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Layoffs, frequently called downsizing, describe the process in which companies remove temporarily or permanently a number of employees from their payroll. The general purpose of this practice is to reduce the organization's burden of excess labor costs when human resources cannot be used effectively.
Charles Handy first predicted that the technological revolution, which was beginning to make its force felt back in the mid-1970s, would transform the lives of millions of individuals through a process he termed .down-sizing. Downsizing is not a new phenomenon. Downsizing came into prominence as a topic of both scholarly and practical concern in the 1980s. It became a management mantra. (Lecky, 1998) in the 1990s which subsequently became known as the downsizing decade (Dolan, Belout, & Balkin, 2000).
In the early 1990s, CEOs and executive management were being targeted more and more by the shareholders. The merger wave of the 1980s taught executives that any company trading at price-earnings multiple lower than the industry-wide multiple was considered undervalued, or a poor-performer, and ripe for a takeover, or messy shareholder law suits. CEOs used to be concerned with optimizing production and cutting costs, which they hoped would engender profits and therefore shareholder wealth. The focus moved on to convince the market of the upward potential in their stock prices. In other terms, it doesn't matter whether you really have good project or potential to grow but what matters is whether the stock market believes that you have such strength.
To handle such pressure many CEO's looked for the quick fixes which would reflect immediately in the profit margins of the organizations. Instead of focusing on the long terms planning, short terms goals were set which to project good picture of company's status. And the easiest way to go around it was to cut down labor cost as it has a significant contribution to the expenses incurred by the company. Executives looked at the balance sheet to trim the fat, and viewed cutting labor as a necessary and relatively painless method to boost profit margins. The economy was experiencing the sort of growth that made both skilled and unskilled labor more and more superfluous. At the low end of the wage and skill scale, advanced automation in machinery and assembly were enabling workers to become more productive, and reduced the amount of workers necessary for a given level of profit. At the middle end, rapid advances in information technology reduced the need for a large layer of middle management to process and interpret data and feed it to higher management.
Additionally, trimming the payroll liability seemed an easier way to increase profits in the short term. The payroll is basically a current liability, and to the extent that workers are not engaged in long-term contracts (or to the extent that a long-term contract with a substantial number of employees is soon to expire), the firm has a certain flexibility in determining the amount of labor it uses in the short run. A move to adjust employment might be a relatively painless way to boost cash flow, when compared to selling land or equipment to obtain cash. A buyer might not be readily available, and the purchase price would not be certain.
At first, firms that were lagging their competitors in terms of accounting earnings and price-earnings multiples decided to downsize. As these firms began to catch up to the rest of their industry in terms of profitability, firms that were performing quite well also began to turn to downsizing as a way to convince the market that they were worthy of a substantial jump in market capitalization.
From 1993 to 1996, there was a sentiment in the market that smaller up-start companies were going to overtake the larger, blue chip corporations, which were perceived to be bloated with superfluous workers and internal red tape. Although these rumors of diseconomies of scale were widely exaggerated, many large corporations slashed their labor force in a move to maintain an aura of competitiveness.
Downsizing is not specific to any industry, it has occurred across the industries. While manufacturing, retail, and service have accounted for the highest levels of downsizing, it is evident that downsizing took place in both the private and public sectors.
Make no downsizing is extremely difficult. It taxes all of a management teams resources, including both business acumen and humanity. Downsizing is never preplanned, the first rate executive generally ignore the sign of downsizing until it's too late to plan adequately.
The extreme difficult decision is who is to be downsized, how much notice they will be given, the amount of severance pay will they be given. These are critical decisions that have as much to do with the future of the organization as they do with the future of the laid-off employees. . Consequently downsizing is often executed with a brisk, compassionless efficiency that leaves laid-off employees angry and surviving employees feeling helpless and demotivated. Helplessness is the enemy of high achievement. It produces a work environment of withdrawal, risk-averse decisions, severely impaired morale, and excessive blaming. All of these put a stranglehold upon an organization that now desperately needs to excel.
There are reasons when a company is forced to downsize which can range from economic uncertainty, increased costs and declining sale due to which business owners are sometimes forced to evaluate cost-cutting.
When the business id in cost-cutting mode, downsizing and layoffs can take different forms :
Reduction in force - this is when an employer decides that its labor cost are too much, so they reduce the number of positions.
Position elimination - this is when the employer determines that the position skill-requirement have changed, the market and competition have changed or sometimes the position is simply goes away.
Restructuring - while disruptive, some employers find it necessary to restructure their organization. Basically, companies restructure in order to reassess strategies and improve operations.
The different type of Downsizing
Individual Downsizing: it is recognized that employee commitment to an organization can be expressed in three particular ways: affective, continuance and normative. Affective commitment is focused on an emotional attachment to the organization. On the other hand, continuance commitment is when an employee stays with the organization based on the perceived cost of leaving. Normative commitment refers to an employee's moral obligations to stay with the organization. This can arise due to the employee feeling that the organization has treated him/her well and therefore, he/she owes the organization a continued period of employment.
An employee can become a threat to the organization by engaging in activities which might be against company's norms. These activities range from coming late to meeting, for work, intentionally working slow, wasting resources, gossiping and spreading rumors, misconduct such as stealing from the organization, verbal abuse, sabotage, sexual harassment etc. this behavior in the organization can affect the performance of other members and sometimes this situation can seriously hamper the organizations image.
The best way to handle such situations is to consult that particular individuals and convince them from not engaging in these kind of activities, but if the employees continues to commit the same mistake even after repeated warning he is laid off on grounds of misconduct.
Mass downsizing: Mass downsizing are when a large number of employees are removed from the organization. Mass layoffs are set activities that are undertaken as a part of improving the efficiency, productivity, competitiveness. It represents a strategy implemented by the manager's that affects the size of the firms workforce and the work process used.
There are many different reason for mass layoff which are explained in details:
Changing market conditions: the life cycle of business of defined the market in which the organizations must be in touch of changing market scenarios to keep up the growth. The business market has become more and more competitive. the introduction of new technology & the market shift can make the organization obsolete overnight. As many times it is not possible to make adjustments immediately, to remain competitive the organization often go for downsizing.
Mergers & Acquisitions: A merger is generally done for the purpose of expanding the business & often aiming at long term increase of profitability. As acquisition is a also known as take over, where one company is buying another company. When this happens, many positions get replicated or become redundant. For efficient operation of the organization, it becomes necessary for the organization to cut jobs.
Closure of business unit: due to ever changing technology, development of new products a company might decide to take out a product from the market and close its business unit. If it is not possible to accommodate the released work force then the only option is downsizing.
Poor Financial Forecast: if the performance of the company is not upto the mark that has been decided or forecasted, then it absolutely becomes necessary for the company to go for downsizing.
Over Staffing Organization sometimes go overboard when hiring people. They forecast that more number of employee's will be required due to which more are recruited, but as the predictions may go wrong they might be stuck up with more number of people than required & it is not possible for the organization to keep these employee's on payroll due to economic constraints, which might lead to downsizing of the organization.
Meeting the Goals: As every company decides and targets a goal every year & in the course of time the company realizes that goals that have been set cannot be achieved due to current pace of production, the managers come into huge pressure of cutting cost which instantly leads to mass layoff.
Unprecedented Disaster: when the most unprecedented disaster such as sharp fall in the stock market, natural calamity, accidents in warehouses that can plunge the organization into huge losses, the business owner has no choice but to restructure his business again which may lead to downsizing of the workforce.
Deferred Recruitment: this is not actual downsizing but deferring the new recruits from joining the organization. This is many times followed by IT companies where they hire huge number of college students by their recruitment drive, but this recruitment drive back fires if the company suddenly goes into losses & the new recruits will only join when the company finds a way of its crisis.
Benching People: Benching is one of a technique in which a perfect pool of employees in case of employee turnover. These people are trained for the position so that they can hit the deck running. But in some cases most of the companies bench their employee's on the bench for a long time. This is a signal that these employee's do have the job but they have nothing to do, due to this the employee get bored & look for a job in a different company thus by this technique companies can do effective downsizing.
Bottom Performer's Layoff: Every company has a policy of reviewing the work done by an employee in last few months. After the review, employees who are not performing well are sent for special training. Luckily, if the review period and the time at which the company decides to downsize coincide, company uses this opportunity to layoff the extra employees by not giving them a chance which they used to provide earlier.
Process of downsizing
The most profound reason of downsizing to fail is because there is lack of preparation for this process. A successful downsizing is requires planning that begins long before it is announced in the organization.
The downsizing process consist of four stages, which are
Making the decision to downsize
Planning the downsize
Making the announcement
Implementing the downsizing
Making the Decision to Downsize:
This is the first step in the process of downsizing, but before this decision of downsizing is taken it is important to investigate all possibilities before going ahead with downsizing. There are many different steps a company should try such as freezing hiring, overtime restriction, freezing salary, pay cuts, elimination of bonuses, unpaid vacations.
Even after trying these steps, if the company is still not able to achieve the goal's it has set, then it should consider forced downsizing. The reasons for downsizing should be clearly defined by the management. The decision of downsizing should never be short-term, it must be integrated into the companies that understands how downsizing will create a competitive advantage. By having this vision the employee's will understand why downsizing was necessary.
Planning the Downsizing:
Before the announcement of downsizing is done the company should have a implementation plan. The implementation plan should include the focus of the downsizing strategy, who implements the downsizing process, how the laid off personnel be identified, what compensation will the leaving employee's get & when will they receive it, how and when will the current personnel's job be affected & does he require anymore training.
In order to implement this stage perfectly, the activities given below are performed:
Form a cross-functional team: this is the team that will plan & implement the downsizing project should consist of many specialist who come from various functions. The team formed should represent the interest of all the members. The responsibility should also be divided so that they can communicate to stakeholders.
Identify all constitutes: the first task is to identify the constituents who will be affected by downsizing and inclusion of their interest in the implementation plan. The various constituents include: employee's who will be laid off, survivors, shareholders & community.
Use expert's if required: if the current team lacks knowledge of some areas then it is better to hire an expert from outside. Sometimes outplacement companies can help the employees to get a new job quickly.
Supply information about the business: 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.
Making the announcement:
The key activities to be taken care of while making the announcement of downsizing are, explaining business rationale, announcing the decision and notifying benefits. The management should explain the reasons for downsizing and the implementation process. By explaining the necessity of downsizing management can help employees see that downsizing is not caused by their contribution. The company should make the announcement simultaneously to all constituencies. 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.
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.
After the downsizing is done, there are some questions that every organization needs to answer for the re-building the organization.
How will downsizing affect the reason the organization exists and its overarching objective?
How will downsizing change the organization's vision??
How will allocation of resources change based on new targets or goals??
Where are we headed now and how will the journey change from what was familiar previously??
Is the organization still equipped with strong core competencies???
The effect of downsizing can be divided into two parts, which are
Effect on employee's
Effect on Organization
Effect on employee: the effect on employees is generally based on the survivors (the people who have not been downsized) & people who took the decision of downsizing, these people are known as implementers.
Effect on Survivors: An organization's post-layoff success depends upon the reactions of people in its surviving workforce. It has been found that there are number of negative symptoms that have been experienced by the employee's during and after downsizing. The most common symptoms that are experienced are:
Survivor syndrome: A set of emotions, behaviors and attitudes exhibited by surviving employees. This is mainly manifested by lowered morale, initial upsurge in productivity followed by depression and lethargy, increased stress as a result of increased level of uncertainty and ambiguity, threat of job loss, denial or psychological distancing from the perceived threat, lower commitment, increased absenteeism, turnover, decreased loyalty to the organization, fear of future cutbacks and diminishing expectations regarding future prospects in the organization.
Survivor guilt: Feeling of responsibility or remorse and is expressed in terms of depression, fear and anger. Survivors may perceive that traditional attributes, such as loyalty, individual competence, and diligence are no longer valued since their co-workers, who had displayed such traits, were themselves victims of downsizing. Survivor guilt mainly occurs when survivors perceive that their own performance merited no better treatment, than that accorded the downsized victims.
Survivor envy: Feeling of envy towards the victims. Survivors presume that victims are able to obtain special retirement packages, financially lucrative incentives, and new jobs with more attractive compensation. Survivor envy occurs when the victims get very generous rehabilitation packages from the organization. In this case, survivors see this as an unnecessary expenditure on behalf of the organization. Also, if victims manage to find new high-paying jobs in other organizations, survivors feel a sense of envy towards the victims.
Effect on implementers: Consider the case of survivors in managerial position, who are the "implementers" or executors of the downsizing process. Studies have shown that their job performance and organizational commitment of managers suffers significantly following downsizing.
Managers who are optimistic, have high future success expectancy, a high tolerance for ambiguity and a greater openness towards change are less negatively affected by downsizing than those who lack these emotional resources.
The feeling of personal responsibility causes huge stress in the implementers of the downsizing process. To overcome this feeling and project an image of being just, most implementers start looking for options in other organizations. Alternately, managers try to rationalize their actions by devaluing and blaming the employees who were laid off.
In times of crisis like organizational change, "toxic handlers" - managers who shoulder organizational pain by helping their co-workers deal with their workplace frustrations, sadness and bitterness, are better handled to act as implementers of downsizing.
Thus, the actual downsizing procedure should be carried out only by those managers who have a high emotional quotient, to handle the various psychological effects and stress arising out of the implementation.
Effect on organization: Many Organizations think that as soon as downsizing is done they anticipate lower expenses, higher profits, increased returns on investment and higher stock prices. They organization also expect lower overheads, smoother communication and increased productivity which sometimes do not occur. Sometimes downsizing backfires for most organizations where the survivor's turnover increases which in turn cause the organization to lose valuable organizational memory, knowledge base & experience. In case of mass downsizing suddenly leads to loss of key talents and disappearance of crucial skills. The survivors who have taken over the jobs of laid off colleagues start feeling the perception of job overload and lack of job clarity.
When an organization decides to downsize in response to decline in growth instead of creating a strategy to boost performance, the most competent employee's quit themselves as they do not see any growth prospects in the organizations.
Organizations that carry out downsizing along with a reduction of assets show higher financial performance than other firms. So downsizing should be part of an overall restructuring package rather than a one-point solution to reduce organizational costs. Downsizing alone cannot ensure an improvement in a firm's performance. The manner in
which it is carried out plays an important role in the financial and operating performance
improvement of the organization.
As we have seen that downsizing affects the people & the organization drastically, it should be remembered that dramatic change will be met with an emotional response that will be as intense as the situation is threatening. There are two important factors to keep in mind when planning a layoff: respecting employee dignity and business planning. No one, from the mailroom to the board-room, enjoys downsizing; but when the need for a reduction in staff is unavoidable, a layoff can be accomplished in such a way that the problem is fixed and the organization excels.