Should we think twice before downsizing?


Authors:

M. Kameswara Rao
Faculty-HR
E-mail:
mkameshrao@yahoo.co.in

K. Francis Sudhakar
Faculty-Marketing
E-mail:
kfsudhakar@yahoo.co.uk

Centre for Management Studies
National Institute of Technology
Warangal-506 004 (A.P.)
 


Should we think twice before downsizing?

    * The downsizing strategy of AIR INDIA was to cut almost 1000 jobs by launching VRS.

    * As a part of its downsizing strategy, Bajaj Auto will reduce its work force by 4000 by the end of 2003.

    * Downsizing was planned at MTNL, Mahanagar Telephone Nigam (Public Sector Telecom Major) in order to enhance productivity. Over 10,000 employees are eligible to opt for the scheme announced. This is the largest VRS announced by a Public Sector company.

The major concern for managers in the organizations these days is the effective utilization of work force. The issue has become increasingly important because of the pressure to reduce the labor costs. The issue deals with the shortage as well as surplus of employees in an organization. Where there is surplus of work force, trimming of manpower becomes necessary. Downsizing is opted by most of the organizations in an effort to right size their human resources. Downsizing literally means to reduce the size of the organization by cutting down the number of employees presently working in the company. Downsizing strategies enable a company to rightsize its manpower. The unproductive workers should be eliminated while retaining the most effective personnel, thereby optimizing the performance of the workforce.

Downsizings were clearly regrettable but understandable as they helped firms survive during recession period. Such a large number of workers were certainly unnecessary for a firm doing a smaller volume of sales, so the workers were released over short intervals of time in large numbers. Downsizing involves several implications for the short-term profitability and even the long-term growth of the company. It is a decision on the part of the Management to reduce the overall workforce.

The reasons that force the company to opt for downsizing may be any of the following:

    1) Intense competition
    2) Technology advancement
    3) Automation
    4) Outsourcing
    5) Strategic alliances
    6) Elimination of costs
    7) Improve profitability

One of the reasons for the companies to downsize their manpower may be seen as the intense competition that cuts into the company's revenues. Lower revenues lead to efforts to quickly cut down the costs and some employees are laid off as a result. The Management of a company adopts downsizing strategy when less work is done by more number of employees and the potential of employees is not utilized to the full extent.

The factors that lead to downsizing are the developments in the technology, automation and outsourcing one or more processes in an organization. The technological change has been a catalyst to an expanded view of work in many companies. Technological advances have allowed for the expansion of many jobs by combining multiple functions into a single operation. Workers are presented with a broadened scope of activities that challenge their skills. The employees who are ready to adapt to the changes in the environment and as a result, in the organization culture and who moulds themselves according to the environmental requirements should be retained. As the technology advances, the skills of the employees become obsolete. Skill obsolescence can be eliminated or at least minimized so that experienced employees are retained.

Automation or the replacement of man by machine also is one of the major reasons behind downsizing. The work done by a group of people, say 5 or 6 workers is done by a machine, which can be operated by a single person. Thus this has initiated the need to reduce the number of employees in the organization. Companies have opted for downsizing its manpower following the computerization and automation of several operations.

Outsourcing a department or a particular process is another reasons that force companies to conduct layoffs in an effort to downsize its human resources. In an organization where an entire department or a particular process is outsourced by an agency, the employees who belong to that particular department or those who are involved in the operations of that particular process are laid off. Consider that an organization has offered its recruitment and selection to an outsourcing agency, the employees involved in it are to be laid off.

Another reason is the strategic alliance of two or more companies. The joint venture necessitates the downsizing of the manpower in the companies involved in the venture. The term downsizing was coined to describe the action of dismissing a large portion of a firm's workforce in a very short period of time, particularly when the firm was highly profitable. In a standard downsizing story, a profitable firm well poised for growth would announce that it was firing a large percentage of its workforce. The equity market would get excited and initiate a buying frenzy of the firm's stock. This goes counter to a standard micro-economic analysis, in which weak firm anticipate a slump in the demand for its products, and lays off workers, while strong firm foresees a jump in the demand for its products, and hires more workers to increase production.

Investors care about downsizing, since it contains severe implications for the short-term profitability and even the long-term growth of a company. Downsizing is quite unlike a traditional layoff- in a layoff, a worker is asked to temporarily leave during periods of weak demand. In downsizing, the separation between a worker and a firm is permanent. Downsizing is not a dismissal for individual incompetence but rather a decision on the part of the Management to reduce the overall workforce.

The other reasons being intended to improve profitability eliminate obsolete functions and reduce the overstaffed areas of an organization. As the organizations move towards more strategic workforce management, downsizing will remain part of the work force landscape, but the catalyst for it will change. Downsizing began as the strategy of sick companies shedding workers in the face of weak demand, but soon strong firms looking to boost shareholder value also adopted the policy. Downsizing can be used as a strategic option that Management can exercise in order to boost the equity value. It can be perceived as a planned change involving the elimination of the positions, operations or jobs. To quote an example, the position of secretaries to executives in the organizations have been replaced by the computers thereby reducing the number of employees which leads to reduction in the labor costs.

The implementation of downsizing strategy should be carefully planned and performed by the organizations. To begin with, a clear and careful analysis of the effects of the layoffs in the long run as well as in the short run is to be carried out. If a company performs layoffs in response to the short-term losses, its long-term survivability may be endangered. Thus before conducting layoffs, the companies should seek an appropriate balance between short-term and long-term demands. The companies should be well prepared for downsizing. Anticipating the kinds of human resource problems that crop up subsequently, help the companies to cope up with this change to some extent.

The employees should be informed well in advance about the layoffs. Prior warning or informing about the layoffs creates a chance for the employees to revolt against the Management, cause damage or sabotage to the machinery and valuable assets of the company. This impact can be reduced by providing the employees with retraining and offering them adequate compensation and benefits.

The major techniques of adopting downsizing strategy are listed below:

      2) Layoff
      3) Retrenchment
      4) Closure
      5) Voluntary retirement

Layoff is a temporary measure to reduce the workforce in case the organization faces problems like shortage of fuel or power, accumulation of raw material and finished stock due to recession, shortage of working capital, breakdown of machinery or natural calamity. Layoffs were declared illegal by the Labour Department. Hindustan Motors, one of the key players in the automobiles, in the recent past entered into a legal course against the order of refusal of permission of layoffs. Another US-based company Texas Instruments adopted a different strategy to cope up with a recession. It terminated the jobs of thousands of employees and had to rehire, retrain and motivate the employees when things improved.

Under the Industrial Dispute Act, 1947, an organization can retrench employees for any reason other than termination of employment due to disciplinary action. The employees can prune the workforce using this method and pay them the retrenchment compensation as stipulated in the Act. Retrenchment should be often based on the Last In First Out (LIFO) principle wherein junior-most employees would be retrenched, even if they were competent. Retrenchment involves a tricky and complex a process for identifying the non-performers, who are required to be separated from the organization permanently.

A thorough performance appraisal is to be carried out in order to identify the non-performers and remove them thereby enhancing the profitability as well as productivity. Performance appraisal system should be well designed so as to identify the most efficient employees so that they can be retained while conducting the layoffs. Companies must be aware that even their short-term problems may not be solved by downsizing because of the loss of skills resulting from the departure of the experienced employees who were offered Early Retirement Schemes and VRS.

An employer can close down the whole or part of a unit if the circumstances that lead to closure are beyond the control of the employer. In the case of closure on account of unavoidable circumstances beyond the control of employer, the maximum compensation payable to a worker is his three months salary.

Companies have been downsizing through the process of a compensation package based on Voluntary Retirement Scheme or VRS. VRS is viewed as one of the methods for the turnaround of the company when business cycle is on a declining curve. In many large sized organizations, there is no more lifetime employment. The symptoms of such decline in the business cycle are seen in gradual decline in profits, reduction of market shares, loss of monopoly, fast emergence of new technology and the like. When these symptoms are round the corner, Management must initiate action thorough strategic planning.

One of the most important drawbacks of these methods of downsizing is that they cannot be used at the discretion of the employer in case of large organizations. Approval of government before layoff, retrenchment and closure is compulsory. In a country like India, where unemployment is one of the major problems, the government is very reluctant to give permission for cutting jobs even if the reasons are genuine. Trade unions also offer stiff resistance.

Having identified the reasons for the present downtrend of the organization and also having decided the probable actions required for the rectification, the company must compare its vital data for all the factors with the best company in the same or similar trade. Such benchmarking helps in understanding the level of efficiency at which the company is presently working. After implementing one of the downsizing methods and reducing the manpower, the main issue for the Management is to handle the survivors or the employees who remained in the company after downsizing.

The survivors experience an emotional shock that prevents them from suddenly changing direction. A decade of downsizing has made it abundantly clear that traditional psychological contract between the employer and the employee has been forever broken. Not knowing what to do people will wait and see what happens. They are waiting for leadership, someone to tell them what to do. A good manager has to have the compassion for human need to cope with the shock and fear that people feel, combined with a sense of optimism direction and mission will help them through the often painful transition from what was to what is to be. Thus planned separation is not an end itself. It is essential to plan for working out schemes that the retained organizational members are not demoralized. A fall out of VRS is that the retained employees are a scared lot, always afraid and apprehensive that anyone or some of them may be asked to retire at any time. Though in reality it is not possible to assure all the retained employees about their retention for all the time in future, Management should demonstrate by its action that retained employees are considered and treated as the valued members of the organization.

It is important to maintain the morale of the retained staff. It is therefore necessary to maintain close communication with them and dispel rumors, which are generally rampant in such conditions. Efforts should be made to build a good deal of counseling services. Counseling should be used as a process to communicate effectively with the organizational members so that they realize that VRS is the last resort for the revival and survival of the organization. A good counseling session must include practical advice about how to use or invest the sum received as compensation. The retained employees shall also need advice not only on investment but also on income-tax implications. When layoffs are conducted or perceived to be conducted according to random criteria or on the basis of merit, they may have an impact on the work performance of the retained employees. They tend to develop a sense of job insecurity and search for job offers outside.

The companies can reduce the impact of downsizing by retraining or redeployment policies. These help employees to acquire more than one skill. Also potential employees should be involved in planning the downsizing process thereby creating awareness among the employees that downsizing is inevitable in that particular situation facing the organization. Providing good and attractive compensations and severance packages can soften the impact of downsizing.

Downsizing is also aimed at increasing profitability by reducing the costs as well as enhancing and improving the productivity of the retained employees. But the fear arises here that the performance of the retained employees might be reduced because of the job stress they experience due to the additional workload on them. In fact there is a danger of productivity level going down. In order to ensure that performance level of the survivors do not go down, they should be motivated and made to feel that the organization needs them and values them.

Many organizations have been downsizing their manpower over the years. It is just not sufficient to plan downsizing well but the coping strategies should also be designed properly to handle the implementation of downsizing. Over the past decade, downsizing has been in full swing and reductions in the workforce became a fact of life in the world of work. The downsizing strategies adopted by many companies recently, support the above statement:
 


M. Kameswara Rao
Faculty-HR
E-mail:
mkameshrao@yahoo.co.in

K. Francis Sudhakar
Faculty-Marketing
E-mail:
kfsudhakar@yahoo.co.uk

Centre for Management Studies
National Institute of Technology
Warangal-506 004 (A.P.)
 

Source : E-mail September 21, 2004

 

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