Downsizing in Organizations: Strategies, Impacts, and Alternatives

Posted on Jan 17, 2025 in Local Administration

Downsizing: Definition

Downsizing is a set of activities carried out by the management of an organization, aiming to improve its efficiency, productivity, and/or competitiveness. It often involves staff reductions, although it is not limited to this aspect. In other words, it is a process of “slimming” that aims to act on the proportion of employees to the work to be performed in the company.

Downsizing: Causes and Motivations

Companies need to face the challenges of competitiveness brought about by the globalization of markets and the constant change in organizational environments.
To survive and compete, they need to reduce costs, adapt to technological innovations, respond to competitive maneuvers, and face changing customer needs and tastes.
Many mergers and acquisitions of companies generate redundancy of jobs, impelling the removal of surpluses.
For learning reasons, through economies of scale and/or as a result of the introduction of technological improvements, companies are progressing in productivity ratios – generating surpluses of resources.
In the path of strategic reorganizations, companies decide to focus on their core competencies by outsourcing activities that are not “essential” and that other companies can execute more effectively and efficiently.
The new information and communication technologies eliminate the need for various jobs.
As a result of management errors, the organization goes through a process of decline, requiring reducing costs in order to survive.
For the reasons of fashion, managers adopt innovative models and techniques and are often sensitive to the speeches of producers.
Managers are induced by attempts of imitation.
Consulting companies disseminate the advantages of downsizing in a logic of promotion of own.
Managers are attracted to the belief that downsizing, by conveying the idea of good management and good future health of the company, can induce positive reactions in the capital markets, leading to a valuation of stock prices.

Downsizing: Does it Work?

The process can contribute to solving problems and/or increasing competitiveness, but it does raise concerns of various kinds.
The results of the investigations are not consistent. Some studies suggest that downsizing firms achieve higher productivity, better economic and financial performance, and higher capital market performance. Others, however, suggest either otherwise, or that the effect of downsizing is null.

Downsizing: The Type of Strategy

Workforce Reduction:

Reduction of staff (redundancies, retirement incentives, etc.)
Short-term focus

Organizational Redesign

Organizational change (elimination of jobs/positions, merger of units, elimination of hierarchical levels, elimination of products, etc.)
Medium-term focus.

Systemic Strategy

Changing organizational culture, employee attitudes and values (changing responsibilities, redefining roles, new strategic priorities, etc.)
Long-term focus

Downsizing: Positive Consequences for the Organization

Increased organizational efficiency.
Reduced costs.
Removal of obsolete or redundant jobs.
Elimination of unnecessary tasks.
Less bureaucracy.
Improvements in organizational communication.
Greater speed in decision processes.
Increased productivity and profits.
Increased efficiency of the company against the competition.
Greater competitive capacity.
Survival of the company.

Downsizing: Negative Consequences for the Organization

Decline in the health and well-being of the remaining employees and the executing staff.
Impoverishment of the image and reputation of the organization among customers, the community, and other stakeholders.
Overall decline in performance of people and organization.
Neglected long-term planning.
Costs with possible legal proceedings.
Less inclination for innovation.
Increased “levels of cynicism” within the organization.
Degradation of the organizational social climate.
Potential outflow of talent from the organization.
Increased levels of absenteeism.
Decrease in loyalty ties and trust of employees with the organization.
Erosion of team spirit.

Downsizing: Negative Consequences for Dismissed Employees

Depression.
Decreased self-esteem.
Increased levels of apathy and passivity.
Manifestations of hostility.
Alcohol and drug abuse.
Health problems, such as sleep disorders, cardiovascular dysfunctions.
Attempted suicide.
Family tensions (divorces, conflicts with the children) and the neighborhood.
Negative effects on the relatives of the employees dismissed, especially in children.

Downsizing: Negative Consequences for Remaining Employees

Greater anxiety about the future of your job.
Feelings of guilt.
Break of trust in the organization’s leaders.
Greater cynicism.
Fractures in the sense of loyalty to the organization.
Decreased levels of affective and normative organizational commitment.
Higher levels of absenteeism.
Possible work overload, with further consequences.
More stress caused by the social climate prevailing in the organization and/or the work overload.
Possible retaliation behavior.
Decrease of the cooperative spirit.
Lower rates of citizenship behavior.

Downsizing: Negative Consequences for Society

Increasing unemployment.
Decrease in social security contributions.
Increased crime and social conflict.
Lower social cohesion.
Reinforcement of feelings of pessimism and mistrust.
Break in the purchasing power of citizens.

Downsizing: Guidelines for More Effective Processes

It is important that the organization is guided by a vision (realistic, appealing, clear, mobilizing) and that the business is redefined according to the new competitive landscape.
It is recommended the systemic orientation of the process, not just focused on mere reduction of staff in order to reduce costs.
Before “cutting” the staff, it is recommended to eliminate unnecessary work. Otherwise the “survivors” feel that the workload has increased and that the change has degraded the conditions in which they performed their duties.
It is recommended that the “base” of the hierarchy participate in the process of analyzing the work, improving it, solving problems and, not least, participating in the search for alternative solutions to downsizing.
If cost reduction is effectively the right prescription for a declining organization, or a response to falling productivity, then the dispensation of personnel should be taken as the last resort – not the first remedy.
Other alternatives can be considered.

Alternatives to Downsizing

Reduction of costs with waste.
Unpaid leave.
Contracting freeze.
Increased number of “forced” vacation days.
Wages freeze.
Letting people go, but with a promise to return to work when possible.
Restrictions on the use of overtime hours.
Exchange of employees with other companies.
Training, recycling, retraining.
Transferring people to jobs where their skills are most needed.
Leave incentives.
Conversion of full-time work into part-time work.
Allow members of the organization to work for the community during a given period, earning only a percentage of the salary.
Job sharing.
Financial support for dismissed employees for self-employment initiatives.
Reduction of the work week.
Non-renewal of contracts with temporary workers.

Outplacement: Services Provided

Outplacement is an advice service paid by the company that is letting employees go, designed to help them find a new job adjusted to their needs and life goals.

Help in the preparation of the CV.
Access to secretarial services, photocopy, fax, telephone, and computer.
Individual and group counseling for career transition.
Evaluation of competences.
Training for the purpose of interviews.
Counseling in stress management.
Counseling to family members.
Information and training about how to start a business.
Workshops on personal marketing techniques.
Help in networking creation.
Seminars on change and financial planning.
Private meeting room.
Access to databases.
Active search of new job opportunities.

Outplacement: Benefits

For the employee: support in the search for a new job.
The company conveys a message of respect for employees who have been dismissed and they are less likely to take legal steps, delivering more positive messages about the company.
Reinforcement of good reputation with stakeholders.
The company becomes a reference recruiter.
Survivors respond more positively.
The company retains talent more easily.
Reduction of costs.
If people are the most important capital of a company, when it has to let someone go, it is better to do it in the most correct way, and not as if the person was “something disposable.”

“Death Angels”

Performers of the downsizing process – those who plan and implement the process

These individuals may suffer from emotional and psychological problems similar to those experienced by the “survivors” and the “victims” of the downsizing processes: – Tiredness, burnout, feelings of confusion and guilt, irritation, depression, anxiety, etc.
They experience the feeling of doing “dirty work.”
The need to act as managers of the “toxic emotions,” which usually accompany such processes, is sometimes incompatible with the negative emotions they themselves experience.

The negative effects these individuals feel emotionally, psychologically, and even physically, as a result of the work they do, may undermine the effectiveness of the downsizing process. Among the possible reactions that help explain the decline in effectiveness are:

Emotional detachment – leads the performers to depersonalize the subjects of downsizing, treating them as numbers and depreciating the negative consequences. They may even reach a state of “emotional numbness.” As a consequence, they can depreciate the emerging emotional upheaval and provide no support to those who need them most (including survivors).
Cognitive detachment – forces the performers to reframe the situation, seeking to rationalize it in positive terms (e.g., “these people will find better jobs in other companies”) and trying to diminish the guilt. It also leads them to find justifications for their role as agents (e.g., “the harsh reality of business”).
Physical detachment – leads the performers to avoid contact with people. As a consequence, they lose the ability to act precisely in times of greater need.

The problems tend to be greater when:

Have positive social relationships with the victims and/or know their personal and family situations;
They consider that dismissal is not justifiable and/or that alternative measures were not considered;
They feel compelled not to tell the truth to people they trust who are about the possibility of being fired;
They feel stigmatized for doing “dirty work” that their families and community members do not understand;
They fear retaliations and fear for their personal safety;
They have feelings of insecurity about their own future in the company.
The way the performers behave significantly influences how victims and survivors react
They must be able to properly manage their own emotions so that they respect the dignity of others and are effective.