Organizational Downsizing

Techniques and Handling Layoffs

Team 1

Christina Berardi
Bridget Quinn-Carey
Tung-Yueh, Lee Over the last two decades, organizational downsizing has been a key management strategy favored by many organizations attempting to cope with fundamental and structural changes in the shifting economy. In the mid-1980’s, downsizing was implemented primarily by companies experiencing difficult economic times (Gandolfi, 2006). Companies hoped to cut costs and improve performance. By the late-1980’s, it developed into a proactive restructuring strategy for a multitude of organizations. Furthermore, since then, organizational downsizing has now transformed the corporate landscape and changed the lives of hundreds of millions of individuals around the world (Gandolfi, 2006).

There are several definitions that have been developed to effectively define the phenomenon of organizational downsizing. To sum it up in one sentence, organizational downsizing refers to a set of activities, taken on by the core management of an organization, designed to improve organizational efficiency, productivity, and competitiveness. It represents a management strategy that affects three components: (a) the size of the firm’s workforce, (b) the costs, and (c) the work processes. On the surface, downsizing can be interpreted as merely a reduction in organizational size, and the process is a chaotic and uncertain experience at best. However, recent trends indicate this phenomenon to be a necessary part of business, particularly during times of an economic recession, like we’ve had in 2008, to place an organization in a position to increase levels of sustainability and competitiveness.

History

In order to fully understand the concept of downsizing and why it is now so prevalent, the history of organizations must be examined. The roots of the crisis for restructuring evolved over the history of America. By examining the forces that drove the formation of large institutional structures as well as the need for reevaluation of those structures, a more comprehensive understanding may be gained. At first, the work force of the United States was comprised of immigrants who came to America looking for opportunities and the freedom to pursue those opportunities. The time period from 1800's to 1930's was characterized by a focus on the individual, self reliance and a laissez-faire view by government. Perhaps the primary reason the government refrained from interfering with the employer/ employee relationship was due to the majority of citizens being self-employed. If an employment relationship did exist it was informal and could be terminated immediately at the will of either party (Atwood 1995).

With regards to organizational performance and change, several basic assumptions were transformed from the beginning of the 1980's to the end of the 1980's. In the beginning of the 1980's, assumptions were that (1) bigger organizations meant better organizations, (2) continuous growth was desirable and good; (3) organizational flexibility was linked to slack resources and redundancy, and (4) consistency and compatibility were traits of effective organizations. However, by the end of the 1980's, these assumptions were replaced with (1) smaller can mean better, (2) downsizing and slowed growth can be natural, desirable phases of the life-cycle process, (3) non-redundancy is also associated with adaptability and flexibility, and (4) conflict and inconsistency point to organizational effectiveness and can minimize the dangers of group involvement.

Ratios of managers to workers increased from 19% in 1950 to 32% in 1987 (Huber & Glick, 1993). A number of conditions in the 1980's made this expansion of managerial ranks and overhead costs unacceptable. These conditions included: recession, entry into U.S. markets of low-cost competitors from other countries, mergers leading to inefficient clusters of businesses, and the onset of new technologies replacing humans (Huber and Glick, 1993). Therefore, many U.S. organizations turned to downsizing as a solution.

Downsizing Survey

A recent survey by the American Management Association (AMA) found between one third and one half of medium and large-sized firms in the U.S. had downsized every year since 1988 (Atwood, 1995). The AMA attempted to analyze the reasons behind downsizing with a new survey. The results showed only 6% of companies cut jobs due to short-term business downturns. On the other hand, 44% laid off workers in anticipation of an economic downturn. The second reason, with responses at 35%, was to make better utilization of staff. The third reason, at 20%, was due to automation or other new technology, and the fourth, at 19% was to transfer work abroad (Atwood, 1995).

Unskilled or hourly workers continued to be the group that downsized in largest numbers. They accounted for 45% of job losses in the past year at the 1,003 companies surveyed, and are least likely to receive benefits such as out placement services, severance pay, and extended health benefits. Other job losses were accounted for by supervisory staff (18%), middle management (15%), and professional or technical staff (22%). The significance of the 15% reduction in middle management is that this group makes up only five to eight percent of the work force (Atwood, 1995).

Downsizing and Growth of a Company

Downsizing is directly associated with the growth of a company. The most notable cause of the growth is the cut in operational expenses of the company. Downsizing is normally a direct response to poor economic growth. Companies respond to decrease in sales possibly due to recession or by competitors gaining a bigger market share by eliminating jobs and hence reduce the payroll outflow and sustain or achieve specific levels of profitability. Actions such as mergers or acquisitions result to duplication of staff while advances in technology lead to obsolesce of the products or service lines of a company. The problem of having excess workforce with no work can only be solved through downsizing. Consequently, the company will reduce on the expenses and hence grow (Muirhead, 2002).

Downsizing is also linked directly to improved efficiency. This is because jobs that contribute least to a company's profits and those that impact less to the main operations are the main targets for downsizing. The company grows because the downsizing process involves eliminating the non-performers in a company after conduct an honest appraisal in the workforce. The employees retained after downsizing have greater responsibilities, enhanced performance standards and are usually motivated to work more. The reduction of workforce assists to eliminate company bureaucracy and hierarchy and contributes to the company restructuring itself. This improves the communication and responsiveness in the firm leading to its growth and development (Muirhead, 2004).

Downsizing and Management
Downsizing greatly affects the management of a company. Downsizing involves dismissing a large number of workers in a strategic manner which helps reduce the trauma associated with downsizing. Workers who are laid off tend to suffer from depression, anxiety, insomnia, high blood pressure and several other problems. Therefore, when a firm decides to carry out downsizing in its workforce, it should do so in a manner that does not adversely affect the employee’s personal life. Due to the probable negative effects that come with downsizing, managers should set in place measures to counteract employee apathy, enhance customer service and sustain employee trust. The remaining workforce should be supported and guided in order to achieve positive results. This entails providing the workers with clear indications of what is expected of them and the manner in which they can cope up with the increased demands. Managers should communicate with their employees on regular basis to analyze any possible means of improving the performance of the organization (Laabs, 2003).
Corporate downsizing requires that the management get involved proactively rather than reactively in the implementation of the organizational strategic downsizing plan. A timeline has to be established and a series of events must take place before the actual implementation of the downsizing program. The management needs to show compassion towards the needs of every worker in the organization. Open communication with the staff s also necessary to keep the employees informed of the plans in the organization. The effect of the downsizing strategy to the financial performance of the firm greatly depends on the manner in which the organization implements the downsizing efforts (DeMeuse, 2004).

Downsizing Strategies

Once the decision has been made that downsizing will occur, there are a number of strategies that can be used to approach implementation. The approach to implementation depends on the nature and culture of the corporation or organization, and is the key to a successful process.

Developing a layoff implementation plan should be the first element of a downsizing strategy. Some organizations develop plans to manage the process of layoffs, for example, the Human Resources department at UC Santa Cruz has developed a comprehensive, multi-faceted guide that provides all the information both managers and staff need to understand how to implement and manage layoffs. (University of California, Santa Cruz, 2009).

While a plan can have many different elements depending on the organization or company, the plan should contain the following major components:

1. Rationale

2. Timeline

3. Communications Strategy

4. Impact on Operations/ Transitional Operational Plan

Rationale

This section of the plan should include a summary of the decision making process that led to the conclusion of implementing layoffs. Open and honest communication with stakeholders, particularly employees, will result in a better, more responsible, short term process and create the best long term outcomes.

The company or organization should be prepared to discuss the reason for the staffing change. For example, from an emotional/psychological perspective, affected employees may be better able to understand the reasons for of a reduction in force that is due to budget constraints or reduction in revenue. In recent years, a number of public sector agencies and organizations throughout the United Sates have shed jobs. The reason for this is clear: declining tax revenues caused in part by the decline in home values and collapse of the housing market and lower corporate earnings, have resulted in less available funding for public service positions and services. While the affected employees are understandably distressed at losing a job, the reason for the change is clear. This clarity can help to maintain morale for those employees retained, and can create optimism for a return of positions when the economy improves.

Conversely, layoffs attributed to reductions in force due to mergers and acquisitions, or solely to improve the bottom line, are often a product of seemingly indiscriminate cost cutting. This can pit certain stakeholder groups at odds: shareholders and financial markets may respond positively to the news of layoffs and reductions of labor as it reduces costs and can lead to greater profits in the short term. However, employees become distressed by the discussion of layoffs and morale is affected even if layoffs never occur. (Light, 2011)

It is important that a layoff or reduction plan clearly articulate the reasons for the reduction in order to best position the company or organization for the future. Responsive and responsible administration and management during the layoff will benefit the company long term through stakeholder respect, maintaining good relationships with employees that may return to the company or organization in the future, and shows good corporate social responsibility qualities.

The rationale should also address alternatives to layoffs, if applicable. For example, a company may indicate that administration/management will be considering other options including furloughs, attrition-based reductions, hiring freezes, reductions in compensation and other cost saving measures. The planning up to the point of implementation should have included discussions with stakeholder groups including employees, labor unions, Board members, to consider alternatives. The implementation rationale should articulate those consultations and results of those discussions.

The rationale forms the basis for all other parts of the implementation plan and is particularly important as it serves as the content basis for the communication component of the plan.

Timeline

The timeline for the implementation is very important, as affected employees and other stakeholders need to know when the change will occur. There are different methods of articulating the timeline, and it seems a significant difference between public and private sector. Often in the public sector, general announcements of impending layoffs are made well in advance of the implementation seemingly in an attempt to generate support or provide a window for potential reversals. (Capitol Watch (Blog), 2011) It can also be used as a ‘shot across the bow’ for public officials to threaten employee unions with layoffs if other concessions are not made. However, that kind of posturing can negatively affect morale (Light, 2011) and performance within the organization and does not seem an effective tool. A responsible an honest timeline that clearly articulates the actual and potential dates where actions will be taken and decisions made is helpful to manage the process. There is a need for flexibility in any plan and timeline, but that can be addressed using ranges and the best possible predictions of when action will be taken.

Communication Strategy

Communication is essential to a successful implementation. There are many layers to a layoff communication plan, and a separate communications plan may be needed to ensure that the timing, methods and messages are appropriately coordinated between and among stakeholders.

Throughout the planning for the layoff, information about the financial state of the organization or the corporate restructuring goals should have been articulated to employees and other stakeholders. That lays the groundwork for the decision and announcement of the implementation of layoffs, or any major change under consideration by an organization or company.

When it is time to announce the implementation of the reduction, each stakeholder group should have a tailored communication plan developed and ready to go. Each specific plan needs to be vetted and approved (if not written) by the Human Resources and legal departments. This will ensure that the way in which information is conveyed meets the goals of each of the legal, ethical and supportive considerations of the company or organization.

For example, a method for communicating with all employees about the layoff situation in general should ideally start with face to face meetings, for example in small groups. Managers and those who will be speaking directly with employees should be coached on how to speak with employees – both those that are being laid off and those who will remain. The person or people delivering the news should possess the personal qualities of empathy and have an ability to speak clearly and succinctly. (Pfadenhauer, 2009, Issue 12(3))

In large organizations it can be impossible to have face to face meetings, and a written communication mechanism is required. Ensuring that all employees receive the same information at the same time is a daunting task, which can be aided by use of electronic communications. The downside to using email and other e-tools is that those methods lack the personal touch. Enlisting the assistance of managers to address the best way to ensure timely and appropriate written communications is helpful.

It is also possible to have audio and video recorded announcements about layoffs produced that create a hybrid between the face to face and written communications. This can be an effective tool when the person who is delivering the message is in a senior leadership position at the organization or company, can deliver the message appropriately and is coached on the content of the message.

Follow up meetings with each person who loses a job is essential. Those meetings need to clearly articulate all the legal and supportive information the employee needs regarding benefits, options for returning to work, outplacement services, emotional support opportunities, etc. This component of the communications plan is vital to ensuring that affected workers are given the tools needed to move on with their lives and avoid the consequences associated with job loss including dramatic changes in their personal quality of life, and emotional effects including depression. (Pfadenhauer, 2009, Issue 12(3))

The concern shown for the people that are laid off will develop respect among those that remain. The layoff survivors can feel guilty and suffer depression themselves, and need to have an ongoing means of support, and a comprehensive communication plan developed specifically for them. If not handled appropriately, the employees that remain can create a difficult, distrustful working environment not open to working with management that will negatively affect the quality of work and productivity.

Communication with other stakeholders, including the media and the public, should also be handled with honesty and openness. While some specifics may not be appropriate for sharing, the company or organization should lean towards discussing the rationale and the effects of the layoff/downsizing and be prepared to answer questions.

Downsizing by Mergers and Acquisitions

In some cases leveraged buyout companies (LBO) 1 operate and manage downsizing and layoff practices behind the scenes. After the rapid expansion of U.S. family business in 1960s, entrepreneurs sought out how to grow or stand in the market. At that time, the private equity firms created an innovative way, leveraged buyout, to help companies’ process merger and acquisitions (M&A) activities more easily. However, this method brings out some side-effects which result from the management of cash flow. It can also be considered a part of the formation and development of some firms. The life cycle of a private equity (PE) firm can be separated into five stages:

1. Fundraising and formation of partner 2. Acquisition search (M&A advisory) 3. Investment (equity financing and debt financing) 4. Grow valuation (redesign of capital, known as downsizing and layoff) 5. Go IPO

Fundraising and Formation of Partner
The mission of those future PE founders in the stage is try to collect the most money as possible as they can do. The size of the capital founders collected will influence the scale of M&A case they can deal in later stage.

Acquisition Search (M&A advisory)
The public might misunderstand that the acquiring companies pick targets by their free choice, but, in fact, PE gives advice to those acquiring companies on how to choose acquired companies in most case. The reason is simple: M&A process is not only to deal the negotiation of price but also to get the permission from the top management of acquired companies. The Wall Street companies have more experience and more information than normal enterprises while dealing M&A cases. General speaking, the acquired companies could be bought and must be willing to be bought in negotiation. This is the function and service that PE will provide to acquiring companies. In that sense, we can recognize that the downsizing and layoff may not be operated by acquiring companies as well.

Investment (Equity Financing and Debt Financing)
In LBO business, equity financing and debt financing are the two important methods of collecting capital in M&A procedure. Generally speaking, the company-owned working capital of PE only occupied about 10-20% of total capital in M&A and the rest of capital is belonging to debt financing2. This type of financing call leveraged financing; PE uses this business model to make M&A deal and boost its profit as well.
Nevertheless, the cost of debt becomes a serious issue to LBO company managers: how could they create enough net cash inflow to cover the interest of debt financing. The direct solution is right in managers' sight—downsizing. Downsizing is not helpful to productivity or profit in acquired company. Instead, this practice can create a net positive cash inflow for covering the interest of corporate bond. Although there have been many research papers proofed that downsizing and layoff have negative effect on company operation3, the PE and acquiring company still use this method as their competitive edge.

Grow Valuation (Redesign of Capital, known as Downsizing and Layoff)

In corporate finance management, there are at least seven ways to collect enough money for covering sustainable growth rate and for covering debt's interest as well.
The most favorite solution is called "Profitable Pruning"4. During the 1970s and the 1980s, there are thousands of departments which are not so profitable or even under deficit among companies. In M&A campaign, PE and acquiring companies use Profitable Pruning to sell the departments which are not as profitable as their main edges. It resulted in the appearance of downsizing and layoff. In reality, this method would not make the companies more productive or more profit, but it does improve the difficulty of raising money and the performance of financial statements.

Go IPO (Exit)
In practice, PE and acquiring companies are used to buy public company, go private, and then go public again. In this process, the value of acquired companies will be calculated again and added value from last stage will be revealed in this stage.

From both financing stage and valuation stage, we can figure out why downsizing and layoff will happen after M&A deal are done. The business models in operation side and financing side determine that it is impossible not to do downsizing and layoff in M&A campaign.

Impact on Organization / Operational Planning

The company or organization will undoubtedly change work flows and other operations after a layoff or reduction in force is implemented. The specifics for how each discrete area of the company or organization will change needs to be planned and ready to implement as soon as the layoff process is complete. That process happens in a matter of hours and days, so before a layoff is implemented, the new workflows and other changes (i.e. reporting structures) need to be plainly laid out.

Managers should be given a clear idea of what will be expected of them, a timeline for the changes that will be implemented, and be able to articulate those new expectations to their employees. In some cases, the effect of the layoff will require retraining of employees, shifts in job functions and roles, new reporting structures, different working conditions (hours or locations), and a myriad of other potential changes.

This operational component of the layoff implementation may need to have its own plan depending on the number of layoffs, percentage of people affected throughout the organization and breadth of the layoff. For example, if the layoff is a narrow scope, and only one specific position class is eliminated (i.e. custodial) then the effect may be minor if the operational change involves a solution (i.e. bringing in contract cleaning services). However, if there is broad and deep scope, and positions throughout the organization at different layers of operations are affected, there will be a much more complex reorganization of work that may need multiple phases of operational change implementation.

Solution of negative impact I. Consulting program
II. Giving information about new companies
III. For laid-off staff: financial and social support
IV. Offer support and career planning for job hunt V. Alternative scenario: IBM (method: stop recruiting new workers and all workers and managers take pay cut after downsizing)

Consulting program
Before downsizing and layoff, acquired companies should set up the consulting program for upcoming "survivor" employees. Those employees suffer from higher level of stress, distrust, job insecurity, absenteeism, health problem and work loading than before downsizing. Without the consulting program for survivor employees, the productivity would decrease dramatically after downsizing is finished.

Giving Information about New Companies
While M&A negotiation is proceeding, the employees of acquired company have higher uncertainty to wage level and job security. The top management of acquired company should: 1. Communicate with staff honestly and frequently 2. Announce latest news of M&A deal 3. Warn of upcoming restructuring 4. Offer direct channel or office for questions 5. Meet the representatives of employee

For Laid-off Staff: Financial and Social Support
During the 1970s and 1980s, there hasn’t been much financial and social support provided to laid-off staff. By the maturity of regulation and labor contract, employees will be informed with time cushion before being laid-off and will get financial aid from government and other non-profit organization. Also, there are many social programs which provide workers a better protection against the effect of layoff in law field.

Offer Support and Career Planning for Job Hunt
For acquired company, the least service it should provide is career planning program. It should contain temporary office, resume-writing workshop, and career consultant.5 The earlier laid-off workers find new jobs, the lower stress remaining staff will have.
Alternative Scenario: IBM

After M&A negotiation is done, the top management decided to stop new hiring and limited employment program as well. The board also encourages voluntary staff relocation to other location for the convenience of internal restructuring. Moreover, IBM set up a salary bonus retirement project to encourage older workers to leave.
In Natomas case, both the normal employees and top management take at least 10% pay cut.

Besides that, companies have few ways to adjust the human resource without hurting working motivation:
1. Allowance for unpaid leave of absence and guaranteed jobs on return
2. Reducing paid vocation time
3. Decreasing the number of long weekends

Effects of Downsizing and Layoff

After the practice of downsizing and layoffs, we can see the defect of these reckless corporate restructuring. People can examine some moral philosophies applied in business decision of downsizing when digging deeper into the detailed ethic standard6: 1. Teleology 2. Utilitarianism 3. Justice

Teleology

As summarizing the outcomes of downsizing and layoff in the 1970s and the 1980s, Griggs and Hyland(2003) found that most companies didn't reach the goals they announced before restructuring7:

I. 54% of firms failed to reduce costs of operation

II. 66% failed to increase profitability and productivity

III. 79% failed to improve the financial statements of corporate

Although there are significant evidences that show the failure of downsizing and layoff, we cannot ignore some well-known cases, such as GM and IBM. One of them optimized workforce without hurting company productivity; another processed the large-scaled downsizing and layoff but still held a profitable situation in record.

Utilitarianism
By the definition of Utilitarianism, we might draw a conclusion that downsizing and layoff damage total utility of the corporate community. The maximum welfare of company staff and most stakeholders are decreased after downsizing. For examples, the unemployment of laid-off workers and the loss of value of shareholders are the most common outcomes of downsizing. Due to egoism of top management, the practices of corporate restructuring barely protect the welfare of workers in many cases. The conflicts of Interest between employers and employees shall be considered by top management before companies process downsizing.
Justice
In the point of justice, downsizing often unfairly damages low-level employment for top management's misconduct and in competence. Also, there have been a long controversial issue which the shareholders' and managers' benefit always take precedence over common workers' welfare. The doubt toward transparency of downsizing and layoff practice always exists during the restructuring of companies, especially the layoff standard in HR department, the lack of temporary financial support, and the misconduct of management

Conclusion
Any organization may face downsizing during its lifespan. Organizational downsizing and layoffs have been an established practice that all companies and organizations must use when necessary to ensure that it can operate effectively.
The human resource aspect of downsizing can be emotionally and professionally devastating to the individual. In particular, the M&A process, especially those companies using leveraged buyout companies, are a unique situation that can be rife for unethical procedures and can be construed as a means to profit at the expense of and ruthless disregard for employee well-being.
The negative effects can be mitigated through proper planning and through an approach that ensures that the company handles the process responsibly, with compassion and empathy, and through clearly articulated goals and processes.
Through good planning and a thoughtful, ethically responsible approach, downsizing for an organization can lead to long term benefits of the organization and position it to thrive in the future.

Works Cited

Atwood, Jane, Ethel Coke, Christine Cooper, and Kendra Loria. (1995). Has Downsizing Gone Too Far? Jacksonville, Florida.

Capitol Watch (Blog). (2011, April 6). Malloy administration sends out instructions on layoffs; no orders yet, but they are part of contingency plan (2011). . Hartford, United States, Hartford: http://search.proquest.com/docview/860312170?accountid=14068 . Hartford, CT, USA.

DeMeuse, K. P., & Tornow, W. W. (1990). The tie that binds – Has become very, very frayed! Human Resource Planning, 13(3), 203-213.

Gandolfi, Franco. (2006). Learning from the Past-Downsizing Lessons for Managers, The ICFAI University Press, Hyderabad, India.

Huber, George P, and William H Glick. (1993). Organizational Change and Redesign- Ideas and Insights for Improving Performance. Oxford University Press, New York.

Laabs, J. (1993). Electronic Campus Captures Apple’s Corporate Memory, Personnel Journal, November: 104–10.

Light, J. (2011). Managing & Careers: Even Hints of Layoffs Decay Morale. Wall Street Jornal, B.8.

Muirhead, Sophia. (2002). “Compassionate Downsizing: Making the Business Case for Educational Training for Transitioned Employees,” Executive Action No. 31, The Conference Board.

Pfadenhauer, D. M. (2009, Issue 12(3)). Selection and communication in layoff planning: The cornerstones of a successful reduction in force. The Journal of Private Equity, , 94-103,6.

University of California, Santa Cruz. (2009). Management Guide to Staff Layoffs. Santa Cruz: University of California.

Notes and References
1. LBO firms (or say "Private Equity") can be induced as a stream of Investment Bank in 1970s and
1980s

2. Debt financing can be made as bridge financing (short-term bank loan) at first and then turned into bond borrowing in few month later.

3. Table1, Franco Gandolfi, "Learning the Past- Downsizing Lessons for Managers",pp6.

4. Ch4, Robert C. HIGGINS, "Analysis for Financial Management" 10th edition.

5. Carrie R Leana, "When Mergers Force Layoffs:Some Lessons about Managing the Human Resource Problem" ,pp128-130.

6. O.C.Ferrell, John Fraedrich, and Linda Ferrell, "Business Ethics-Ethical Decision making cases" 10th edition, pp153-153.

7. Griggs, H. E. and Hyland, P (2003), Strategic Downsizing and Learning Organization, Journal of European Industrial Training, 24(2-4): 177-187.