EMPLOYEE

“ Next to the death of a relative or friend, there's nothing more

traumatic than losing a job. Corporate cutbacks threaten the security
and self-esteem of survivors and victims alike. They cause turmoil and
shatter morale inside organizations and they confirm the view that
profits always come before people.“

- Laura Rubach, Industry Analyst, in 1994

 Downsizing
• From the management's point of view, downsizing
can be defined as a set of organizational activities
undertaken by the management, designed to
improve organizational efficiency, productivity,
and/or competitiveness.

• It refers to the process of reducing the number of

employees on the operating payroll by way of
terminations, retirements or spin-offs within a very
short span of time.
 In the 1980’s
• Downsizing was mostly resorted to by weak
companies facing high demand erosion for their
products or facing severe competition from other
companies. Due to these factors, these companies
found it unviable to maintain a huge workforce and
hence downsized a large number of employees.

• Till the late-1980s, the number of firms that adopted

downsizing was limited.
 During the early 1990’s

•Organizations resorted to downsizing on account of various reasons:

1. To eliminate duplication of work after mergers and acquisitions .
2. To optimize resources and cut costs.
3. To increase productivity and
efficiency by eliminating unnecessary
Intermediary channels.
•Companies such as General Electric(GE)
and General Motors (GM)
downsized to increase productivity and efficiency, optimize resources and
survive competition and eliminate duplication of work after mergers and
acquisitions
 By the mid-1990’s
•Factors such as increased investor awareness, stronger
economies, fall in inflation, increasing national incomes,
decrease in level of unemployment, and high profits,
reduced the need for downsizing across the globe.
•Downsizing trend picked up momentum again in the late-
1990s, this time spreading to developing countries as well.
•This change was attributed to factors such as worldwide
economic recession, increase in global competition, the
slump in the IT industry, dynamic changes in technologies,
and increase in the availability of a temporary employee
base.
DOWNSIZING BY MAJOR COMPANIES (1998-2001)
YEAR COMPANY INDUSTRY NO. OF EMPLOYEES DOWNSIZED

1998 Boeing Aerospace 20,000

1998 CitiCorp Banking 7,500

1998 Chase Manhattan Bank Banking 2,250

1998 Kellogs FMCG 1,00

1998 BF Goodrich Tyres 1,200

1998 Deere & Company Farm Equipment 2,400

1998 AT&T Telecommunications 18,000

1998 Compaq IT 6,500

1998 Intel IT 3,000

1998 Seagate IT 10,000

1999 Chase Manhattan Bank Banking 2,250

1999 Boeing Aerospace 28,000

1999 Exxon-Mobil Petroleum 9,000

2000 Lucent Technologies IT 68,000

2000 Charles Schwab IT 2,000

2001 Xerox Copiers 4,000
2001 Hewlett Packard IT 3,000

2001 AOL Time Warner Entertainment 2,400

 During the late 1990’s and early 21st
century
• Rationalization of the labor force and wage
reduction took place at an alarming rate.
• Increased strategic alliances and growing
popularity of concepts such as lean
manufacturing and outsourcing.
• Many companies began offering flexible work
arrangements to their employees in an attempt
to avoid the negative impact of downsizing. Such
an arrangement was reported to be beneficial
for both employees as well as the organization.
 DOWNSIZING

Need to reduce
costs

Alternatives Voluntary Involuntary

to Layoffs Quits Separations

Early Voluntary
Workforce Layoffs
Retirements
Reductions

Outplacement

Pictorial Representation
 MAJOR TECHNIQUES AND STRATEGIES OF DOWNSIZING

• Attrition: Natural reduction of workforce that occurs when employees

leave the organization due to retirement, death or resignation.
• Voluntary retirement: Encourage employees to retire early with full or
reduced pension benefits before the stipulated retirement age.
• Buyout benefits: Buyout is a technique that includes offering lumpsum
payment to encourage employees (eligible/not eligible for voluntary
retirement or regular retirement) to voluntarily leave the organization.
• Involuntary Separation/Layoff : A layoff may be defined as the separation
of an employee from service for involuntary reasons other than
resignation, not reflecting any discredit on the employee.
• Leave without pay: Leave without pay is granted to employees with
reduced benefits, but with the guarantee of job when they return at the
end of their leave period
 Downsizing and other HR Systems
Loss of training
investment from
turnover
Training Employee
Relations
Reputation
effects on
Morale of survivors
recruitment

Employ-
Downsizing
ment
Performance
Management
Reward
Severance pay Systems
& benefits Performance evaluation
as layoff criteria
 Downsizing Effects: Overall

 Mixed effects on firm performance: some short-term

costs savings, but long-term profitability & valuation not
strongly affected.
 Firm’s reputation as a good employer suffers.
Example: Delta Airlines, which had laid off over 18,000
employees during the early 1990’s.
 Downsizing forces re-thinking of Employment
Strategy. Lifelong employment policies not credible
after a downsizing. Example: GE abandoned policy of
lifetime employment and introduced the concept of
contingent employment.
 Downsizing Effects: Employee Morale

 Employee motivation disrupted: increase in

political behaviors, anger, fear - which is likely to
negatively impact quality of customer service.
 Violation of psychological contract, leads to
cynicism, lowered work commitment, fewer
random acts of “good will”.
 “Survivors” experience more stress due to
longer work hours with re-designed jobs, and
increased uncertainty regarding future
downsizings.
 Downsizing Effects: Workforce Quality

• Uneven distribution of employees (too many employees

in a certain division and inadequate employees in
another), excess workload on the survivors, resistance to
change from the survivors, reduced productivity and fall
in quality levels also cropped up.
• Due to the loss of experienced workers, companies
incurred expenditure on overtime pay and employment
of temporary and contract workers.
• Productivity suffered considerably during the period
when contingent employees were being trained.
Reasons for the increase use of downsizing during the
late 20th century and the early 21st century

• Reducing cost of operations.

• Right size resources in relation to demand.
• Signal that the company is taking proactive
steps to adjust to changing business needs.
• Taking advantages of cost synergies after a
merger.
 Positive effects of downsizing

• Reduce company expenses that

comes after layoffs are made.
• Increase productivity.
• Free up workers for other industries.
• Raise stock prices.
• Lower unemployment percentages.
• Speed up the corporate decision making process
 Negative effects of downsizing
• Low morale of retained employees.
• Loss of employee loyalty and loss of expertise .
• Uncertain job environment created by downsizing
negatively effected the quality of the work produced.
• Depression, anxiety, frustration, anger and bitterness
in the downsized employees.
• Survivors experienced low morale and high stress and
had to cope with an increase in workload. In addition,
they felt downsizing syndrome marked with
frustration, anger, depression, envy and guilt.