- Published: October 31, 2021
- Updated: October 31, 2021
- University / College: San Diego State University
- Language: English
- Downloads: 20
This paper will provide a comprehensive description of the implications of corporate downsizing across an organization. The disadvantages of downsizing include the big financial implications required at an instance, decline in employee morale, and legal complications. Downsizing has negatives effects to the locality of the organization and the business supported by the income from the employees of the organization is significantly affected. The results are negative effect in the society when disposable income decreases. The adoptions of lean operations in organizations have been the main contributor to the systematic downsizing across the world. However, there are benefits of abandoninga downsizing strategy to an organization both in the short term and long term. This can be implemented through organizational restructuring that incorporates all the employees.
Within the past few years, organizational leaders of corporations have made national headlines, using different strategies to justify their actions, which have led to distorted viewpoint for readers that know little or nothing about operational aspects of corporations. The paper also provides a fundamental basis for justifying the process of downsizing as an important aspect of the financial cycle of an organization. The research within this document will show why corporate downsizing, with its disadvantages, would still have a positive result for a corporation. Although corporate downsizing may seem cost effective for the employer, labor saving promises will create instantaneous financial implications, decline in employee morale, and legal complications that will cost a corporation more money in the long run.
On the basis of its origin, the term downsizing is defined as the managerial strategy to streamline, shrink, trim down or reducing a certain structure by dispensing or scaling down some physical elements that are considered to be a burden or having very little economic value. Downsizing is done so as to optimize a certain structure in beneficial condition in the aim of minimizing the use of other resources that are essential. Downsizing is the most preferred option for organizations to maintain their operating costs and also comply with existing scopes of business. It however, requires huge assistance from the department of human resource for it to be successful.
The following are main reasons as to why organizations downsize:
Merging: Organization combines its operations with another organization to operate as one entity in order to expand markets or stay in profit, and as a result some positions become redundant. It results to situations where same work is to be done by two or more staff members. Mostly, in such cases, the organization cuts off staff so as to reduce redundancy in work. This is also characterized by some staff leaving the organizations voluntary especially in the positions of higher management.
Acquisition: In the situations where an organization buys another, there is obviously a change in management and as a result, the acquired company workers have to face layoffs.
Change in management: Downsizing can be caused by change in the top management as different people have different methods and procedures of working. A change in roles of the management may drastically affect the size of workers that are required so as to suit a particular style of management.
Economic crisis: It is the single largest reason for downsizing. It usually consists of a large number of lay-offs by many organizations in the various domains. The economic recession facing the world has actually resulted to downsizing in popular and reputed firms in the world. Following a survey that was carried out by the US Bureau of Census, the organizations that consist of higher number of managerial staff undertake downsizing much often than the organizations with higher number of production process employees.
Change of strategy: Companies usually reduce some areas of operation to be able to focus more on other areas. An example is a situation where a company may be working on project that does not have assured returns, it may end up downsizing the workers who are working on that project to focus its resources on projects that could be profitable ventures.
Increase in computerized services and efficient flow of work: If the work processes of an organization are extremely fast and also easily meet the market requirements, the organization may downsize some of the workers. In a similar way, if the manual work of an organization can be carried out using machines in much better and cost effective ways, it can also lead to reduction in the number of workers.
The practice of outsourcing: The organizations that serve the international markets need a large and efficient base of employees. If the labor is obtainable through importation of jobs from other countries, a large downsizing is probable to take place. For example, if a particular job can be carried out more effectively in a country like India and is also more viable there than it is in U.S. the business may be operated from India.
Implications of downsizing
Downsizing serves as a means for companies to maintain their levels of profitability, but this action usually results to negative effects in the place of work. The workers who leave the company are not the only ones who are affected by it. The remaining workers are also negatively affected after downsizing has taken place and this can result to harmful effects on businesses. The owners of businesses may have their own reason as to why they seek to downsize their businesses. Downsizing may be the better option for particular businesses. Regardless of the reason to downsize, it has its set of disadvantages and advantages to both the employees and the owner.
Downsizing can be effective in the reduction of payments made in benefits and salaries but this comes with a set of costs. Payments and packages for the continued benefits may cost an organization a huge sum of money during the time of downsizing depending on their contracts and the number of workers the organization is laying off. The employees who had a built up time for vacation have to receive a payout for that particular amount and as a result this adds up to the main costs. Usually, the employees who are left in the organization are forced to take the tasks that were being carried out by those who have left. This consumes more time and it leads to overtime which costs more money to organizations. If in the future the organization requires to hire more workers, it incurs more expenses in the processes of advertising the posts, recruiting new workers, screening and also hiring the workers.
The major disadvantages resulting from downsizing lie with the workers of the company. The process of downsizing means that workers will be eliminated due to fewer available positions within an organization. This also means that the existing workers who will be left in the organization will have fewer opportunities to rise and grow to higher positions in the organization. A downsizing organization is not a good environment for the workers who want to advance within a single organization. When there is an announcement to downsizing, the morale declines of the organization’s workers drastically. The employees are in constant worries of who is going to lose their jobs and how the organization is going to function without some of its employees. After downsizing has taken place, the remaining workers are faced with larger responsibilities that do not result to extra payments and this causes a further decrease in the employee morale. The employees are also worried that there will be another round of layoffs. If the reasons for reducing employees is not convincing by the employees, they may end up losing the respect and trust they had for the organization.
Even in the situations where the organization has valid reasons to downsize, they are usually faced by potential for legal fallout in case the eliminated employees have a feeling that they were unfairly targeted. Accusations of unjustified layoffs or discrimination leave organizations exposed to lawsuits that are costly to the organizations. A downsizing organization may have a negative view by the public if the owners do not give a convincing explanation for the reasons of downsizing. An organization that is terminating its employees and reducing the number of client and amount of production may be seen as a failing organization. Due to downsizing, the organizations also stand to earn a bad reputation that could hurt the organization even further.
Downsizing by organizations leads to losing reliable and skilled employees. This makes the organization to be ill-prepared and ill-equipped to take advantages of sudden turnarounds and new opportunities because of the difficulty to find new suitable workers. Regardless of the merits of downsizing, lay-offs result in the interruption of interpersonal relationships at the workplace both informal and formal which had taken their roots over the years.
Teresa Amabile from the Harvard Business School, after carrying a study on downsizing said, “When employees are told that they are going to lose their jobs due to the process of downsizing, they may become despondent. They compare themselves unfavorably to their colleagues who will be left in the organization and as a result lose their confidence in their abilities and skills.” She continued to say that “The employees may become angry at the organization for making the decisions to dismiss them and over time, this anger can result to bitterness.” In order to deal with these psychological effects, organizations may be forced to offer counseling to the terminated employees. Employed workers build a lifestyle that is based on receiving an income that is regular. This includes taking on mortgages and debts because of their ability to make monthly payments. Lose of job can be a big blow to such an employee as they are not able to find some alternative employments easily. The unemployment benefits and severance payment may not be able to cover all the employees’ expenses. If this is the case, the employee is forced to change their lifestyles in order to accommodate their lower earning and this may not be taken positively by the employees.
Advantages of downsizing
One fact regarding downsizing is that all the areas or departments of the organization require to be downsized. Even though this may not be seen as a positive move in the eyes of the workers, the owners of the organization are able to make decisions and cuts that equally affect every department. The mutual downsizing effect enables the managers to create balanced plans so that every department gets enough resources to perform as it is required. Downsizing also gives the management more control of the employees and also creates increased opportunities for the managers to interact more with the employees of all levels.
Downsizing has an advantage in that it creates a chance to scale organizations down to more manageable and realistic sizes. In the times of growth, organizations tend to increase the number of personnel and equipments that serve the immediate purpose. It is then normal for an organization to shift it business model during the evolution of the organization. Downsizing is the chance to bring the size of the organization down to something that is able to efficiently serve the customer and also remain profitable. Due to downsizing, an organization is forced to re-evaluate the business processes and also re-write the business plan so as to accurately reflect on the current status of the organization. Organizations are supposed to constantly update their business plans to reflect on internal shifts and the changes in the marketplace that affect the productivity of the organization.
The workers who lose their jobs due to downsizing are entitled to get severance pay if their employment contract provides for it the organization has a practice or policy to pay severance pay. Receiving such lump-sum payments due to termination of employment can be positive as employees can be able to clear their debts or even build up on their savings. Even though it may be upsetting for workers to receive news that they are going to lose their jobs, this may open up some other opportunities they might not have considered. Most organization help their departing workers in finding other jobs which is referred to as outplacement support. The employees may get jobs that offer better terms and conditions compared to the previous one. Some of the eliminated workers seize the opportunities of setting up their own businesses using the severance pay they get after they are terminated.
One of the major reasons for downsizing is to reduce costs. Many employee payrolls are a liability to the balance sheet of organizations and as such it reduces the organization’s equity. Retained earnings for an organization are influenced by the amount it pays in payrolls and as such, removal of this obligation is a major way of cutting costs. Apart from payrolls, the employee benefits are very costly to organizations as are the operating costs which are related with the process of overproduction.
A major criticism that is levied against the actions of downsizing employees is that organizations terminate the permanent employees to outsource their jobs, or to hire temporary workers who require low wages and little benefits. The loss of permanent employments results to negative economic effects that lead to lesser levels of income, higher rates of unemployment and as such the government is force to spend more to help the displaced employees. However, some economists suggest that the increase in organizations’ operating efficiencies through use of such practices may result to more profits which would in turn bring more growth enabling them to employ higher wage and high skilled workers. A review of the advantages and disadvantage of downsizing indicate that even though downsizing results to temporary disruption to the workforce, it does not cause an overall decrease in productivity and living standards.
However, the success of downsizing is dependent on using the right methodology and also a stable leadership that is able to manage the after effects of downsizing. Lack of strong leadership may result to confusion of the employees and the inability of adjusting to the new roles which can result to the loss of the benefits related to downsizing.
William J. Baumol, E. N. (2005). Downsizing: Reality, Causes, And Consequences. Rusell Sage Foundation.
This book provides a multidimensional review of the process of organizational reengineering. The book examines the performance of organizations as well as their prospects after a reengineering process is complete. The trend in the business world is to alter the business model to enhance the competitive advantage of this organization. The author articulates the best practices in ensuring that a successful reengineering process is achieved. The book also outlines steps instrumental in ensuring that downsizing does not reduce the productivity of an organization. The dynamic nature of the business environment demands that business leaders incorporate strategies to align businesses with the environment. The book will provide a broad basis of argument against laying off workers.
Trimmer, D. (2010). Downsizing: Strategies for successful reduction of workforce. Addison-Wesley.
This is an article published after a four year study examining the best practices across different industries adopted in the process of organizational restructuring. The study focused on the processes within the automobile industry. Organizational performance in this industry is based on four basic ideologies which include lean operations, mass production, business congruency and systematic downsizing. The report provides a comprehensive analysis of data collected from different organizations. This paper provides a fundamental basis for justifying the process of downsizing as a pertinent element of the financial cycle of an organization. This will be instrumental in supporting the research points.
Pomponio, D. (2008). Human Effects and Experience with Corporate Downsizing. Proquest.
This article elaborates that downsizing should be a reactionary tactic adopted by business managers to adapt to the business environment. The article provides a broad coverage of the different implications of implementing a downsizing process in an organization. Moreover, the author describes the significance of having a participatory process where all stakeholders are incorporated. According to the author the process of organizational redesigning should be done in an articulate manner. Many factors should be considered before authorization of a downsizing. This article provides essential details on the implications of downsizing. It is pertinent to note that the author focuses on a systematic process of downsizing. 105
Bowen, B. J. (2008). After the Downsizing: Ethical Analysis. ProQuest.
This article provides a description of the ethical aspect of downsizing. The article provides three different perspectives of ethics which include the rights and duties, fairness and utilitarianism. The article justifies the significance of downsizing when it is done to save the prospects of an organization. The validity of the process is evaluated in the article in a detailed approach. The diverse perspectives on the implications of layoffs in organizations indicate that termination of employment is multidimensional aspect. However, the article indicates the justice and fairness perspective does not support downsizing. This article provides a significant support to the argument that downsizing should not be supported in totality since it is an immoral business engagement.
Mishra, K. & Mishra, E. (1994). The Role Of Mutual Trust In Effective Downsizing Strategies. Human resource management, 33 (2) 261-279.
This article provides comprehensive descriptions of a study conducted on the implications of downsizing in organizations. A clear elaboration of the workforce reduction downsizing strategy is provided in the article. It is pertinent to note that the process of organizational redesigning incorporates different systematic changes. The oldest strategy for downsizing is the workforce reduction which has been criticized by different business researchers. The focus of the study is the different relationships that exist between employee trust and the strategies adopted for downsizing. The report provides detailed information on the process of organizational redesign. The information provided in the article is instrumental in developing an inherent understanding of downsizing.
Gandolfi, F. (2008). Corporate Downsizing Demystified. Scholarly Analysis of Business Phenomenon, 23-50.
Karake-Shalhoub, Z. A. (2010). Downsizing. Corporate Social Responsibility, 12-13.
Marek Korczynski, P. K. (2011). Downsizing. Social Theory at Work.