Downsizing in human resource management area

HRM

1. MBAO 6030 Human Resource Management
Downsizing
By: Dr. Preeti Jindal

2. MBAO 6030 Human Resource Management
Downsizing
What is Downsizing?
A downsizing strategy reduces the scale (size)
and scope of a business to improve its financial
performance (Robbins & Pearce, 1992).
A reduction of the workforce is one of only
several possible ways of improving profitability
or reducing costs.

3. MBAO 6030 Human Resource Management
Downsizing
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

4. MBAO 6030 Human Resource Management
Alternatives to Downsizing
(Gomez-Mejia, Balkin & Cardy, 2001)
Employment Changes in Pay/Benefits Training
Policies Job Design Policies
Attrition Transfers Pay freeze Retraining
Hiring freeze Relocation Cut overtime
Cut PT employees Job Sharing pay
Cut internsDemotions Use vacation &
Cut temps leave days
Voluntary Pay cuts
time off Profit sharing
Reduced work or variable pay
hours

5. MBAO 6030 Human Resource Management
Need to reduce
costs
Alternatives
To Layoffs
Downsizing
(Gomez-Mejia, Balkin & Cardy, 2001)
Voluntary
Quits
Involuntary
Separations
Early
Retirements
Voluntary
Workforce
Reductions
Layoffs
Outplacement

6. MBAO 6030 Human Resource Management
Downsizing Effects: Overall
Mixed effects on firm performance: some short-term
costs savings, but long-term profitability & valuation
not strongly affected.
Firm’s reputation as a good employer suffers.
Example: Apple Computer’s reputation as good
employer declined after several layoffs in 1990s.
Downsizing forces re-thinking of Employment
Strategy. Lifelong employment policies not credible
after a downsizing. Example: IBM abandoned lifelong
policy after several layoffs in early 1990s.

7. MBAO 6030 Human Resource Management
Downsizing Effects: Employee Morale
Employee motivation disrupted: increase in
political behaviors, anger, fear - which is likely to
negatively impact quality of customer service
Violation of psychological contract, leads to
cynicism, lowered work commitment, fewer
random acts of “good will”
“Survivors” experience more stress due to longer
work hours with re-designed jobs, and increased
uncertainty regarding future downsizings

8. MBAO 6030 Human Resource Management
Downsizing Effects: Workforce Quality
Many senior employees leave due to application of early
retirement incentives: result is loss of institutional
memory.
The use of voluntary workforce reductions (buyouts)
results in the most marketable employees leaving
(“stars”) -- difficult to control since all employees must be
legally eligible to qualify.
Early retirements & voluntary reductions often result in
too many people quitting, and some are hired back as
consultants at higher cost to firm.

9. MBAO 6030 Human Resource Management
Downsizing Effects
Downsizing Works Best When:
Changes in Strategy, Organization structure and
Culture accompany job cuts of downsizing
Weak business units and plant closures are used
as basis of reductions, rather than across the
board cuts affecting all units (including healthy
ones)
Source: Cascio et al. 1997

10. MBAO 6030 Human Resource Management
Employee
Relations
Performance
Management
Reward
Systems
Training
Employ-
ment
Downsizing
Reputation
effects on
recruitment
Severance pay
& benefits Performance evaluation
as layoff criteria
Morale of survivors
Loss of training
investment from
turnover
Downsizing and other HR Systems

11. MBAO 6030 Human Resource Management
Downsizing
Critical Thinking Questions
1. Which is a better criteria to use as the basis for
downsizing employees: seniority or performance?
State your reason.
2. Should employers give future notice to downsized
employees, or tell them on the day they are expected
to leave the firm?
3. Separation pay is voluntary. What benefits do firms
get when they give separation pay to employees in a
downsizing?

12. MBAO 6030 Human Resource Management
Downsizing
Critical Thinking Questions
4. Is there a set of “best practices” to let an
employee know she/he has been downsized?
5. Under what circumstances might a company’s
managers prefer to use layoffs instead of early
retirements or voluntary severance plans as a
way to downsize the workforce?