When you downsize a company, you are decreasing an enterprise’s generational knowledge, creativity, workplace culture, trust, and in turn, production, performance, and profitability.
Often implemented as a fast response to the potential for or the presence of short-term failures, downsizing seems to be a go-to strategy for increasing profit and performance. However, reality demonstrates a concrete divider between the perceived results and those that exist. Referring to the planned elimination of positions or jobs, most commonly in the form of layoffs, the process is typically expected to create economic and organizational benefits. Economic benefits include an “increase in value for their stakeholders” (i.e., the company’s stock). In contrast, organizational benefits involve “lower overhead, less bureaucracy, faster decision making, smoother communications, greater entrepreneurship, and increased productivity” (Cascio, 1993). Interestingly enough, however, despite these grand hopes and elaborate strides to react to short-term losses, the lack of communication and consideration in downsizing ventures often results in adverse outcomes for participating enterprises. In responding to this apparent deficit in our workplace and societal structure, we might be able to capture the important notion that companies who push off layoffs as long as possible do best, or in other words, companies who take long consideration into planning, who communicate openly, and who demonstrate their value in their employees in all company practices finish on top of the rest.
More specifically, research demonstrates that firms that could, in fact, “absorb more pain and delay downsizing employees and assets did much better two years later” (Cascio et al., 2020). It is recommended that firms avoid downsizing as a “quick fix for profitability” (Cascio, 1993). A particular study captured “an adverse association with 9 of the 12 work conditions and all 16 employee outcomes” (Frone & Blais, 2020). Other research revealed that layoffs result in the smallest payoff and that only 46 percent of surveyed companies described that their preformed cutbacks reduced their expenses enough. The most common reason for this would be that 4 out of 5 times, managers who were previously dismissed are rehired.
Additionally, companies end up paying the costs of having to hire consultants to replace the staff functions that were removed. Companies also must engage with retraining programs for their employees who remain at the company but now must take on a more significant or different role (Cascio, 1993). Enterprises often forget to account for these costs when creating their downsizing plans, and more so, they often “ignore the importance of establishing policies to deal with cutbacks and therefore experience negative results of cutting back” (Cascio, 1993).
Downsizing significantly impacts company culture. Studies show that employee productivity either stayed the same or deteriorated after the layoffs, reporting that upon downsizing, “surviving employees become narrow-minded, self-absorbed, and risk-averse,” which work counterproductively to an entrepreneurial mindset that is looking to increase company wealth or even stay afloat (Cascio, 1993). Typically after layoffs, employees often describe declined commitment and performance, which has been tied to survivor syndrome, which is the concept that downsizing causes lower identification with the employer, which in turn relates to lower performance of employees” (van Dick et al., 2016). The culture of Corporate America, specifically, has ignored the possibility of a downside of downsizing. Companies demand department heads to decide on “long-term research and development expenditures, capital investments, or workforce training when they are paid to attend to short-term profit or production” (Cascio, 1993).
In more greatly comprehending the reasons why anticipated cost savings do not necessarily take shape as planned, we might turn our attention to the fact that focusing only on short-term numbers is not a strategy for the breeding of short nor long-term success. Dr. Cascio of the University of Colorado described in his review, “Downsizing: What Do We Know? What Have We Learned?”:
“Effective downsizing often involves contradictions — that is, processes that are thought to be opposite and incompatible. Organizations that downsized effectively generally tried to maintain consistency, harmony, and fit in their downsizing approach. The key seems to be to adopt a “both/and” approach to downsizing, even though this is not consistent with traditional techniques to change” (Cascio, 1993).
Downsizing negates the empowering and enabling culture that looks for the opportunity in challenge. If leadership demonstrates to their employees that they must respond to crises and losses by placing blame on specific individuals and then removing them, they are both directly and indirectly, creating a culture of unease for employees. Additionally, a culture of blame, which identifies the removal of specific individuals as the method for improving company outcomes, does not represent an equitable nor empathetic company culture. Downsizing also constructs a poor environment that has been shown to cause negative psychological effects that equate to poor health outcomes (another outcome of survivor syndrome) (Moore et al., 1996). It will be the firms that implement the principles of HumEnt that will understand that employee health is the vital and non-negotiable foundation upon which an enterprise can operate.
Therefore, these outcomes are not to demonstrate that strategic downsizing is not possible nor should be avoided, but instead, that downsizing typically initiates more cycles of downsizing. So, if downsizing is to be successfully executed, enterprises need to instate effective planning measures before, during, and long after the downsizing occurs (Davis, 2003). Looking at specific studies in the realm of healthcare management, Davis et al. wrote that:
“This must be included in the strategic management plan of all organizations, regardless of whether they plan to downsize or not. By including such a plan, the organization will be better prepared to begin the staff-reduction process should it be forced to do so in response to environmental changes. Finally, providing ample support and protection for staff is key to the organization’s recovery and growth” (Davis, 2003).
If one must downsize, the recommendation is for the company to not only execute layoffs but also look to downsize assets when faced with deteriorating results (Cascio, 1993). This strategy is more demanding and comprehensive, which would demonstrate the seriousness with which the company is taking its downsizing ventures. This, combined with open and clear communication as well as care for the current and old employees, could grant a profitable downsizing venture for a company. Successful downsizing also, unsurprisingly, involves top-level communication with managers who can provide a narrative to their numbers. When there is open and clear communication throughout the process of downsizing, companies can more than not avoid the common trend of eventually replacing between 10 and 20 percent of those that had been previously dismissed (Cascio, 1993).
Better yet, companies that can “resist downsizing benefit from retaining key employees and attracting new talent, which, in turn, enhances profitability” (Cascio, 1993) — returning us to the well-backed notion that the people are a firm’s greatest asset. When you downsize a company, you are decreasing an enterprise’s generational knowledge, creativity, workplace culture, trust, and in turn, production, performance, and profitability. As Humane Entrepreneurs, we must spread the mission of human-centered business ventures, execution, and maintenance. Downsizing must no longer be seen as a one-time, quick-fix solution to enhance competitiveness. Instead, by creating a real and authentic company culture that centers around the human, viewing hiring and firing as a way to ensure that employees are both benefitting and benefiting from their position, downsizing can be seen as part of a process of continuous improvement. In searching for guidance through the lens of Humane Entrepreneurship, we will be able to decide more purposely ways in which we can create healthy and whole work environments that endure profitably regardless of the circumstances.
Dr. Ayman El Tarabishy
President & CEO, ICSB
Deputy Chair, Department of Management, GW School of Business
Editor in Chief of the Journal of Small Business Management (JSBM)
Cascio, W. F. (1993). Downsizing: What do we know? What have we learned? Academy of Management Perspectives,7(1), 95–104. doi:10.5465/ame.1993.9409142062
Cascio, W. F., Chatrath, A., & Christie-David, R. A. (2020). Antecedents and Consequences of Employment and Asset Restructuring. Academy of Management Journal. doi:10.5465/amj.2018.1013
Davis, J. A., Savage, G., & Stewart, R. T. (2003). Organizational downsizing: a review of literature for planning and research. Journal of healthcare management / American College of Healthcare Executives, 48(3), 181–201.
Frone, M. R., & Blais, A. R. (2020). Organizational Downsizing, Work Conditions, and Employee Outcomes: Identifying Targets for Workplace Intervention among Survivors. International Journal of environmental research and public health, 17(3), 719. https://doi.org/10.3390/ijerph17030719
Moore, S., Kuhrik, M., Kuhrik, N., & Katz, B. (1996). Coping with downsizing: stress, self-esteem, and social intimacy. Nursing Management, 27(3), 28–30.
Van Dick, R., Drzensky, F., & Heinz, M. (2016). Goodbye or Identity: Detrimental Effects of Downsizing on Identification and Survivor Performance. Frontiers in psychology, 7, 771.