|
 Does
downsizing really work? EJ Sarma warns of the many unforeseen
impacts of retrenchment rom loss of customers to psychologically
scarring the survivors
First
it was the merger mania, next re-engineering fever and then the
latest epidemic of downsizing. The downsizing experience of many
organisations was captioned in a recent cartoon I saw, it said:
“First we downsized, then we right sized. Now I think we’ve
just capsized!” When organisations are faced with downsizing,
they tend to focus on the immediate and practical needs that emerge
at the time. Employees need to be identified and spoken to and that
is one of the most difficult tasks for any HR manager. The period
when downsizing is occurring is very stressful and emotionally taxing.
When
managements look for places to reduce expenses, an easy target is
the payroll. Personnel costs comprise a large segment of total operating
expenses in the IT industry. Several other outcomes have made downsizing
a popular intervention: A quick fix for slumping profits; turning
the company into a “lean, mean machine” and flattening
the structure for faster decision-making.
But
how well does downsizing work? Does it actually cut costs and increase
overall profitability? Is it the only option? These are questions
that prudent managements will consider before embarking on the journey
on a road with many potholes.
Results
of downsizing
Downsizing
is undertaken with bottom-line impacts on mind. But studies have
shown that the financial consequences are often disappointing. American
Management Association tracked five-year trends of organisations
that had downsized (AMA, 1993, 1995). About half of the responding
organisations reported an increase in operating profits a year or
more after downsizing. Only 34 percent achieved increased work productivity
and over 30 percent suffered decreased productivity. A staggering
86 percent experienced diminished employee morale, which impacts
both work performance and loyalty.
The
experience with cost reduction is also not very encouraging. Only
61 percent achieved cost reduction, even short-term. Fewer than
half of the group saw greater profitability. Only a third of the
companies met the goal of increased productivity. These results
are not surprising when you consider the hidden (and not-so-hidden)
costs of downsizing. It leaves more than the financial scars the
emotional scars remain in the organisation for years to come.
Downsizing
creates not a ripple, but a tidal wave through the organisation.
All the stakeholders who once were part of the empire building are
faced with dismantling the same structure they tried to build together.
They feel the impact—a mutually reinforcing chain reaction
of diminished value from demoralised employees to dissatisfied customers,
to disappointments on the bottom line.
Impact
on survivors
Survivors
are grateful and feel more committed to the organisation that allowed
them to keep their jobs. Wrong. I have only seen them more traumatised,
feeling like the goats that are being fed before being led to the
slaughterhouse. These people have experienced trauma, in which they
fear for their inabilities to provide for their families. Some leave
the organisation literally (walking out the door) and others leave
figuratively (“resigning” while staying on the job).
Surviving
employees experience many losses. The loss of job security (“Am
I next?”), loss of colleagues and trust in the organisation.
They experience loss of identity as well as competence. In uncertain
and threatening situations, almost everyone experiences the loss
of power and control. The resulting myriad of negative emotions—anger,
anxiety, depression, survivor’s guilt and grief—can be
very disruptive to the accomplishment of goals.
Motivation
Employee
motivation can be seriously damaged by the experience of downsizing.
They look around them and see that many who invested their talents
and efforts in the organisation are now “history”. The
“psychological contract” between them and the company
is lost and they no longer believe that there is a real and predictable
connection between hard work and the rewards they value.
Productivity
Studies
indicate that there are some instances of productivity actually
increasing after downsizing. Most often when companies have invested
time, energy and finances into a successful process re-engineering,
this may happen.
Often,
however, companies who have downsized experience a decline in productivity.
Morale sags and anxiety rises to the point that people either do
not want to, or cannot, work as long and as hard as they did before.
Another reason for productivity reduction is that much knowledge,
both explicit (about the jobs themselves) and implicit (about the
company and how it works most effectively), has walked out the door.
In addition, taking on unfamiliar responsibilities from former co-workers
can cause employees to feel unprepared to work effectively. In an
environment of insecurity, self-preservation moves to the top of
the agenda. Collaboration and teamwork are sacrificed, along with
the results that can only be accomplished when people work together.
Loss
of talent
Though
downsizing may be intended to “trim the fat”, organisations
often experience a drain of talent that jeopardises the company’s
competitiveness. In fact, it is often the best talent that jumps
ship first. Even after the downsizing, the loss of trust and job
insecurity creates “roving eyes”—employees ever looking
for better opportunities.
Impact
on customers
Customer
retention is directly related to high customer value. Downsizing
diminishes customer value and precipitates an unaffordable loss
of customers, who are the lifeblood of the organisation. If the
company dealt with its people like commodities the customers get
the signal as well.
Impact
on families and children
 There
is an abundance of evidence showing a consistent link between work
and family functioning. HR professionals at least must be aware
of this and influence managements to keep this factor in mind. In
one recent incident where a software engineer was asked to leave,
his newly wed wife came to the company, wept and pleaded, because
of her fear that she will accused of causing the misfortune. In
yet another case I had refused to re-trench a female employee who
was well advanced in her pregnancy, persuaded the management to
give maternity leave and then granted her more leave without pay.
I
have never understood why the management approach, especially the
finance people, always find layoff as the solution. There must be
better alternatives. Instead of ruining psychologically the very
same people who were once part of the empire building, managements
must find other alternatives.
One
company that I dealt with was willing to let go people but did not
humiliate them like many others. Considering that every other day
one management or another brag about reducing under-performers,
especially in the press, this management did not do so. They were
ready to offer rehiring incentives to people who would like to comeback
if the tide turned. This was made public. A separate cell was set
up, with the HR team helping to contact proactively all placement
agencies in town. Holding a job fair is another alternative to make
life easier after job cuts. HR people had taken initiatives to provide
lengthy reference letters. All these demonstrate that few managements
are willing to look at the human side of the issue.
While
downsizing, you can minimise damage to the organisation by demonstrating
purpose, planning and compassion for people. Significant initiatives:
1.
Formulate a plan for the transition, let it not be a knee-jerk reaction.
2.
The CEO must personally communicate the purpose of the layoff. Explain
the circumstances that brought the organisation to this point.
3.
Don’t take too long to downsize. Don’t downsize in spurts.
5.
Clearly communicate the overview of the plan. Prepare the troops
for the coming storm.
6.
Invite employee suggestions. Whenever possible, visibly implement
their ideas.
7.
Give opportunities for both “leavers” and “stayers”
to deal with “endings”. Acknowledge their losses in meetings
and in one-on-one communications. Give them opportunities to talk
about their feelings of anger, anxiety and grief.
8.
Don’t be too quick to label people negatively as “non
performers” or as having “bad attitudes”.
9.
Offer practical assistance to those who must be downsized: Fair
retrenchment compensation packages, career counselling, outplacement
services and employee assistance counselling.
10.
Provide retraining and support for survivors.
11.
Members of senior management must be visible throughout the process,
being available for communication, showing concern for the struggles
of survivors, providing updates (even when there is no news) and
demonstrating the values that will carry the organisation into the
future.
12.
Be patient: Even after a change has occurred human transitions take
time. Provide plenty of coaching and support to help each person
become re-established, functionally and emotionally, in the “new
organisation”.
Conclusion
As
an organisational leader, your primary challenge is to maintain
profitability by building employee value. You are well aware of
the need to create high customer value, which leads to retention
and word-of-mouth advertising. How can one offer exceptional service
to those customers if systematically one does not create high value
for the employees who serve them?
(EJ
Sarma is chief executive officer, Hurmist)
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