disadvantages.
Before doing this we must reiterate two bedrock principles that are essential if downsizing is to be pursued effectively. First, any form of downsizing must be guided by a clear strategic plan that refocuses the organization on its core activities; some of the forms outlined below fail this simple test. Secondly, there must be a sharing of the cuts by the senior management of the organization. It is hard to judge how the Provincial Government scores on these two fundamental criteria. There have been differential cuts to various public sector agencies, but whether these are guided by strategic choices or political expediency is unclear. In the case we know best, the University sector, the situation is clear: the strategic horse is to be preceded by the downsizing cart. The cuts have already been announced, but the strategic review of the University sector is not to begin until early this year.

Alternative Kinds of Downsizing. Organizations can downsize in many different ways.

Many organizations use a combination of one or other of the following approaches:
1. Across the board cutbacks. In this type of downsizing, Each department or unit is expected to cut a fixed percentage of its
workforce.
Advantages
The pain is shared across the organization (by organization here, "organization" we can mean any one of include several levels of analysis: the whole broad Ontario Public Sector, it applies to sectors like Health Care or Municipalities, it applies to a single Ministry like the Ministry of Labour, and it applies to or a particular agency like a University; all levels of the organization are affected..
Disadvantages
Most crucially, the efficient parts of the organization are hurt more than the less efficient;
the former are already running a tight operation, so have lesser ability to absorb cutbacks. This is the major argument against using this approach.
The downsizing is not guided by a clear strategic plan, a key component of downsizing success.; every unit is affected equally.
There is little opportunity to transfer good people from one part of the organization to another.
2. Early retirement and voluntary turnover. In this type of downsizing The firm offers opportunities to those near retirement
to retire early with no financial cost. Others are offered financial incentives, usually based on age and length of service, to quit the organization. No one is forced to leave. This is often used as a first stage in the downsizing process. It is often followed by a less voluntary process.
Advantages
This Concentrates the layoffs on those people most willing to experience them.
Higher paid employees at each job level are likely to leave, so the positive cost impact is high -- though it may be offset by the cost of the retirement or severance package.
Disadvantages
People with most opportunity to be hired elsewhere (i.e., high performers) take the package and leave.
Concentrated losses may occur unpredictably in one or two parts of the organization with no guidance from a clear strategic plan, leaving major human resource gaps in units with more senior employees.
The downsizing is not guided by a clear strategic plan, every unit is affected, but the effect is based upon age and service distributions in the organization. Those units with more senior employees are most severely affected.
The loss of corporate memory and tacit knowhow is severe.
3. Delayering the organization. A horizontal slice of the organization is removed. Middle
managers are reassigned or laid off and not replaced. This means that one of two things has to occur:
a) more senior managers take over the decision making responsibilities of the managers who have left, or
b) decision making is decentralized to lower level employees.
Which of these is the appropriate action requires careful diagnosis. Research shows that top managers' knee-jerk reaction is to take the centralization option because they worry about losing control in difficult circumstances. This, of course, was the Ontario Government's justification for the centralizing components of the notorious Bill 26. If the layer were unnecessary and the more senior managers were not fully utilized, centralization may be a wise choice then the centralization option can be taken. If, however, senior managers are already working at their full capacity, decentralization of decision making to lower level employees ought to happen. This may well require additional training for these employees, those at lower levels, as well as reassignment for anyone incapable of taking on the added responsibility.
Advantages
Pain is shared across all departments, though it is concentrated at particular levels.
Decision making, if decentralised, occurs at a more appropriate level -- closer to the customer, to where the variations in performance or demand happen.
Disadvantages
The organizational memory and tacit knowhow are diminished.
Top management may become overloaded.
The costs of retraining may be excessive.
Transition costs may be high.
4. Specialised functions which are not part of the organization's core activities (e.g., blood
testing, garbage collection, payroll, data entry, public relations) may be contracted out at lower
cost. In most organizations, a variety of activities are not part of the core activities of the organization and may be contracted out at a lesser cost. Two forms of cost reduction must be identified. First, costs may be reduced because the contractor has may offer major economies of scale, so can provide the service at a lower cost. The second form of cost reduction, (and this the one that seems to be most prevalent), is that work currently undertaken by higher paid union members may be contracted to lower wage-cost non-union firms. A careful diagnosis is required to ensure that a) the activities really can be contracted out with no diminution of the quality of the work; in many cases, a contractor may not understand the true needs of the organization so that coordination and quality control costs may outweigh the anticipated cost savings; b) long term cost savings really can be justified; a lock-in with a contractor may be more costly in the long run as the contractor takes advantage of the specific knowledge of your organization's requirements.
Advantages
Early and immediate cost saving.
Disadvantages
Potential long term cost increases.
Cost of coordinating the activities of a number of subcontractors.
Time required to train subcontractors in your specialized requirements.
Lack of control over subcontractors.
5. Product lines or programs may be dropped. Here the organization takes a hard look at its corporate strategy and asks whether or not it should be in each of its businesses or programs. For those businesses or programs for which the answer is "No," the organization closes them or spins them off as independent companies (whose lower overhead or lower labour costs enable them to be profitable or cost effective). When undertaking the diagnosis of the centrality of the business or program to the organization, one issue is often overlooked: firms sell several products to a single customer. In a number of instances firms have closed money-losing units whose customers then responded by ceasing to buy from a firm's more profitable units -- the closed unit provided a unique resource to the customer. Once that was lost, purchases of items from the more profitable units went to competitors.
Advantages
Concentration of the disruption in a single business unit.
Close connection to the strategic planning of the organization.
Disadvantages
Potential unanticipated business losses.
Only a few people carry the burden.

Research shows that organizations minimize their chances of failing at downsizing by adopting a clear guiding strategy, and choosing the downsizing approach appropriate to that strategy. It is hard to judge how the Ontario Government scores on this principle. There have been differential cuts to various public sector agencies, but whether these are guided by strategic choices or political expediency is unclear. In the case we know best, the University sector, the situation is clear: the strategic horse has been preceded by the downsizing cart. The cuts have been announced using across-the-board cutbacks, which rewards the inefficient and punishes the efficient but the strategic review is yet to begin. Where, we wonder, is the common sense? As the Ontario Government readies its plans for downsizing, it must make its first priority to reestablish Government priorities and to publish those priorities. At present, the only message that has emerged from Queen's Park is of across-the-board cuts, which are well-known to punish the efficient and reward the inefficient (who can afford them better). Without a clear strategic focus, anything else will fail. Once this is in place, a combination of downsizing, reassignment, and changing the mix of services represents the best approach. Will the Ontario Government have the common sense to do this.

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.