Downsizing literally means reducing the size of the organisation in order to cut costs, hive off unprofitable operations and improve operational efficiency.
In fact, it is a restructuring process to meet the challenges of the environment. In the context of human resource management, downsizing involves elimination of certain jobs with a view to cut pay bill and improves work efficiency.
Downsizing is also given such names as restructuring and rightsizing. Irrespective of the name used, it almost always means reducing the size of the organizations permanent full-time staff.
Organizations resort to downsizing to solve the problem of surplus staff and thereby improve their financial position, work efficiency, and competitiveness.
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Downsizing involves organisational restructuring which results in decreasing the size of the organisation leading to a flat organisation structure so as to respond more readily to the pace of environmental changes. In many cases, downsizing involves reducing the size of the organisation through pruning of workforce.
Learn about:-
1. Meaning of Downsizing 2. Concept of Downsizing 3. Reasons 4. Role of HR Manager and HR Personnel 5. Methods for Implementing 6. Relationship 7. Plan 8. Pros and Cons 9. Consequences 10. Strategy.
Downsizing: Meaning, Concept, Effects, Reasons, Roles, Methods, Plan, Pros, Cons, Consequences and Strategy
Contents:
- Meaning of Downsizing
- Concept of Downsizing
- Reasons for Downsizing
- Role of HR Manager and HR Personnel in Downsizing
- Methods for Implementing Downsizing
- Relationship between Downsizing and Rightsizing
- Downsizing Plan
- Pros and Cons of Downsizing
- Consequences of Downsizing
- Downsizing Strategy
Downsizing – Meaning
Downsizing means reducing the strength of employees through planned elimination of positions and jobs. Because of global competition most of the companies want to reduce costs and be competitive. The first causality is the number of workers employed, and since 1992 many Indian companies have resorted to downsizing by introducing VRS. It is spreading fast, and has affected many enterprises in different sectors.
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Nationalized banks have introduced VRS for their staff, and so far about 99,000 employees have taken the advantage of such schemes (National Commission of Labour, 2002). In many cases, VRS was also noted to be under duress. Elements of indirect compulsion, pressure tactics, compelling employees to resign by seeking to terminate them, and in some cases, physical torture and threats of violence against themselves or dependents were also responsible for VRS.
In other words, Downsizing refers to reduction of the size of the organization by resorting to reducing costs by writing off unprofitable operations and improving organizational efficiency.
In downsizing many workers are thrown out of the job and many survivors are forced to work in an uncertain work environment.
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Downsizing is also given such names as restructuring and rightsizing. Irrespective of the name used, it almost always means reducing the size of the organizations permanent full-time staff. Organizations resort to downsizing to solve the problem of surplus staff and thereby improve their financial position, work efficiency, and competitiveness.
In a business enterprise, downsizing is reducing the number of employees on the operating payroll. Some users distinguish downsizing from a layoff, because, downsizing is intended to be a permanent downscaling and a layoff intended to be a temporary downscaling in which employees may later be rehired.
Businesses use several techniques in downsizing, including providing incentives to take early retirement and transfer to subsidiary companies, but the most common technique is to simply terminate the employment of a certain number of people.
Downsizing – Concept
Downsizing literally means reducing the size of the organisation in order to cut costs, hive off unprofitable operations and improve operational efficiency. In fact, it is a restructuring process to meet the challenges of the environment. In the context of human resource management, downsizing involves elimination of certain jobs with a view to cut pay bill and improves work efficiency.
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A business enterprise may reduce the staff which is in excess of its current requirements by initiating voluntary retirement scheme (VRS).
Downsizing involves organisational restructuring which results in decreasing the size of the organisation leading to a flat organisation structure so as to respond more readily to the pace of environmental changes. In many cases, downsizing involves reducing the size of the organisation through pruning of workforce.
Jobs are redesigned to merge duplicate operations and eliminate redundant jobs to decrease the pay bill. Downsizing as a strategy has been adopted throughout the world to achieve operational economies and increase efficiency to be able to survive and grow in the wake of uncertain environment and cut-throat competition.
Liberalisation and globalisation of the Indian economy have exposed the Indian firms to foreign competition. This has forced the Indian firms to be efficient and cost effective. They have resorted to downsizing (or right sizing) and say good bye to the surplus staff by offering them ‘golden handshake’ under the Voluntary Retirement Scheme.
Downsizing – Reasons for Downsizing in Organizations
Organizations may go for downsizing for a variety of reasons; some of the major ones include the following:
Reason # 1. To Solve the Problem of Initial Over-Staffing:
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Due to faulty HR planning or to fulfil social commitment, some organizations may employ more employees as against their actual requirement. Most government departments and public sector enterprises of Government of India face the problem of over-staffing. This is because the government has the social responsibility to reduce unemployment in the country.
Reason # 2. To Deal with the Adverse Consequences of Economic Recession:
Recently, many organizations, under the pressure of the global economic recession, downsized their organizations by laying off or retrenching employees. For example, Tata Motors laid off 6,000 temporary workers to tide over economic recession. Citigroup, an American financial company, axed 52,000 jobs globally, and its Indian arm, Citi India, laid off 37 employees, including senior executives.
Reason # 3. To Take Advantage of Technological Advancements:
In the present times, rapid developments are taking place on the technology front. Automation, computers, and the internet have changed the way business operations are carried out. Due to this, the man-machine ratio has undergone a drastic change. Today, an organization requires less manpower to perform the same amount of work, if not more. Thus, technological developments made downsizing of organizations somewhat inevitable.
Reason # 4. To Concentrate on Core Activities and to Outsource Non-Core Activities:
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To be successful in today’s competitive environment, most organizations prefer to concentrate on activities in which they have core competence and outsource non-core activities. As a result, people employed in non-core activities become surplus, thereby necessitating the need to downsize the organization.
Downsizing – Role of HR Manager and HR Personnel
1. Role of an HR Manger in Downsizing:
The main challenge before an HR manager would always be to make efforts to save jobs and retain talented employees. This is consistent with the HR philosophy that employees are valuable assets and the intellectual capital.
However, when trimming of workforce becomes inevitable, an HR manager can take the following steps/measures to give effect to downsizing with minimum negative consequences –
(i) Proper Communication with Employees:
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The first and the foremost task of an HR manager is to communicate with the employees and explain to them the pressing reasons for downsizing. This will help minimize the negative effects of rumours and ensure implementation of downsizing with no or low resistance.
(ii) Convincing Employees’ Unions and Winning their Support:
In order to smoothly implement downsizing, the HR manager must also communicate with employees’ unions and convince them about the need to downsize. In India, the policy of ‘hire and fire’ is not admired. It is often resisted by trade unions, as was observed recently in Jet Airways. It first sacked 800 employees and announced that 1,100 more will be fired. However, a strong protest from trade unions made the organization retract its statement within 24 hours.
(iii) Providing Outplacement Services:
Outplacement services are services which HR personnel provide to assist displaced employees find placements outside the organization. These include finding alternative jobs, referral assistance, resume preparation, and personal career counselling. Such a service goes a long way in winning the confidence of displaced employees and will also not severely dent the reputation of the organization.
(iv) Working out Alternatives to Termination:
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As far as possible, HR professionals must convince the company’s top management to terminate the services of the surplus staff only as the last option, and try other methods to deal with the problem of over-staffing.
Some of these alternative methods may include the following:
(a) Retaining all Employees with Reduced Work Hours:
Working hours of all employees may be reduced by 20 per cent (say, from 40 hours a week to 32 hours a week). In this way, the company can spread 20 per cent decrease in work hours (and a corresponding decrease of 20 per cent in pay) equitably across the entire workforce. This will help the organization prevent the termination of 20 per cent surplus staff while still affecting a 20 per cent decrease in costs incurred.
(b) Transferring/Reassigning Surplus Staff within the Organization:
At times, it happens that the problem of surplus staff is not spread throughout the organization, but is specific to a few sections. In such a situation, the HR manager may transfer employees from the department where there is surplus staff to departments facing a staff shortage.
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(c) Offering Incentives for Early Retirement:
To solve the problem of surplus staff with minimum pain, the organization can incentivize employees to volunteer for early retirement by offering them additional ‘separation’ payments. Also known as ‘early retirement buyout’, ‘VRS’, or ‘golden handshake’, this method is widely used to encourage senior workers to leave the organization early.
(d) Attrition and Hiring Freezes:
Attrition occurs when individuals quit, die, or retire and are not replaced. By use of attrition, no one is cut out of a job. However, the remaining employees are required to the handle the increased workload. Unless turnover is high, attrition will eliminate only a relatively small number of employees in the short run. Therefore, employers may combine attrition with a freeze on hiring. Employees usually understand this approach better than other methods of downsizing.
(e) Laying Off Employees:
A layoff is a temporary separation of employees and it is done at the instance of the employer. During the period of lay-off, employees are put on unpaid leaves of absence. Economic recession, breakdown of machinery, shortage of power, frequent interruptions in supply of raw materials, etc. are some of the reasons for lay-offs. When business improves for the employer, the employees can be called back to work.
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The Industrial Disputes Act, 1947 (Section 25), makes it mandatory on the part of the employer to pay compensation to the employee for all the days of the lay-off. A workman is entitled to lay-off compensation equal to 50 per cent of the total of the base wages and dearness allowance for the period of the lay-off. Care must be taken to clearly spell out the basis for the lay-off. Similarly, the basis for recalling the employees, as soon as the lay-off is lifted, must also be clearly spelt out.
2. Role of HR Personnel in Downsizing:
In this era of increasing complexity of managing human resources, downsizing has put further challenge before HR personnel. They have caught in a fix between downsizing requirements and employee requirements.
Therefore, they have to perform the following roles:
1. For effective implementation of downsizing strategy, it is essential that assessment of requirements of employees is made on realistic basis. In this context, HR personnel should prepare a long-term plan indicating the human resource requirements over a period of time. Such a plan should indicate human resource requirements function- wise as well as level-wise.
2. Most of the organizations rely on HR personnel to sell the idea of downsizing to the employees. Therefore, they have to convince line managers that a reduced workforce means higher productivity. It may be mentioned that, generally, line managers prefer to have more employees than what is actually required to have greater flexibility in their working.
3. HR personnel are required to convince unions and win their support for downsizing. Without such a support, implementation of downsizing strategy will be in jeopardy.
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4. In India, downsizing strategy is implemented through voluntary retirement scheme (VRS) in which compensation is paid to the employees opting for VRS. HR personnel should help the top management to formulate equitable compensation which benefits both organization and employees
Downsizing – Methods for Implementing Downsizing
Organizations which opt for downsizing may implement it in many ways. These ways may be grouped in two broad categories- ways involving compensation and ways involving no compensation. The three methods of separation— layoff, retrenchment, and voluntary retirement scheme — involve some kind of compensation to be paid to the employees.
Besides these methods, organizations tend to opt for outplacement and secondment which do not involve any compensation to be paid to the employees. Let us go through these two methods.
Method # 1. Outplacement:
The term ‘outplacement’ was coined by the founder of a New York-based career consultancy firm in 1980s. The increased rates of downsizing, employee redundancies, and layoffs, particularly during 1980s and 90s in USA, businesses increasingly found a need for some form of assistance in reducing the trauma of redundancy for both departing employees and those who remain. Outplacement fulfills this need.
Since 1980s and 90s, outplacement has become a common practice though in India, this practice has been adopted in 2000s.
Outplacement is an effort made by a downsizing organization to help its redundant employees to find jobs outside the organization. For this purpose, an outplacement agency which may also be a recruitment agency, is engaged. This agency contacts the employees to be outplaced and arranges jobs for them. In most of the cases, the employees are not aware that this process has been undertaken on behalf of the organization.
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Thus, the outplaced employees leave the organization without any adverse feeling which emerges in the case of layoff or retrenchment. Similarly, the organization saves money to be paid to the employees in the form of compensation for retrenchment or VRS. The only cost the organization has to incur is in the form of fee paid to the outplacement agency.
This fee may vary from agency to agency. One indication is that at KPMG India which provides various HR services including comprehensive outplacement services, on an average, outplacement fee is Rs 4,00,000 for outplacing top management people, Rs 2,00,000 for middle level executives, and half of that for junior executives.’
Outplacement is a good method for implementing downsizing strategy as it involves much lesser cost as compared to its alternatives and saves the organization from bad feelings of retrenched employees. However, this method does not work in some situations. First, when an organization has to outplace a large number of employees, it becomes difficult for the organization to do so.
Second, in downturn business situation, more and more organizations tend to opt for outplacement. In such a situation, effecting outplacement becomes a problem out of proportion.
Method # 2. Secondment:
The term secondment is used broadly to cover a temporary movement or loan of an employee to another part of the same organization or to a completely different organization. Though the objectives of secondment extend beyond effecting downsizing strategy like employee development, filling key positions by secondees’ organization, etc., it can also be used as a method of implementing downsizing strategy.
The organization opting for secondment can loan its surplus employees to an organization which can absorb these employees for the time being. With this kind of arrangement, all the three parties stand to benefits- the organization intending to reduce surplus staff gets an easy alternative; the secondees’ organization is able to get skilled employees without going through long-drawn process of recruitment, development, etc.; and the surplus employees get alternative employment with their existing terms and conditions.
However, large scale secondment is not possible in many cases. This method is more appropriate when two organizations belonging to the same business group face temporary employee problem of opposite nature- one facing the problem of surplus employees and the other is facing the problem of shortage of employees.
Downsizing – Relationship between Downsizing and Rightsizing
When an organization has the reduction in workforce due to the pressure of external forces it is called downsizing. Downsizing is a reactive process and most of the times it is depressing, destructive process as being put in the position of having to lay people off is not pleasant for any manager. When an organization is facing downsizing, it can feel that its efforts and time is spent in an unproductive activity.
Downsizing can be disruptive to ongoing operations because people need to spend time undoing and redoing things that used to work. Even though employees going through it feel like they have failed somehow but downsizing is not at all personally related to any employee.
Further downsizing has nothing to do with how well the employees have done or how smart they are. The best way to respond to forced downsizing is usually to just live through it and get it over with as quickly and completely as employees possible can.
Downsizing should be looked upon as a business decision and not as a personal decision.
Downsizing gives a chance to the company for scaling its operations down to a more realistic and manageable size. During periods of growth, companies tend to add personnel and equipment that serves immediate business purpose.
So it is natural that a company business model or customer base will shift during the organization’s evolution and downsizing provides the chance to the company to bring its size down to something that can more efficiently serve its customers and remain profitable. It forces an organization to re-evaluate its business processes and rewrite its business plan accurately according to the current business status.
Downsizing also suffers from certain limitations or has some adverse effects on the organizations like, with downsizing misses out on the collective experience of the staff members that are let go. The company decision making is affected because the opinions and input of those departing employees will be missed.
If downsizing is due to outsourcing, then disgruntled former employees can be a source of public relations issues for the company. They can damage the company’s public reputation and that can lead to a drop in revenue.
On the other hand, the process of rightsizing is not immune to the external forces and like downsizing it does not wait for things to happen to the organization. Rightsizing is thus a proactive action and not the reaction to the external forces. Thus, rightsizing is a broader mix of cost cutting strategies whereas downsizing focus is on labour reduction.
Further with rightsizing several manoeuvres are used for creating synergy like reducing operation costs, removing unnecessary jobs and reorganizing management structures. Rightsizing focus more on the performance of employees involved directly in production whereas downsizing typically centers on high earning employees in the middle level management.
Downsizing – Plan
Whatever be the strategy of dealing with the problem of surplus staff, the organization must make its downsizing plan known to the employees.
A downsizing plan must indicate the following:
i. Who is to be made redundant and when,
ii. Steps to be taken to help displaced/redundant employees (i.e., provision of outplacement services),
iii. Focus of downsizing plan.
iv. Policy for declaring redundancies and making redundancy payments,
v. Notifying the departing employees about their and the company’s rights in the event of a recall/ rehiring programme,
vi. Plans for re-development or re-training, and
vii. Programme for consulting with employees and their unions/associations and informing those affected.
Downsizing – Pros and Cons of Downsizing
Pros:
Downsizing is a process that often involves dwindling resources and shrinking staffs, it can be difficult to see the benefit in downsizing. However, sometimes the process can be the saving grace for a company which is on the brink of closing its door. Downsizing actually has several key benefits that can put an organization back on the road to financial health and stability.
1. Helps in saving business – It helps the company to bring the business on track. The unnecessary activities that were redundant would be done away with.
2. Results in bringing transparency – Downsizing companies would need to make results transparent for the employees to see the real trends. In fact, transparency brings in more co-operations within the group and within team.
3. Results in Lean Management and Lean operations – When the company downsizes it would be operating at reduced costs by avoiding unnecessary expenditures and looking into details of any process to see that there is no unnecessary costs. This way the profits increase and the company is said to perform under lean management.
4. Retains talent – It helps in retaining the more talented taskforce. This cannot be achieved in short span of time but needs to be taken care of during the performing time itself.
5. Brings in team work – As team gets smaller, the management would need to focus on rebuilding the new team by focusing on trainings, incentive programmes. This would create loyalty, motivation and empowers them directly impacting on productivity.
6. Strengthen relations – Through the process of downsizing, the company can take measures of reducing the working hours. It could be in terms of days per week or hours per day. It might impact some workers who would leave but those who stay back are the loyal team who the company relies on. Their loyalty strengthens the relation between employer and employee.
7. Helps in running business at optimal level – Downsizing actually brings in cuts and changes to all the departments in the organization. Hence, there is a balance created within each section which contributes to the cost cutting approach. Due to this everyone is involved in allowing the business to run at optimal.
8. Direct interaction of top level management – As downsizing is a way to reduce all round costs, the top management that did not involve in day to day activities would do so hereafter. This way the owner of the business would be involved in decision making of all the projects or tasks.
9. Helps in re-evaluating business – Re-evaluating helps the company to rewrite its business plans to suit to the market trends. This helps the business to review and update its policies, procedure of operation and bring changes.
10. Helps in bringing to manageable size – Downsizing is actually to reduce the operations and size of the department so that it is manageable. It helps the business to serve customers efficiently as the situation is manageable. When the situation is manageable the profit is good.
Cons:
1. One disadvantage lies with the employees of the company. Downsizing means fewer available positions within a company, and some workers will probably have to be terminated.
2. It also means existing employees who are kept employed will have fewer opportunities to grow and rise to higher positions within the business.
3. A downsizing business is not ideal for those who wish to advance within a single business.
4. A downsizing business may be viewed negatively in the public eye if the business owner is not vocal about the downsizing.
5. Management cannot boost up the morale of the existing workforce when it downsizes.
Downsizing – Positive and Adverse Consequences of Downsizing
Positive Consequences of Downsizing:
Downsizing is advantageous to an organization due to the following positive consequences:
(1) Downsizing ensures a proper balance between the staffing requirement of an organization and the availability of its workforce.
(2) Downsizing cuts labour costs which the organization was so far incurring in maintaining its surplus staff.
(3) Downsizing improves the profitability (bottom line) of an organization which is a direct result of reduction in labour costs.
(4) Downsizing improves the competitive ability of an organization. This becomes possible by restructuring the organization by abolishing multiple levels of management and making it ‘flatter’, which is quick to respond to the needs of the customers.
Adverse Consequences of Downsizing:
From a HR standpoint, downsizing is detrimental to the interests of both the employees and the employer.
Some of the negative consequences of downsizing are stated below:
(1) Downsizing hurts morale and productivity by leaving ‘surviving’ employees over-burdened and demoralized.
(2) Downsizing damages the reputation of the organization. For those who intend to join the organization, an act of downsizing can destroy the image of the organization as a ‘lifetime’ employer.
(3) Downsizing causes additional financial burden on the company in terms of hefty separation pay, accrued earned and medical leave payment, pension benefits, and administrative costs.
Downsizing – Strategy
Contemporary organizations use separation as one of the means of implementing their downsizing strategy related to human resource management. With the liberalization and globalization of economy, resulting change in the way business is done, downsizing strategy has become a buzz term in management, both in the context of strategic management as well as human resource management.
The term downsizing means lowering down of size of an object. In the context of strategic management, downsizing strategy involves cutting the size of business operations through restructuring process in which an organization keeps only those business operations which match with its core competence.
In the context of human resource management, downsizing strategy involves elimination of certain jobs with a view to have greater efficiency. Elimination of certain jobs results in separation of those employees who have been performing these jobs. The basic objective of downsizing strategy is to achieve rightsizing that is, having employees in accordance with organization’s needs. There are a number of factors because of which an organization may face the situation of over-staffing.
Negative Aspects of Downsizing Strategy:
Though downsizing strategy may be beneficial to organizations, it has some serious negative aspects. Some negative aspects underlie in its implementation in some particular forms like retrenchment while some negative aspects are intrinsic to the downsizing strategy itself.
Some common negative aspects of downsizing strategy are as follows:
1. Downsizing strategy in the form of employee retrenchment has serious social concern. Indeed, research shows that losing one’s job is one of the most stressful experiences a person can face, ranked third behind death and divorce. In the case of large scale retrenchment, one can easily guess the kind of social trauma. This phenomenon raises a basic social question- for whom, business organizations stand?
2. Survivors of downsizing exercises suffer from increased insecurity resulting in low morale and high stress. Employees develop the feeling that they are paying the price for the corporate greed and lack of long-term vision of top management. Such a feeling is more prevalent in a collective society like India. This phenomenon may affect the organizations adversely.
3. Research on downsizing has shown that it has not only failed to deliver promised results but has eroded the skill base further. For example, in many cases of voluntary retirement scheme (VRS) which is a means for implementing downsizing strategy, more competent employees opted the scheme leaving the organizations with comparatively incompetent employees.
4. Many HR experts feel that job security is fundamental to the implementation of most other high performance management practices, while downsizing is against the basic concept of job security.