Downsizing During Economic Downturns: Effective?

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Downsizing During Economic Downturns: Effective?
Anneke Zwart, Student (University), Netherlands, Moderator
As we have seen in recent global economic crises, many organizations use downsizing (DS) as an approach to survive economic downturns. They consider DS as a useful instrument to survive difficult times. DS is used by organizations in both high developed and emerging countries.

But Luan et al. (2013) argue that downsizing is not always efficient when dealing with economic downturns. Indeed it might even negatively affect an organization! In their interesting article they discuss 3 forms of downsizing during economic downturns and their effects:

1. Layoffs: Layoffs can lead to the reduction of short term cost, but do not ensure improved performance; rather, wrong-sizing is often the result. Other consequences of layoffs mentioned are the loss of talented employees, the loss of trust and severance pay.
2. Decreasing organizational slack: Normally, by providing a buffer of resources, organizational slack helps to maintain stability by allowing organizations to deal with unexpected changes and threats. Therefore It is found that downsizing through decreasing organizational slack during economic downturns negatively affects the financial performance of a firm.
3. Pay cuts: DS through pay cuts normally result in better financial performance, because of the reduction in labor cost. However an economic downturn weakens the positive effect on financial performance. The main reason is that cutting salaries during an economic downturn will have greater negative effects on staff morale and productivity, and on trust of laborers compared to pay cuts in good economic periods. As a result it is critical to be careful when implementing pay-cut strategies.

Source: Luan, C., Tien, C. And Y. Chi. (2013). “Downsizing to the wrong size? A study of the impact of downsizing on firm performance during an economic downturn. The International Journal of Human Resource Management, 24:7, 1519-1535.

Effect of Downsizing During Crises
Musonda Ernest Kabwe, Zambia, Member
I think the best way of surviving the economic downturns in an organization is to encourage an open book management style rather than using downsizing because indeed it becomes a cost on its own if not handled properly.

Effect of Downsizing during Downturn
Mohankrishna, Manager, India, Member
During downturn organizations should cut the costs by classifying the expenditures with respect to their necessity.
Instead of lay offs they should reduce the number of working days while holding on to the productivity as per the required moving average with respect to demand.
They should hold on to the pay hike with a clear market analysis instead of just cutting the pay. Negative feelings of pay cuts may be more demoralizing than not getting the hike with respect to business circumstances.
Similarly inventories should be carried with a flexible approach to absorb the cyclical requirements of the customers while safe guarding the 3 tier suppliers.
Achieving all above is not an easy task but there may be no other options left.

Is our Current Organization Efficient?
Roberto Sauma, Consultant, Costa Rica, Member
The question is not whether we downsize or not, the question ought to be: is our current organization efficient? With the people and resources we have, are we a cost-effective alternative to our customers? Are we up to the market?
One of the most common mistakes is that in good times managers tend to increase the size of the organization, without a clear definition of the roles or without paying much attention to how this will help reach the objectives of the company.

Effect of Downsizing in Downturn
Samuel Diaz Florian, Consultant, Colombia, Member
The organizational Structure depends on the key Processes that efficiently manage the Resources (human, financial, logistic, technological, etc.) in order to reach the Functions (products and services for dealing market niches with suitable technology) needed to achieve the goals and objetives.
The above systemic approach of the organizations allows us to understand that the size of the structure has a positive correlation whith the number of processes (value chain).
Each process must be performed by a responsible person.
The downsizing approach affects the quality of processes, management of resources, functions and objectives.

Prepare for Downturn in Good Times
Jay Shah, Manager, Australia, Member
The best way to deal with this situation is to prepare for any future downturn in business when the business is going well. By setting aside some financial resources for this time as well as by involving all critical team members in the decision making process, the business has the best chance of surviving a downturn without much impact on the business future.
Downsizing only addresses the present problems and could adversely impact the future.
A full analysis of the impact of any decisions on both the short and long term should be carried out and documented.

DS is a Short-term by its Nature
Moses Mutethia Muriungi, Strategy Consultant, Kenya, Member
Thank you all for your contributions.
Firstly, DS by its nature is done to address issues on a short-term basis, its more of a reactive strategy and not proactive. Its weakness comes in by the fact that it can't address the future hence its sustainability is questionable.
During tough economic times, management should brainstorm and come up with approaches like diversification of services, products or processes.
And indeed downsizing, if not carried out well, can be a very costly affair to an organization, since valuable and talented staff are lost.
I agree with @Jay Shah that organizations should plan for economic downturns or low seasonsto ensure that operations continue smoothly.

Downsizing During Economic Downturns
Khalil Rajati, industrial enginer, Iran, Member
@Mohankrishna: I agree the expenses must be classified before any action is taken. First we have to analyze their effect and rank of them in comparison to each other.
For example, we might have to reduce certain inventories which are not important or reduce other expenses.

Downsizing During Economic Downturns
Ralph Kolle , HR Consultant, Cameroon, Member
Downsizing happens to be one among many possible solutions in maintaining the strength/survival of an organization during economic downturns:
- A basic SWOT analysis is required of the organization.
- The management style should be participative and open.
But generally there are expenses on budgets that need to be tailored and reclassified. When these are done and it becomes clear that there is a need for downsizing, salary cuts would be the best option. Employees and management would realize they have to all work for the sustenance of their organization. It would not be a matter of affecting the morale of employees, because they will all realize that they need to even become more committed so that they may reestablish their former situation.
A lot of brainstorming has got to be carried out. I think pay-cuts done in an open manner with open finance records remains the best of the three downsizing options. We should however realize that any solution will always have varied effects.

What to Do in Times of an Economic Downturn
Mr. J. van Delft, Director, Netherlands, Member
The list of possibilities is too short according to my opinion and experience. Of course organizational slack needs to be removed (that is a daily necessity, also in times of upturn), but in such a way that the entrepreneurial spirit stays vivid. How? By focusing on innovation in products, organization and marketing policy. Get the organization in shape for good and bad times. Continuous improvement and full cost consciousness is the proper way out!

DS in Times of Downturn
Marcel Wiedenbrugge, Consultant, Netherlands, Member
@Mr. J. Van Delft: I like your answer.
Create financial reserves during good times, innovate in a timely manner, use reserves especially in the downturn. Create an organizational culture and business model that leads to continuity. Generally speaking, that is good for both customer and employee loyalty.
Of course, when the market you are in is shrinking, you may have to downsize or (timely) invest money to find alternative product-market combinations.

HOW to Go About Downsizing if this Strategy is Chosen
Sabine Pitcher, Manager, United Kingdom, Member
In most western countries, staff costs are high, pay cuts aren't easy to implement, and therefore an organisation should always review their staffing - alongside any other strategic considerations. Do we have the right people, the right number of them and in the right places?
Savings can be obtained in may ways but, ultimately, an organisation might find itself in a situation where layoffs are unavoidable.
What is hardly taken into account: There will come a time when the organisation will want to recruit again - how they handle DS will have an impact on their image and their potential to attract staff in the future. Furthermore, DS can have a severe impact on those who remain in the organisation - their morale and even their health. (I studied this as part of an EU funded research project some years ago.)
If staff understand the rationale and communication happens in an open and transparent way - and people feel they are being treated fairly - the impact will be less severe.

Organizing for Downsizing During Downturns
Ellis, Manager, United Kingdom, Member
It is a fact of life that companies will go through economic roller coasters, either through external influences or internal issues.
One company I worked for had a core team of 'staffees' and used contractors to make up the slack. In times of prosperity there were a lot more contractors but during austerity, contractors were laid off leaving the permanent team to sustain the business.
What is important is that strategically placed 'staffees' provided the corporate memory and retained skills necessary to carry on, seamlessly.
Might not work for everyone, but it certainly did for the company in question.

Cost Reduction Exercise During Economic Downturns
Friday O. Ngbodi, Student (MBA), Nigeria, Member
The whole essence is to reduce cost, and there are many ways to do so without jeopardizing the life and time of the organization.
The cost cutting effort can be managed by constituting a committee on cost cutting among the work force administered by HR.
The strategies to be applied differ according to the organization and the country of origin, considering also the reaction of any organized trade union. It is a double edge sword that must be handled with absolute business sense by the corporate head.

Sizing = Efficient Organizing
De Monte, Canada, Member
If a management team is planning effectively, then organizing an entity is a matter of corporate intelligence (data/information/ knowledge) collected, to analyze to trace, account and prioritize, continuously, either up, down or steady, based on principles of statistical process control, including knowing when to shut down.

Any and all ideas have a time and place, to plan/activate the corrective action policy, rather than react.
A good management team has a leader/CEO that is committed to the entity to know how it functions to allocate time, resources and budgets wisely (intelligently, sensitively, respectfully).
Driving an organizational entity, whether in good times or bad times, requires skill, knowledge and experience.

Downsizing During Economic Downturn
bright lomotey, Student (MBA), Ghana, Member
Firms have to survive - no matter if the shocks originate from within or from the outside. I agree with @Jay Shah that if the shock is better managed, the side effects of downsizing can be minimized.
Note that using salary cuts to reduce cost can be illegal, for instance in Ghana.

The Way to Survive an Economic Downturn is to Cut Cost
Friday O. Ngbodi, Student (MBA), Nigeria, Member
Downsizing during economic down turn could be avoided if the organization has units of companies offering different products. However, if this not the case, the economic way of surviving bad patch in business is to cut costs mainly through wages and salaries by providing staff with option of being laid off or opting for salary reduction which is perfectly legal because it was consented to.
As earlier written, much depends on the type of industry, products, country and strength of organized labor.

Efficient Employees
Bibi Mussarat, Student (University), Afghanistan, Member
Downsizing during an economic downturn is a necessity, but should be based upon an analysis of the departments and its members on how efficient they are. There may be employees with a high position and a high pay, but no efficiency.

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