Downsizing - good or bad, it’s here to stay

by CPD - Centre for Professional Development

Corporate restructuring has become the fast track to business success in Australia. With staff the highest cost factor for most organisations, getting the balance right between over-resourced and under-resourced is critical. Many Australian companies are competing on a global platform and have to develop ways of being leaner, meaner and keener. This has caused a change in the way work is conducted and perceived. Downsizing as a strategy to improve business has been practiced by US companies since the early 1970s says Professor Boris Kabanoff, Head of School of Management, Queensland University of Technology (QUT). "Downsizing got its bad name in the late 80s and 90s when it became synonymous with massive job cuts in recessionary times". So the bad downsizers got mixed up with the good downsizers, and this strategic corporate practice needed to find a new identity. Workforce re-alignments, company rightsizing, trimming positions, or job eliminations are some more positive names used. Even the meaning of the word downsizing has got academics "troubled". The definition is so "loose" at present that is hard to research the phenomenon for fear of including or excluding too many workers, says Kabanoff. He describes downsizing as "the shedding of a number of permanent full-time employees". This is probably the definition most commonly used, but accepts it has limitations in today’s non-traditional work structure. Traditionally, downsizing implied a large-scale culling but research by career management specialists Lee Hecht Harrison in the US found that, "over the past three years, only 5% of companies that had downsized had terminated more than 25% of their workforce, while 68% had let fewer than 10% go," says Karen Pond, CEO. The good, the bad and the ugly Plenty of research has been done in the US to pinpoint the hallmarks of a good or bad downsizer. Kabanoff headed a team in 1999 who took copious, readily available data on 300 US companies (such as financial performance statistics, sections of annual reports, employment figures, etc) over a two-year period following the time a company had been downsized. They analysed the data against industry benchmarks (mainly consumer durables and manufacturing) and general economic indices to come up with a conclusion on how companies fared as a result of downsizing. Their three main discoveries were:
  • Most companies that downsized had been financially under-performing (as compared to the industry average) prior to doing so.
  • On average, downsizing did not improve financial performance (it neither went up nor down).
  • There was a short-term gain in productivity, but this was not sustained beyond the first year. (Productivity was measured as total sales divided by the number of employees).
The QUT team has been trying to replicate the US study in Australia for more than 12 months, albeit with a more modest 100 companies. The problems they have faced are myriad, but centre around the lack of a single source of corporate information resulting in months of trawling through scattered and hard to access data. It could well be another 12 months before any comparable Australian findings are released. Australian data A very comprehensive study of downsizing has recently been released by Professor Peter Dawkins of the Melbourne Institute and Professor Craig Littler of the University of London that supports the theory that downsizing can either be good or bad - from a corporate performance angle. Instead of analysing corporate data, the Melbourne Institute team ran a telephone survey of Australian corporate representatives, asking those they spoke to their opinion as to the success of downsizing in their organisation. Their result concluded bad downsizers are those companies that use the tactic frequently for short-term cost reductions derived from culling the head count. Professor Peter Dawkins, typifies "bad" downsizers as companies that cut costs by crude methods - such as 10% across the board. "Finding it does not achieve the results, they usually do it again," says Dawkins. Bad downsizers go backwards in areas such as costs and also productivity from the survivors. This form of downsizing tends to be a knee-jerk reaction to a sudden drop in demand for services, without any serious thought to the outcome or the objective. The report says bad downsizers are often public sector service organisations. With an eye on the bottom line, those most likely to see the door first are male, middle-aged, middle managers. Without the critical forethought, these organisations suddenly find themselves without the necessary knowledge or experience to weather the next phase. The report looks specifically at the finance industry that has been repeatedly affected by organisational and technical changes. It says this sector, "has experienced major problems of declining organisational commitment and survivor syndrome", and the "sense of job security, of trust, of tracking the future as a known quantity, has gone". Committing to the future Good downsizers, the report says, are those organisations who shed staff, usually as a one-off event and as part of a broad growth strategy and are mainly private sector service organisations. "Good downsizers focus on a problem and a plan, and commit to future growth," says Dawkins. Kabanoff believes the question is not whether downsizing is good or bad, but rather when does downsizing work or not work. His research reveals downsizing that is done like "throwing a hand-grenade into a gathering and seeing who gets hit" rarely succeeds in the long-term. When a company’s main reason for downsizing is cost-cutting and there is little in the way of strategic focus, his research has shown there was no demonstrable improvement in financial performance. Those companies that use downsizing "to improve productivity, improve marketing strategies, improve corporate direction and downsizing is part of a broader or considered managed strategy" will show a significant upturn in financial performance. The reasons why There is plenty of research being carried out on the effects of downsizing on corporate performance, the impact of restructuring on the Australian way of life, and why companies downsize. Kabanoff’s research revealed three fairly predictable reasons - economic conditions, global competition and a need "to do things better". A survey of 450 US HR managers by Lee Hecht Harrison added two more likely reasons - changes in technology, and mergers and acquisitions. Though their survey was done before any economic downturn had set in, it revealed 44% of companies contacted had downsized since 1998, and would likely do so again. The research showed 56% of the HR managers surveyed thought downsizing had helped their company. Businesses with more than 10,000 employees are less likely to downsize than businesses with less than 1,000. Middle managers in operations are the first to go. Sales and marketing is also a target for downsizing, as is professional specialists. Clerical and technical employees are also early victims of an employee cull. Employee benefits? From the employees’ angle, downsizing appears to make people tougher and even ‘liberated’ according to research conducted by outplacement company DBM Australia. It has found managers who had been retrenched placed less importance on job security than those managers who had remained employed. (It appears they have already come to terms with jobs no longer being secure.) For an employer, the new work structure is more likely to measure an employee’s success on performance, flexibility, and multi-skilling rather than length of service, loyalty and commitment. And the onus of career development has also shifted - careers are rarely nurtured by organisations any more. An individual is more likely to look after their own career development and training. Today’s employee is no longer a ‘company man/woman’, more an individual small business marketing his or herself. The Lee Hecht Harrison research showed that more than 40% of the retrenched employees had enhanced their skills sets following a downsizing, 25% had updated their resume, and 22% had sought career advice. According to an Australian Bureau of Statistics survey, managers who received outplacement support took less time to become re-employed. They found new employment on average 1.5 months faster than those who did not receive any professional assistance. The average job search time for retrenched managers who received outplacement support was 3.3 months compared to 4.8 months for those who did not receive any support. From research by DBM & Associates, the most useful components of outplacement services are resume development, job search advice and help with the process of looking for new work. This article is from Workplace Intelligence a CPD newsletter. Workplace Intelligence is a short, sharp monthly newsletter reporting on all the latest developments in workplace relations. Published in association with ACIRRT (The Australian Centre for Industrial Relations Research and Training), it assesses the impact of workplace relations on productivity and workplace culture. It's inside information at its best, written and compiled by specialist journalists with key contacts, and it takes less than 15 minutes to read. It's the best way to keep up-to-date with all workplace relations issues without spending your precious time researching.


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