Downsizing HR Management MBAO 6030 Human Resource Management

Downsizing What is Downsizing? n A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance (Robbins & Pearce, 1992). n A reduction of the workforce is one of only several possible ways of improving profitability or reducing costs. MBAO 6030 Human Resource Management

Downsizing Why do Firms Downsize? n Reduce costs n Reduce layers of management to increase decision making speed and get closer to the customer n Sharpen focus on core competencies of the firm, and outsource peripheral activities n Generate positive reactions from shareholders in order to improve valuation of stock price n Increase productivity MBAO 6030 Human Resource Management

Downsizing (Gomez-Mejia, Balkin & Cardy, 2001) Need to reduce costs Alternatives To Layoffs MBAO 6030 Human Resource Management

Alternatives to Downsizing (Gomez-Mejia, Balkin & Cardy, 2001) Employment Policies Attrition Hiring freeze Cut PT employees Cut interns Cut temps Voluntary time off Reduced work hours Changes in Job Design Transfers Relocation Job Sharing Demotions Pay/Benefits Training Policies Pay freeze Retraining Cut overtime pay Use vacation & leave days Pay cuts Profit sharing or variable pay MBAO 6030 Human Resource Management

Downsizing (Gomez-Mejia, Balkin & Cardy, 2001) Need to reduce costs Alternatives To Layoffs Voluntary Quits Involuntary Separations Early Retirements Voluntary Workforce Reductions Layoffs Outplacement MBAO 6030 Human Resource Management

Downsizing Effects: Overall n n n Mixed effects on firm performance: some shortterm costs savings, but long-term profitability & valuation not strongly affected. Firm’s reputation as a good employer suffers. Example: Apple Computer’s reputation as good employer declined after several layoffs in 1990 s. Downsizing forces re-thinking of Employment Strategy. Lifelong employment policies not credible after a downsizing. Example: IBM abandoned lifelong policy after several layoffs in early 1990 s. MBAO 6030 Human Resource Management

Downsizing Effects: Employee Morale n n n 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 MBAO 6030 Human Resource Management

Downsizing Effects: Workforce Quality n n n Many senior employees leave due to application of early retirement incentives: result is loss of institutional memory. The use of voluntary workforce reductions (buyouts) results in the most marketable employees leaving (“stars”) -- difficult to control since all employees must be legally eligible to qualify. Early retirements & voluntary reductions often result in too many people quitting, and some are hired back as consultants at higher cost to firm. MBAO 6030 Human Resource Management

Downsizing Effects Downsizing Works Best When: n Changes in Strategy, Organization structure and Culture accompany job cuts of downsizing n Weak business units and plant closures are used as basis of reductions, rather than across the board cuts affecting all units (including healthy ones) Source: Cascio et al. 1997 MBAO 6030 Human Resource Management

Downsizing and other HR Systems Loss of training investment from turnover Training Reputation effects on recruitment Employee Relations Morale of survivors Employment Severance pay & benefits Downsizing Performance Management Reward Systems Performance evaluation as layoff criteria MBAO 6030 Human Resource Management

Downsizing Critical Thinking Questions 1. Which is a better criteria to use as the basis for downsizing employees: seniority or performance? State your reason. 2. Should employers give future notice to downsized employees, or tell them on the day they are expected to leave the firm? 3. Separation pay is voluntary. What benefits do firms get when they give separation pay to employees in a downsizing? MBAO 6030 Human Resource Management

Downsizing Critical Thinking Questions 4. Is there a set of “best practices” to let an employee know she/he has been downsized? 5. Under what circumstances might a company’s managers prefer to use layoffs instead of early retirements or voluntary severance plans as a way to downsize the workforce? MBAO 6030 Human Resource Management