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Article Excerpt
Before the 1990s, firms downsized--deliberately shrank--in response to hard times. Now, however, downsizing is just another management tool to increase profitability, efficiency, and competitiveness. Despite a growing body of evidence that the long- if not short-term consequences of downsizing are negative, it remains a respectable and even popular strategy. Managements contemplating a downsizing strategy would do well to heed the five lessons presented here concerning preparation, training, the survivor syndrome, direct and hidden costs, and using the strategy as a last resort.
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Introduction
Organizational downsizing as a change management strategy has been adopted for more than two decades (Gandolfi, 2007). In the 1980s and early 1990s, it was implemented primarily by firms experiencing difficult economic times (Gandolfi, 2006). However, since the mid-1990s, downsizing has become a leading strategy of choice for a multitude of firms around the world (Mirabal and DeYoung, 2005). The prime impetus of most downsizing efforts is the desire for an immediate reduction of costs and increased levels of efficiency, productivity, profitability, and competitiveness (Farrell and Mavondo, 2004). Over the years, this strategy has generated a great deal of interest among scholars, managers, and the popular press. Some authors suggest that the research-based body of knowledge is still relatively underdeveloped (Macky, 2004), while others stress the confusion surrounding downsizing (Williams, 2004; Gandolfi, 2008). The adoption of strategic downsizing has remained popular (Maurer, 2005), yet significant empirical and anecdotal evidence suggests that the overall consequences are negative (Zyglidopoulos, 2003).
The primary objective of this article is to review the consequences of downsizing, focusing on the following questions: Does downsizing work? Have firms reaped the much anticipated benefits? In other words, what do we know about the effects and after-effects of downsizing? This paper draws out implications for executives and showcases five downsizing lessons that managers should consider. Finally, the paper suggests future research for this topic.
Downsizing: Background
Back in the mid- 1970s, Charles Handy first predicted that the technological revolution would transform the lives of millions of individuals through a process he aptly termed 'down-sizing' (Appelbaum, Everard, and Hung, 1999). While few understood his prediction at the time, we now know that downsizing has been adopted as a management technique on a global scale (Macky, 2004). Firms have implemented downsizing as a "reactive response to organizational bankruptcy or recession" (Ryan and Macky, 1998) and proactively as a human resource (HR) strategy (Chadwick, Hunter, and Walston, 2004). Reflecting upon its pervasiveness, it is evident that downsizing has attained the status of a fully-fledged restructuring strategy (Cameron, 1994) with the intent of attaining a new level of competitiveness (Littler, 1998).
Admittedly, downsizing is not new. It came into prominence as a topic of both academic and practical concern in the 1980s and became a management mantra (Lecky, 1998) in the 1990s. The latter period subsequently became the "downsizing decade" (Dolan, Belout, and Balkin, 2000). Downsizing has transformed hundreds of thousands of firms and governmental agencies and the lives of tens of millions of employees around the world (Amundson, Borgen, Jordan, and Erlebach, 2004). The notion of downsizing has emerged from a number of disciplines and draws upon a wide range of management and organizational theories. The body of literature is extensive reflecting its prevalence in the U.S., the U.K., Canada, Western Europe, Australia, New Zealand, and Japan (Littler, 1998; Gandolfi and Neck, 2003; Farrell and Mavondo, 2004; Macky, 2004).
A single definition of downsizing does not exist across studies and disciplines. Still, it is clear that it means a contraction in the size of a firm's workforce. Cascio (1993) posits that downsizing is the planned elimination of positions or jobs whose primary purpose is to reduce the workforce, while Gandolfi (2006) adds that a myriad of terms have been used euphemistically in reference to downsizing, including "brightsizing" and "rightsizing."
Downsizing is ubiquitous. While manufacturing, retail, and service have accounted for the highest levels, downsizing has occurred in both the private and public sectors (Macky, 2004). Downsizing statistics show a sobering picture. The U.S. Bureau of Labor Statistics (BLS) reported that more than 4.3 million jobs were cut between 1985 and 1989 (Lee, 1992). The New York Times stated that more than 43 million jobs had been eliminated between 1979 and 1996 (Cascio, 2003). Cameron (1994) reported that 85% of the Fortune 500 firms downsized between 1989 and 1994, and 100% had downsizing-related plans in the ensuing five years. Substantial evidence suggests that downsizing remains a popular restructuring strategy (Mirabal and DeYoung, 2005; Gandolfi, 2008).
Why do firms resort to downsizing? What are the driving forces? While downsizing is viewed as complicated and multifaceted (Gandolfi, 2006), it has generally been adopted either reactively or proactively (Macky, 2004). To put a single downsizing cause forward is problematic and underrates its inherent complexity. Each downsizing decision reflects a combination of company-specific, industry-specific, and macroeconomic factors (Drew, 1994). Downsizing firms frequently point to deregulation, globalization, mergers and acquisitions (M&A) activities, global competition, technological innovation, and a shift in business strategies to obtain and retain competitive advantages (Dolan, Belout, and Balkin, 2000; Sahdev, 2003; Gandolfi, 2008).
Downsizing Consequences
Downsizing has deep financial, organizational, and social consequences, covered extensively in the change management literature. A closer analysis of the overall effects presents a complex picture with the following questions emerging:
* Is downsizing an effective strategy?
* Does downsizing engender improved financial performance?
* Have firms reaped financial and organizational improvements?
The overall picture of the financial effects of downsizing is negative. While a few firms have reported financial improvements, the majority have failed to report increased levels of efficiency, effectiveness, productivity, and profitability (Cascio, 1993; Macky, 2004; Gandolfi, 2008). Table 1 presents a non-exhaustive overview of some of the findings.
In light of the available cross-sectional and longitudinal data, the following conclusions can be made:
* Most firms adopting downsizing strategies do not reap economic and organizational benefits;
* Non-downsized firms financially outperform downsized forms in the short-, medium-, and long-run;
* While some firms have shown positive financial outcomes,...
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