Downsizing: the Financial and Human Implications

Topics: Layoff, Management, Redundancy Pages: 15 (5753 words) Published: January 29, 2011
Downsizing: The Financial and Human Implications

This essay examines the effects of downsizing with regard to the human and financial implications. Since the mid to late 1980s, downsizing has “transformed the corporate landscape and changed the lives of hundreds of millions of individuals around the world” (Gandolfi, 2008, p.3). For the purposes of this essay, downsizing is defined as the planned elimination of jobs, involving redundancies, and is designed to improve financial performance (Macky, 2004). It will be argued that while downsizing can be an effective strategy, it frequently does not improve financial health, and the human implications can be severe and costly. This essay will discuss: first, downsizing definitions; second, motivation for downsizing; third, a brief history of downsizing; fourth, approaches the implementation of downsizing; fifth, the human implications; sixth, the financial consequences; and, seventh, the reasons for the continued use of downsizing. There are differing perspectives regarding the downsizing phenomenon. At the most simple level, the strategy involves a planned contraction of the number of employees in an organisation (Cascio, 1993). For example, Macky (2004) describes downsizing as “an intentional reduction by management of a firm’s internal labour force using redundancies” (p. 2). However, other definitions encompass a wider range of implementation methods. Cameron (1994) defines downsizing as “a set of activities, undertaken on the part of the management of an organisation and designed to improve organisational efficiency, productivity, and/or competitiveness” (p. 192). These activities include hiring freezes, salary reductions, voluntary sabbaticals, exit incentives and reducing hours worked by employees. This essay will focus solely on the downsizing activity of redundancies. Various synonyms exist for downsizing, including resizing, rightsizing, smartsizing, restructuring, redundancies and reduction-in-force (Gandolfi, 2010; Macky, 2004). The main motivation for downsizing, at least for private companies, is to improve an organisation’s financial performance, which is also known as profit maximisation (Kammeyer, Liao & Avery, 2001). The factors contributing to downsizing decisions are complex and depend on company-specific, industry-specific and macroeconomic factors (Macky, 2004). In hard times, downsizing is a strategy that may be employed as a quick-fix, reactive response to compensate for reduced profit by reducing human related operational costs (Kowske, Lundby & Rasch, 2009; Ryan & Macky, 1998). In healthy times, the workforce may be reduced as part of a proactive human resource strategy to create a ‘lean and mean’ organisation (Chadwick, Hunter & Watson, 2004; Kowske et al., 2009). An overwhelming body of academic research suggests that downsizing has surprisingly little success in increasing profitability and shareholder value, even though financial performance is its main intention (Cascio, 2002; De Meuse, Bergmann, Vanderheiden & Roraff, 2004; Lewin & Johnston, 2000). Despite the limited financial success of downsizing, it has remained a popular strategic tool with its use spanning the last three decades. Prior to the 1980s, downsizing was engaged primarily as a last resort, reactive response to changing manufacturing demands. It affected mostly blue-collar, semi-skilled employees (Littler, 1997). In contrast, since the 1980s, workforce reduction has become a leading strategy of choice, affecting employees at all levels, all around the globe (Mirabal & DeYoung, 2005, as cited in Gandolfi, 2008), within a wide variety of organisations encompassing all industries (Littler, 1998; Macky, 2004). Karake-Shalhoub (1999) suggests that downsizing has been the most significant business change of the 1980s. Downsizing increased in popularity during the 1990s, which has subsequently been described as the ‘downsizing decade’ (Dolan, Belout &...
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