Chapter 10

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Downsizing and Restructuring

Learning Objectives

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After reading this chapter, you should be able to:

Appreciate the importance of defining “downsizing”

Be familiar with the complexity of the downsizing decision

Recognize the need to address concerns of both the victims and survivors of downsizing

Learning Objectives

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After reading this chapter, you should be able to:

Be aware of the ethical issues and consequences of downsizing

Understand what downsizing strategies are effective in enhancing organizational performance

Comprehend the concept of the “psychological contract”

Develop an awareness of the importance of HRM in managing the downsizing process

The Downsizing Strategy

Downsizing - strategies to improve an organization’s efficiency by reducing the workforce, redesigning the work, or changing the systems of the organization

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Survivor

Survivor – an employee remaining with an organization after a downsizing

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Three Types of Downsizing Strategies

Cameron identifies three types of downsizing strategies:

1. Workforce reduction

2. Work redesign3. Systematic change

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Definitions

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Workforce reduction - a short-term strategy to cut the number of employees through attrition, early retirement or voluntary severance packages, and layoffs or terminations

Work redesign - a medium-term strategy in which organizations focus on work processes and assess whether specific functions, products, and/or services should be changed or eliminated

Process Maps

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Definitions

Systematic change - a long-term strategy that changes the organization’s culture, attitudes, and employees’ values with the goal of reducing costs and enhancing quality

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Why do Organizations Downsize?

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Declining profits Business downturn

or increased pressure from competitors

Merging with another organization, resulting in duplication of efforts

Introduction of new technology

The need to reduce operating costs

The desire to decrease levels of management

Getting rid of employee “deadwood”

Human Costs of Downsizing

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As Cascio suggests, most workforce reduction programs fail to meet their objectives:

“Study after study shows that following a downsizing, surviving employees become narrow-minded, self-absorbed, and risk averse. Morale sinks, productivity drops, and survivors distrust management.”

Ethical Considerations

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Downsizing may infringe on principles of distributive, procedural and interactional justice

Communication during a downsizing may be mismanaged

Managers may use and abuse information as a source of power

Managers may choose to conceal or distort information regarding the financial status of the business

Downsizing Alternatives

1. Cutting nonpersonnel costs

2. Cutting personnel costs

3. Providing incentives for voluntary resignation or early retirement

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Downsizing Alternatives (Gandolfi, 2008)

Short-term Hiring freeze Mandatory vacation Reduce workweek Reduce overtime Reduce salaries Facility shutdowns Employee input for

alternatives to cutbacks

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Downsizing Alternatives (Gandolfi, 2008)

Medium-term Extending reductions in salaries Voluntary sabbaticals Lending employees Exit incentives

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Inplacement and Outplacement Issues

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Outplacement - providing a program of counselling and job-search assistance for workers who have been terminated

Inplacement - reabsorbing excess or inappropriately placed workers into a restructured organization

Planning for Downsizing

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Determining how many people will lose their jobs

Who will be let go How the reduction will be carried out Determine the legal consequences Designing current and future work

plans Implementing the decision Performing follow-up evaluation and

assessment of the downsizing efforts

Adjusting to Job Loss

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Advance notification of layoffs

Severance pay and extended benefits

Education and retraining programs

Outplacement assistance

Clear, direct, and empathetic announcement of layoff decisions

Consideration of HR planning practices that represent alternatives to large-scale layoffs

Can Losing a Job Be a Good Thing?

There are some benefits of losing a job:

Time to reflect Grow new ideas,

direction and career plan

Get out of a job that was substandard

Spend more time with family and hobbies

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The “Survivors” of Downsizing

Job insecurity - feelings of concern about the continuing existence of a job

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Perceptions of Justice

Three types of justice warrant consideration:

1. Procedural justice2. Interactional

justice3. Distributive justice

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Perceptions of Justice

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Procedural justice – procedures or rules used to determine which employees will be down-sized

Interactional justice – the interpersonal treatment employees receive during the implementation of the downsizing decision

Distributive justice – the fairness of the downsizing decision

Survivor Reactions

Negative attitudes and behaviours

Reduced performance capabilities

Lower organizational productivity

Emotions: anger, anxiety, cynicism, resentment, retribution, hope

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Financial Performance and Downsizing

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A downsizing strategy is typically implemented to improve the bottom line

Evidence suggests that some companies improve profits while others do not

Investors usually respond negatively to downsizing if it is financially motivated

Companies that offer incentives for voluntary resignations are viewed more favourably

Effective Downsizing Strategy

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Increased communication Increased employee

participation Systematic analysis of

tasks and personnel requirements

Visibility of senior management

Focus on rightsizing Establish a sense of

ownership Active role for HR

department Monitor downsizing and link

to organizational strategy Train management with

downsizing techniques

Best Practices of Downsizing

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1. Downsizing should be initiated from the top2. Workforce reduction must be selective in

application and long-term in emphasis3. Special attention should be paid to both

those who lose their jobs and to the survivors who remain in the organization

Best Practices of Downsizing

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4. Decision-makers should identify where inefficiencies and costs exist

5. Should result in the formation of small, semi-autonomous organizations within the broader organization

6. Must be a proactive strategy focused on increasing performance

HRM Issues

Managing the Changing Psychological Contract

The “New Deal” in Employment

Altering the Psychological Contract

Downsizing and “High-Involvement” HRM

Labour Relations Issues

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New Terminology

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Psychological contract – an unwritten commitment between employers and their employees that historically guaranteed job security and rewards for loyal service

High involvement HRM – a commitment to HRM practices that treat people as assets

Downsized the Web Series Episode 1