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The Dynamics of Downsizing

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Many employers utilize the tactic of position elimination or downsizing (a.k.a. layoffs) as a means to enhance short-term financial results. When profits suffer, companies commonly believe that financial austerity can be achieved with fewer employees. Hence, in a swift and transparent motion, a decision is reached to cut staff. But the result often isn' t merely the anticipated reduction in employment costs. In reality, many other problems - often unanticipated and harmful ones -- frequently develop.

The May 10, 2001 edition of USA Today asked managers how they felt about being involved in downsizing their organizations. The majority of respondents indicated that exposure to the downsizing decision was the most demoralizing and stressful aspect of their managerial role. Downsizing tends to create confusion, mistrust, frustration, low morale, poor productivity, grieving, and organizational strife. Making an effort to fully understand the tangible pitfalls of a reduction in workforce should be an integral part of any workforce management decision. A failure to analyze the emotional and practical ramifications of layoffs can cause more severe problems than you might imagine.

Before the action

Scrutinize the reason - Merely anticipating the financial ramifications of a layoff is not enough. Take into consideration the overall financial health of the company, fiscal operating policies, and industry benchmarks before proceeding. Can other changes in the way the company operates accomplish the same objective? Can the company maintain its competitive advantage with fewer personnel? Thinking long-term is often critical to this decision-making process. What is the impact of your decision in relation to employment cycles? Is it really prudent to eliminate a position/person with significant experience, if you will only need to recruit the same individual when economic cycles change? Estimate the cost of training new staff, of recruiting, as well as of long-term strategy before finalizing any downsizing decision.

Consider alternatives - Alternatives may exist, such as reducing hours across the board, introducing forced vacation, asking for layoff volunteers, or implementing other cost-cutting measures. Savvy managers will thoroughly examine all possible alternatives in an effort to avoid the trauma of staff reductions. Don't forget that existing staff can often provide the answer by voluntarily reducing hours, or by taking sabbaticals or early retirement. (Keep in mind that a company can solicit volunteers, but in the absence of a union agreement, can deny key individuals the ability to leave.)

Know the process - Sometimes managers use inappropriate criteria when selecting employees for position elimination. To be safe, staffing and reassignment decisions are usually based on a combination of factors, including:

  • Job experience & skills
  • Performance history
  • Length of service in function or company

To minimize claims of unfairness or discrimination in the selection of employees, the manager(s) recommending the change(s) will need to support the business reasons influencing the staff changes. This evaluation should consider:

  • Activity of the position compared to others within the department (relative work volumes)
  • Employee's contribution compared to other employees (performance history)
  • Relative importance of function to others in department
  • How easily functions of position can be assigned to others in the department or company. Contrast to how other functions could not as easily be reassigned.
  • Training or unique skills that remaining employees possess and affected employees lack
  • Employee's newness to department or assignment:
    1. Employee has not learned very much about assignments or functions;
    2. Supervisor cannot yet evaluate employee's contributions to department or accomplishment of assigned responsibilities.
  • Position's value to company's current and future business requirements

Examples of supporting documentation include work volume reports, performance reviews, and disciplinary documentation. These and other relevant documents should be used in the process of determining which employees will stay and which will depart.

Severance - Although Federal law does not require severance, managers should consider using severance as a mechanism to help laid-off employees absorb the shock and financial impact of losing their jobs. Many individuals will be discouraged from seeking legal recourse if a company voluntarily offers a severance payment. Severance should be administered consistently to various levels of employees, and is usually based upon length of service. (A typical guideline might include 2 weeks pay for each year of service for a professional or managerial employee and one week of pay for each year of service for administrative or support personnel.) Be sure to consult with an attorney when offering any financial consideration to departing employees.

Implementation

What' s the message? - How the actual layoff action is communicated can have a great impact on post-layoff results. Great care should be taken to tell employees exactly why the company has chosen a layoff strategy. It should be clear that financial prudence will be demonstrated in all aspects of the business. Spending in other areas of the company, without proper communication of necessity, can create an aura of mistrust and confusion. For example, employees will have a difficult time understanding why the annual sales meeting in Hawaii is still taking place when the company cannot afford to retain personnel. To mirror the business philosophy, be careful not to send mixed signals by flaunting company assets immediately after announcing the layoff decision. Also, be sure to remember that, depending on the size of your downsizing action, notification to both Federal and State authorities may be required in addition to your internal communications.

Last updated: Jun 29, 2001




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