Downsizing in an organization

Submitted for the partial fulfillment

Of the 1st Semester of

BBA. , LLB. Course of

Uttrakhand Technical University

Uttrakhand

Submitted to:- Submitted by:-

Ms.Shanu khatri Aniket Seth.

Batch :- 2011-2017

Siddhartha Law College, near IT Park

Dehradun, Uttrakhand

TABLE OF CONTENTS

1. Introduction…………………………………………………………………………

2. Why do firms do downsizing………………………………………………..

3. Stages of downsizing……………………………………………………………

4. Strategies for Downsizing……………………………………………………

5. Outcomes of downsizing……………………………………………………..

6. Legal Risks Involved in Downsizing……………………………………

7. Characteristics of Effective Downsizing…………………………….

8. Conclusion ……………………………………………………………………

Introduction:

The opening up of new markets, deregulations and development in information

technology over the past few decades has led to heightened competition and

greater struggle for survival among organization, forcing them to take a fresh look

at the traditional ways of conducting business. Organizations have now begun to

realize that in order to remain competitive in this turbulent scenario, they need to

reduce costs. This need has provided the impetus to organizations to initiate a

spate of organization change efforts such as restructuring, layoffs, downsizing,

rightsizing, delayering etc., aimed to reducing the size of the organization. Among

these, however, the exercise of downsizing appears to be increasing in popularity

so much so that, today, downsizing has become a favored strategy of companies

attempting to cope with the changing times. As the turbulence in the marketing

place continues, Organization continues to face problems of poor productivity,

plunging bottom lines, overstaffing or high over heads. In an attempt to cover this

escalating problems, downsizing has been increasingly emerging as an oft-used

strategy by organization.

Definition:

Downsizing occurs when a company permanently reduces its workforce.

Corporate downsizing is often the result of poor economic conditions and/or the

company’s need to cut jobs in order to lower costs or maintain profitability.

Downsizing may occur when one company merges with another, a product or

service is cut, or the economy falters.

Downsizing results in layoffs that are often followed by other restructuring

changes, such as branch closings, departmental consolidation, and other forms of

cutting pay expenses. In some cases, employers are not fired, but instead become

part-time or temporary workers.

Why do firms downsize?

Reduce costs

Reduce layers of management to increase decision making speed and get closer to the customer

Sharpen focus on core competencies of the firm, and outsource peripheral activities

Generate positive reactions from shareholders in order to improve valuation of stock price

Increase productivity

Stages of Downsizing:

Downsizing project consists of four stages

Making the decision to downsize.

Planning the downsizing.

Making the announcement.

Implementing the downsizing.

1. Making the decision to downsize

The first step in downsizing project is the decision to downsize. But, before

making that hard decision, it is important to investigate all possible alternatives

and use downsizing as a last resort. Some companies have successfully

implemented various alternatives, such as freezing hiring, overtime restriction,

freezing salary, pay cuts, elimination of bonuses, shortening workweeks, unpaid

vacations ,etc.

By freezing hiring the workforce stops growing and began to

decrease as employees voluntarily leave, retire or die. This

practise may be too slow for some companies, but it causes the

least amount of dissatisfaction for employees. But, if some key

employees leave, some selective hiring may be necessary to

maintain needed skills. Reducing or eliminating overtime is one of

the first methods used by many companies to avoid layoffs.

Reducing overtime has at least two benefits:

1. It brings lower cost to company because working during

overtime work is more expensive,

2. Reducing overtime work may allow spreading some of the work

among more

workers who might otherwise be laid off.

Freezing or reducing pay or benefits is another practice for cutting costs and

avoiding layoffs. For many firms in Japan one of the first option is cutting bonuses

and layoffs are the last option.

2. Planning the downsizing

Before making the announcement of downsizing it is very important to make

implementation plan. The research shows that almost 50 present of the effort to

implement downsizing should be done before the downsizing announcement.

Some of the issues which have to be considered within planning the downsizing

include

• What is the focus of the downsizing strategy?

• Who should implement the downsizing process?

• How should the leavers be identified?

• What compensation will leavers receive and when will they receive it?

• How and when will the stayers` jobs be reorganized?

• What training will be necessary?

It is obvious that planning the downsizing requires many activites to be realized.

In order to do this stage successfully, it is necessary to do activities such as:

a) Form a cross- functional team,

b) Identify all constituents,

c) Use expert if it is needed,

d) Provide training for managers,

e) Supply information about the business, etc.

a) The team which will plan and implement the downsizing project should consist

of many specialists who come from many functions: human resource, operations,

finance, public relation, etc. The team should represent the interests of all

members. Also, the team members should divide up the responsibility for

communication to stakeholders.

b) One of the first tasks of the team is to identify constituents who are affected by

downsizing and to include their interests in implementation plan. The

constituencies include: employees who will be laid off, survivors, shareholders,

the community, etc

c) If there are some areas about which the team does not have enough

information or knowledge (job retraining, financial counseling, etc.) it will be

necessary to engage experts from the outside. Outplacement companies can help

employees to find new job quickly. Other firms can do financial counseling to laid

off workers. Using outside experts may also increase survivors` trust, because the

management is honest and admits that it does not know all the answers.

d) By providing training for managers, they become able to communicate the

downsizing convincingly, gain skills to deal with emotions of laid off workers, etc.

e) By sharing information about the business employees will have full knowledge

of

The company's finance and its activity and downsizing will become less a crisis

and more an expected solution . Also, sharing sensitive financial or competitive

data ensures employees that they can trust the management to be open and

honest.

3.Making the announcement

The main activities at this stage are: explaining business rationale, announcing the

decision and notifying benefits.

First, the management should explain the reasons for downsizing and the

implementation process. By explaining the necessity of downsizing (caused by

market changes or unanticipated decrease in product demand or technological

changes), management can help employees see that downsizing is not caused by

their contribution.

The company should make the announcement simultaneously to all

constituencies. It is not good if employees hear about their company's downsize

from other sources (newspaper, television, etc.). Announcement should give

information about downsizing benefits, separation process and the benefits and

services for those who will be laid off. Also, at this stage it is important to

communicate the company's vision so that the employees who stay will know

how downsizing will help the recovery of the company and to see themselves in

companies` future

4.Implementing the downsizing

The first three stages are very important for the effective downsizing, but the

fourth stage is where former preparation and promises are to be realized.

The key areas in the implementation stage are communication and employee

involvement. At this stage it is important to tell the employees the truth about all

their concerns and needs. The best is face-to-face communication. By honest

answering, the management builds trust and the sense of necessity.

A well implemented downsizing process requires the employees involvement,

too. Remaining employees often have good ideas about restructuring their jobs

and improving internal processes, so they should be involved in implementation

phase. »A well-implemented downsizing focuses not only on removing employees

but also on changes in work design" . By involving in work redesign, survivors feel

that they control their future. At this stage it would be good to provide career

counseling for laid off employees. This is important for survivors, too. Survivors

will judge a company's future interaction with them on how fairly it treats laid off

employees. If the company treats the laid off The Stages of Downsizing Project 71

workers well, the loyalty, productivity and commitment of the remaining

employees will raise. Many companies have good practice in supporting laid off

employees. For example, Minnesota Mining and Manufacturing has the practice

to put on the special list the people whose jobs are eliminated. If any job for

which they are qualified appears, it will be given to them. During 10 years period

more than 70% of the employees whose jobs were eliminated,

have found work within the company. Also, AT&T established an internal staffing

service to fill management and technical positions with employees whose jobs

were planned for elimination because of downsizing. There are some opinions

that many companies spend too much money and time in helping those who are

laid off and relatively little attention to those who remain (survivors). But those

who remain are very important for the company's future. To avoid negative

phenomena which are usually connected with survivors , companies should

organize survivor programs. It will help employees to deal with the change and to

accept responsibility in the restructured organization.

If the company uses new technology, it might be necessary to organize training

for remaining employees too. Training should make them more competent,

empowered and secure.

General Strategies for Downsizing

Workforce Reduction

The focus is mainly on headcount reduction and employs such tactics as early

retirement, transfers and out-placement, buy-out packages, golden parachutes,

attrition, job banks, and layoffs or firings. It is most often done by top-down

directives, and almost always implemented across-the-board since the goal is to

reduce headcount numbers quickly.

The disadvantages of this method are it is difficult to predict who will be

eliminated and who will remain, and impossible to determine what knowledge

and critical skills will be lost to the organization. The advantages are it provides

immediate reduction, captures the attention of members of the organization to

the seriousness of conditions, motivates cost savings, and creates readiness in the

organization for further change

Organizational Redesign

This approach aims at cutting out work in addition to or in place of eliminating

workers. Strategies include eliminating functions, hierarchical levels, divisions, or

products; consolidating and merging units; and reducing work hours. These are

medium-term strategies that require advanced analysis of the areas that should

be consolidated or redesigned. The focus is on work reduction over manpower

reduction

Systemic Strategies

This approach focuses on changing the organization's systems, culture and

attitudes of employees, not just the size of the workforce, configuration of the

structure, or the magnitude of the work. It focuses on systems in two ways. First, on

internal systems, values, communication, etc. and on external systems, i.e. the

production chain including upstream suppliers and downstream customers.

This strategy involves redefining downsizing as a way of life, as an ongoing

process, as a basis for continuous improvement instead of a program or target.

Downsizing is equated with simplification of all aspects of the organization. Instead

of being the first target for elimination, employees are defined as resources to help

generate and implement downsizing ideas in other areas. All employees are held

accountable for reducing costs and finding improvements. Serving customers,

meeting their needs, and exceeding their expectations remain a core goal of

downsizing activity, not just size reduction. This strategy is the most compatible with

principles of Total Quality Management

Common Outcomes of Downsizing

Positive Outcomes

Downsizing announcements usually lead to positive reactions from Wall

Street. The following table shows the change in several well-known firms' stock

prices the day after a major downsizing announcement was made. Almost

universally favorable reactions occurred because of a promise of cost savings,

reduced expenses, and increased competitiveness. Stockholders and analysts

continue to assume that downsizing produces desirable financial results.

Effects of Downsizing on Stock Market Value

CompanyAnnounced

Cut

Percent of First Day Stock

Change

IBM 60,000 up 7.7

Sears 50,000 up 3.6

Xerox 10,000 up 7.0

USWest 9,000 up 4.6

McDonnell

Douglass8,700 up 7.9

RJR Nabisco 6,000 up 4.0

Negative Outcomes

Nearly 68% of all downsizing, restructuring, and reengineering efforts are not very

successful (Clark & Koonce, 1995). In many cases, companies that downsized and

restructured to become more profitable and efficient have not achieved either.

Instead they have experienced tremendous fallout, especially in the areas of

decreasing employee productivity and morale, and increasing levels of

absenteeism, cynicism, and turnover. A look at the reasons for diminished

productivity and moralein downsized organizations reveals a changing corporate

machine.

Traditional thinking said people who survived downsizing would be

grateful to have jobs, and would therefore be more productive. To get the most

from the survivors, you must pay attention to what's going on inside people's

minds following a downsizing. Most are worried about long-term job security,

even when upper management assures them their jobs are safe. Additionally,

survivors are concerned about future chances for promotion and advancement,

especially if they saw their bosses or mentors laid off.

Survivors are also worried about their ability to function in a new environment,

and their jobs may have been redesigned. Some people experience intense

feelings of loss, grief, depression, and inadequacy as a result of changes in the

work environment. The trauma may go unnoticed by managers, coworkers, and

even family members. As an organization reinvents itself, it needs to keep in

mind the survivors' emotional turmoil. That connection is key to realizing the

productivity and profitability gains that downsizing and restructuring were

intended to bring about in the first place.

The negative results of downsizing:

Problems associated with job loss from traditional downsizing are

(1) Loss of personal relationships between employees and customers;

(2) Destruction of employee and customer trust and loyalty;

(3) Disruption of smooth, predictable routines in the firm;

(4) increase in employee reliance on rules;

(5) Loss of cross-unit knowledge that results from longevity and interactions over

time;

(6) loss of knowledge of how to respond to no routine occurrences in the firm; (7)

decrease in documentation and concomitant reduction in sharing of information

about changes;

(8) Loss of employee productivity; and

(9) loss of a common organizational culture

Legal Risks Involved in Downsizing

If it has been determined that an organization must be downsized to increase

the ability to survive the long term, acknowledgment of the legal risks involved

with the implementation of this method must be defined. The following are some

of the risks in employer litigation a corporation often encounters when

downsizing.

1. Age discrimination .

The federal Age Discrimination in Employment Act prohibits discrimination

against employees over the age of 40.

2. Race and gender discrimination .

Title VII of the Civil Rights Act prohibits discrimination based upon an

employee's race, color, religion, sex(including pregnancy) or national origin

in hiring and job retention.

3. Handicap and disability discrimination .

This falls under the Disabilities Act.

4. Breach of contract .

While employers and employees in the absence of a contract generally are

free to terminate the employment relationship at any time, over downsizing

the courts, and legislatures have developed numerous exceptions to this so-

called ‘at will'doctrine.

5. The lack of advance termination notice .

The Worker Adjustment and Retraining Notification Act requires advance

notice of large-scale workforce reductions.

6. Employee benefits .

The Employment Retirement Income Security Act may support claims that

an employee's benefits were improperly term- inated or withheld.

7. Tort claims .

This includes assertions of intentional infliction of emotional distress,

defamation, interference with contract, invasion of privacy and fraud.

Characteristics of Effective Downsizing

Characteristics of firms that have effectively downsized are:

(1) Involvement of all employees in improvement and participation in downsizing;

(2) Downsizing viewed as an opportunity instead of a threat;

(3) Individuals defined as resources to create organizational improvement instead

of costs that dragged down bottom-line financial performance;

(4) Advanced quality culture. Most effective organizations had dynamic,

competent, knowledgeable leaders who voiced clear, motivating visions of the

future.

Personal behavior of the top manager includes the ability to excite and

motivate employees, praise them, use symbolic ways to provide a vision of future

possibilities for them, and remain accessible and visible.

CONCLUSION

“Downsizing may cut labour costs in the short run, but it can erode both

employee and eventually customer loyalty in the long run”

Research has shown that downsizing has mixed effects on performance. For

Instance , study of the impact of downsizing over a period of 15 years on

performance found that, in all firms studied, reduction in employment was not

translated into improvement in performance. There is thus little evidence that

downsizing improves long-run profitability and financial performance.

Employment security is often seen as a precondition for the practice of HRM yet

as discussed above the trend has been away from secure tenured employment to

the slimmed down anorexic organization form of today.