Downsizing: the Financial and Human Implications Essay

This try a bearing examines the effect of retrenchment with regard to the human organisms and fiscal implications. Since the mid to easy 1980s, curtailment has transformed the corporate landscape and changed the lives of hundreds of millions of individuals around the world (Gandolfi, 2008, p. 3). For the purposes of this essay, suppression is defined as the planned elimination of transactions, involving redundancies, and is designed to improve pecuniary capital punishment (Macky, 2004).It will be argued that while retrenchment brook be an effective dodging, it frequently does non improve financial health, and the human implications lavatory be severe and costly. This essay will discuss first, curtailment definitions present moment, motif for curtailment third, a brief history of downsize fourth, get champions the performance of curtailment fifth, the human implications sixth, the financial consequences and, seventh, the reasons for the continued use of downsiz e. at that place argon differing perspectives regarding the curtailment phenomenon.At the most simple train, the strategy charters a planned contraction of the number of employees in an organisation (Cascio, 1993). For cause, Macky (2004) describes downsize as an intentional reducing by guidance of a firms internal jade force using redundancies (p. 2). However, former(a) definitions encompass a spaciousr swear of implementation methods. Cameron (1994) defines downsizing as a set of activities, underinterpreted on the representative of the heed of an organisation and designed to improve organisational efficiency, productivity, and/or competitiveness (p. 192).These activities accommodate hiring freezes, mesh produce reductions, voluntary sabbaticals, exit incentives and reducing hours worked by employees. This essay will revolve around solely on the downsizing activity of redundancies. Various synonyms exist for downsizing, including resizing, rightsizing, smartsizin g, restructuring, redundancies and reduction-in-force (Gandolfi, 2010 Macky, 2004). The main(prenominal) motif for downsizing, at to the lowest degree for private companies, is to improve an organisations financial performance, which is to a fault known as profit maximisation (Kammeyer, Liao & Avery, 2001).The factors impart to downsizing decisions ar complex and depend on company-specific, industry-specific and macroeconomic factors (Macky, 2004). In hard times, downsizing is a strategy that may be engaged as a quick-fix, reactive reply to compensate for reduced profit by reducing human related operational be (Kowske, Lundby & Rasch, 2009 Ryan & Macky, 1998). In healthy times, the work force may be reduced as part of a proactive human vision strategy to hit a lean and mean organisation (Chadwick, Hunter & Watson, 2004 Kowske et al. , 2009).An all all overwhelming body of academic research suggests that downsizing has surprisingly little winner in increase profitability and sh arholder value, even though financial performance is its main intention (Cascio, 2002 De Meuse, Bergmann, Vanderheiden & Roraff, 2004 Lewin & Johnston, 2000). Despite the restrict financial supremacy of downsizing, it has remained a universal strategic tool with its use spanning the last three decades. Prior to the 1980s, downsizing was engaged primarily as a last resort, reactive response to changing manufacturing demands.It modify mostly blue-collar, semi-skilled employees (Littler, 1997). In contrast, since the 1980s, workforce reduction has give way a leading strategy of choice, affecting employees at altogether levels, all around the globe (Mirabal & DeYoung, 2005, as cited in Gandolfi, 2008), at bottom a wide variety of organisations encompassing all industries (Littler, 1998 Macky, 2004). Karake-Shalhoub (1999) suggests that downsizing has been the most signifi rouset piddling letter change of the 1980s. Downsizing increased in popularity during the 1990s, wh ich has subsequently been described as the downsizing decade (Dolan, Belout & Balkin, 2000).It has evolved from a reactive strategy in the 1980s, to frame used as a proactive strategy. During the 1990s, galactic scale circumlocution programs were thinkinged as the solution to the issues approach organisations such as AT&T, IBM, macrocosm Motors and British Telecom (Kinnie, Hutchinson & Purcell, 1998). The statistics are sobering, Cameron (1994) reported that 85% of Fortune ergocalciferol companies were downsized amid 1989 and 1994, and 100% were homework to do so inside the near five years. Furthermore, figures from the most fresh global financial crisis demonstrate that downsizing remains a tool of choice.Rampell (2009) reported in the New York multiplication that 4. 4 million contrasts, in the U. S. alone, were retrenched between September 2007 and March 2009. cardinal main approaches to the implementation of downsizing are currently assiduous. The first approach is popularly terminaled larceny layoffs and the second is attendred to as non-selective layoffs (Gandolfi, 2009). Organisations adopt comm scarce employed both larceny layoffs and non-selective layoffs during the recent global financial crisis. Stealth layoffs involve an attempt to keep redundancies out of media attention, by making a serial of small cuts rather than one large cut.Companies endeavour to save their public reputation from being tainted by their downsizing activities. Managers are not al piteoused to openly discuss redundancies and a blanket of secrecy is placed over all proceedings, employees are not informed of timing or fulfilment of redundancies (Crosman, 2006). Mc Gregor (2008) reported a wave of people slowly trickling out of organisations. Citigroup provides one example of stealth downsizing. Story & Dash (2008) reported that in April 2007 the company announced elimination of 17,000 jobs.Then in January 2008 Citigroup announced a get ahead 4,200 job cuts, f ollowed by an additional 8,700 in April 2008 (Story & Dash, 2008). Non-selective downsizing involves sess redundancies, across all levels of an organisation. This is problematic because firms are at risk of losing their natural covering performers who are difficult to replace. These are the people that will be demand to drive future growth of the firm following the downsizing event. There is plenty of march of non-selective downsizing over the current global recession, for event the finance industry has been deeply alter with U. S. anks making cuts of 65,000 employees between June 2007 and June 2008 (Story & Dash, 2008).Regarding the human implications of downsizing, the literary works identifies three groups of people curbly affected the victims, the subsisters, and the executioners. Academic studies refer to the victims of downsizing as the individuals who contribute been involuntarily removed from their positions (Casio, 1993 Dolan et al. , 2000 Gandolfi, 2008 Macky, 2004). The detrimental effects on victims of downsizing events can be devastating (Havlovick, Bouthillette & van der Wal, 1998). Previously, being well trained was sufficient to ensure a life- retentive job.However, the increasing competitiveness of the business environment has meant that recent layoffs perplex involved higher throw off a bun in the ovening(a) white-collar workers, many of whom are at the peak of their careers. Victims are affected initially during the planning phase of the downsizing, then immediately following the wordiness resolution, and then in their subsequent employment. During the planning phase of downsizing, the threat of redundancies can subject employees to a number of stimulated stresses.The stresses do not only embrace the immediate threat of redundancies, but also the prospect of demotion, and redundancies in the ong term. Evidence suggests that, as expected, such stresses drive home negative psychological impacts. For example, Catalano, pi nch and Dooley (1986) in their interviews of 3,850 principle-wage earners in Los Angeles, found that that a decrease in job security increased the number of medical consultations for psychological distress. Likewise, Roskies and Louis-Guerin (1990) found in their survey of 1,291 Canadian managers, that managers who were insecure about their jobs showed unequaler health than those who were secure, and the managers level of distress rose proportionally with their degree of insecurity.Following the surplusage annunciation, there is strong grounds that victims suffer from adverse effects as a publication of their job losses. These adverse effects include psychological stress, ill health, family problems, marital problems, attentionlessness, reduced self esteem, anxiety, depression, psychiatric morbidity, and feelings of genial isolation (Greenglass & Burke, 2001). In particular, the affected individuals suffer from the loss of established social births and threats to their socia l identity (Macky, 2004). Greenglass and Burke (2001) also explain that the effects can turn greatly from person to person.The extent of personal damage is attributed to the individuals resources of coping strategies, self-efficacy and social birth. Evidence shows that the retrenched employees are qualified to respond in a more constructive manner depending on the extent to which they view the downsizing process as procedurally fair. Brokner, Konovsky, Cooper-Schneider, Folger, Martin and Bies (1994) found that employees remaining in their positions for up to three months after the announcement of their periphrasis continued to exhibit controlling work behaviours if the downsizing process was viewed as fair and transparent.There is evidence that subsequent employment opportunities are also affected by the victims previous pleonasm sees, including a change in their lieu towards the workplace. Macky (2004) provided evidence that the effects of redundancies flow onto the indivi duals next position, resulting in lessen levels of inscription and loyalty. Dolan et al. (2000) also showed that there is some evidence that job loss created by dint of redundancies may create lasting damage to the victims career.Similarly, Konovsky and Brockner (1993) found that individuals report a loss of earning fountain in their subsequent employment. On the other hand, Devine, Reay, Stainton and CollinsNakai (2003), argue that victims who gain rude(a) employment perplex a greater sense of control and place to be in a better position than those who were not retrenched. Noer (2009) suggests that negative impacts on victims are lessened by the various concord packages for displaced employees that are paid for by the organisation, such as redundancy payments, career discuss and out-placement service.The second group of employees affected by downsizing are the subsisters. The survivors are the employees who have remained with the firm after the redundancies have taken pla ce (Littler, 1998). The survivors are important to the firm because they play a pivotal role in the effectiveness of the downsizing operation and the ongoing winner of the organisation. The expertise and motivation of survivors is required to keep the firm moving forward following redundancies. However, live employees are left with increased pressures. These pressures include larger workloads (Dolan at al. 2000), because survivors must take on the work of retrenched employees as well as youthful and increased job responsibilities (Lewin & Johnston, 2000), as a result of key skills going away the organisation. In addition to the increased work pressures, survivors must deal with unsounded and negative psychological responses. Gandolfi (2008) identifies three sets of the emotions, behaviours and attitudes exhibited by surviving employees, which are commonly termed sicknesses in literature (Applebaum, Delage, Labibb & Gault, 1997 Kowske at al. , 2009).The emergence of these sicknes ses following a downsizing event is referred to as the aftermath (Clark & Koonce, 1995) or the downside (Cascio, 1993) of downsizing. The sicknesses place are survivor syndrome, survivor guilt and survivor envy. Kinnie et al. (1998) characterises survivor syndrome as encompassing a variety of psychological states in survivors, including heightened levels of stress, absenteeism and distrust, and as well as decreased levels of productivity, morale and work quality. Cascio (2002) portrays survivor syndrome in a similar way to Kinnie et al. 1998), showing decreased levels of employee involvement, morale, work productivity and trust towards management. These mental states have a strong entrance on the survivors work behaviour and attitudes, such as motivation, commitment, satisfaction and job performance (Applebaum et al. , 1997 Littler, Dunford, Bramble & Hede, 1997). The second sickness, survivor guilt, is a feeling of responsibility or remorse as employees contemplate wherefore the ir colleagues were retrenched instead of themselves. It is frequently expressed as fear, arouse and depression (Noer, 2009).Survivor guilt can be particularly common when survivors perceive that their work performance was no better than that of the downsized victims (Littler et al. , 1997). In this case, employees can reason that there is no benefit in performing if performance is not a criterion for job survival (Appelbaum, et al. , 1997). Appelbaum and colleagues argue that survivor guilt is heavily influenced by the manner in which the downsizing is perceive to be performed and the fairness of the decision making processes. Survivors of downsizing can also be plagued by a third sickness, survivor envy.This reflects the survivors envy of the victims in terms of presumed retirement packages, financially lucrative incentives, and new jobs with more pleasing compensation (Kinnie et al. , 1998). For example, employees may feel that their retrenched ex-colleagues received redundanc y pay outs and have found new jobs they like, while the surviving employee must work twice as hard, and moreover, for the same pay. Kammeyer-Meuller, Liao and Avery (2001) hypothesise that survivors envy is dependent on the amour of the relationship with the survivor.Brokner (1987) found that when survivors have little proximity to the victims, increases in redundancy payouts result in decreased self-reported performance. On the other hand, the prove shows when survivors appoint with the victims, increases in redundancy payouts increased self reported performance. Despite the stresses facing survivors, research shows that the needs of the survivors are frequently neglected by downsized firms (Applebaum et al. , 1997 Devine et al. , 2003 Gandolfi, 2006). gibe to Applebaum et al. 1997), the negative effects on the survivors are under-estimated and organisations fail to take into compute the difficulties of motivating a surviving workforce that is emotionally damaged because it h as watched others sustain their jobs. It is important for organisations to pay more attention to the survivors in station to support their financial health. Carswell (2002), in a New Zealand experiential study, established that the companies that establish redundancy on fair practices, and provided better out-placement for the victims, performed better financially than those that did not use such procedures.Kowske et al. (2009) reviewed survivor engagement during the 2007-2009 global financial crisis and provided further worth(predicate) insights. Using the Keneyas Employment Engagement Index and a sample size of 9,998 U. S. employees, it was determined that employee engagement was significantly lower if redundancies had occurred within the previous 12 months. Kowske et al. (2009) found that although organisations were able to cut human resource costs, they are more likely to have a portion of their workforce disengaged fertile ground for the symptoms that accompany survivor si ckness.An example of a escape of insight regarding survivor sickness was demonstrated in the downsizing of the Deloitte (New Zealand) attempt Risk Management Team, in May 2008 (personal information). The first problem was that on the dot two weeks prior to the redundancy announcement, a statement was made by one of the partners to the team, stating that no-one should be concerned about their jobs. Another problem was that the downsizing process was not transparent and no employee below partner level was involved in the consultation.Not only wew the staff made spare effected, but also the surviving employees who exhibited traditional symptoms of survivor sicknesses feelings of distrust, anger and low moral due to their perceived unfairness of the decision process. The result of this survivor sickness was that, by the end of the following year, the entire senior management team had voluntarily left the firm, taking with them valuable skills and produce. Such friction is consisten t with Trevor and Nybergs (2008) ascertainings that voluntary turnover rates increased within 24 months following the downsizing event.It is clear that management must pay more attention to survivors in order to minimise survivor syndromes. The literature highlights four key improvements to current downsizing methods, in order to slander survivor syndromes. Firstly, a detailed strategy must be devised, this is because planning has been place as a pivotal issue in the success of downsizing (Applebaum et al. , 1997 Gandolfi, 2008). The strategic plan should establish how the survivors will be taken care of during the downsizing process (Gandolfi, 2009).This includes giving survivors access to honest, timely and indifferent(p) information (Dolan et al. , 2000) as well as access to counselling, support and help (Allen, 1997). Second, training must be improved as it is identified as key tool to combat survivor sickness (Dolan et al. , 2000 Farrell & Mavondo, 2004 Makawatsakul & Klein er, 2003). The retrenched individuals often bring with key skills that must be taught to the surviving employees. Third, managers are recommended to communicate the long term business strategy to the surviving employees, n order to create a shared vision for the future of the firm (Cobb, Wooten & Folger, 1995). Last, fairness in the way the redundancies are selected and implemented including open converse occupations are valuable to support trust within the organisation (Hopkins & Weathington, 2006). For example, retirement programs are viewed as more fair downsizing methods by survivors and lead to increased commitment (De Witt, Trevio & Mollica, 1998). Executioners are the group of survivors that form the third category of people affected by downsizing.Executioners are the individuals entrusted to plan, carry out and evaluate the downsizing (Gandolfi, 2009). other(a) synonyms for executioners include downsizing agents (Clair & Dufresne, 2004) and downsizers (Burke, 1998). The effects on such personnel are important because downsizers are commonly employees and managers, who can have a large impact on the success of the change. This is because the executioners have power to influence employees and power to employ tools and techniques to minimise harm.Although they are a category of survivors, the executioners experience differs to that of the survivors because of their effectual responsibilities, in executing the downsizing, managing relationships with the retrenched individuals as well as supporting the survivors. Gandolfi (2007) is one of the few academics to offer some insight around the experiences of the executioners using empirical research. Gandolfi interviewed 20 executioners from a major Australian trading bank and identified four key themes from their responses.The first was the very negative emotional responses and reactions from the executioners, including the bother and complexity the executioners had in selecting the downsizing victims. Se cond, Gandolfi also identified coping strategies, including the executioners distancing themselves from the business physically, cognitively and emotionally in order to preserve their own emotional well-being. In further research, it would be interesting to explore the relationship between the implementation of coping strategies and the effectiveness of the downsizing operation.Third, Gandolfi found that executioners with more experience reported a lesser degree of emotional distress. This is in line with Clair and Dufresne (2004) who suggest coping behaviours are learned with experience. Fourth, Gandolfi identified that the closeness of the relationship with the victims is also important in that the layoffs were more taxing when the executioner had substantial personal ties with the victims. Another aspect of the executioners experience is their manipulation of the currently employed downsizing methods of stealth layoffs and across the board cuts.Executioners have reported that they are uncomfortable with the degree of secrecy involved with stealth downsizing (Gandolfi, 2009). For example, executioners have reported instances causing internal conflict when they have had to lie to employees (Gandolfi, 2009). In the case of across the board cuts, executioners often find it difficult of rationalize the unfairness of the choices and question their rights to be playing theology with the individuals involved. The significant negative impacts on the executioners highlight the need for firms to provide up to(predicate) training and emotional support for the executioners (Gandolfi, 2009).Although more research is required in this nation, it is apparent training should at least raise awareness of the range of emotions that executioners may experience, and include tools and techniques to cope with the emotions involved with carrying out the task. Clair and Dufrense (2004) suggest that throughout the process of downsizing, firms should sustain available to manager s social forums, employee assistance programs and social support groups. The profound human consequences on the survivors and the executioners are interlinked with the financial consequences.Literature has identified that the human consequences of downsizing play a large role in the financial success of the downsizing operation (Carswell, 2002 Devine et al. , 2003 Gadolfi, 2008). The financial success of the strategy is particularly important to shareholders and to external bodies such as suppliers, distributers and allied organisations (Kammeyer-Mueller, 2001). A large and growing body of literature has investigated and measured the financial success of carrying out downsizing, and found that most organisations do not improve their financial performance after downsizing (Applebaum, et al. 1997 Cascio, Young & Morris, 1997 De Meuse et al. , 2004). The research around financial performance following a downsizing event focuses on plain measurements of financial performance, such as e xamining changes in profit, share price and decrease on investment, before and after the downsizing event.However, it is noted that some companies do improve their financial performance by using downsizing as a strategy. Griggs and Hyland (2003) surveyed 1,005 U. S. organisations and found that of the respondents, 46% of companies able to decrease costs, 33% were able to ncrease profitability and 21% were able to report satisfactory improvements on pay back on investment. Only 46% of firms reduced costs due to poor planning, and this was because, in four times out of five, managers ended up refilling the very positions they made redundant (Griggs & Hyland, 2003). Wayhan and Werners (2000) findings contradict most downsizing research, in their examination of the largest 250 U. S. companies which had reduced their workforce by at least three percent during the period 1991-1992.These researches measured changes in stock prices and they showed that, in the short term, downsized compa nies significantly financially outperformed companies that did not downsize. However, it should be noted that Wayhan and Werners (2000) study uses a different technique, in that they treat time as a moderator of the affects. The rationale behind this is that other influences on the firms stock price will decease more important than the influence of the downsizing event, as the time from the downsizing event increases.When Wayhan and Werners study was repeated using typical techniques (not using time as a moderator), the results were more in line with other research, showing small decreases in relevant financial measures. Sahdev (2003), Zyglidopoulos (2003) and Macky (2004) are among numerous researches showing that while a small number of organisations have reported improved financial performance, the bulk were unable to account improved levels of effectiveness, productivity, efficiency and profitability in the short term.A typical example is Cascio, Young and Morriss (1997) study of 537 companies listed on the S&P 500 between 1980 and 1994. After comparing comely companies in the same industry, and controlling for firm effects, they discovered no evidence that downsized firms could subsequently increase profits or share price over a period of two years subsequent to the downsizing event. This is in line with evidence from New Zealand (Carswell, 2002). Furthermore, Cascio et al. (1997) found that downsized firms were outperformed in the short term by those companies that increased their workforce and also companies with stable employment.This study was limited by focusing only on extreme reductions of 10% or more. The long-term implications of downsizing on financial performance were investigated by De Meuse et al. (2004) in a more recent U. S. study. Using U. S. Fortune 500 companies, De Meuse and colleagues think at a period of nine years following the redundancy announcement, from 1989 to 1998. De Meuse et al. found that in the first two years following the announcement the financial performance of the firms decreased, in line with Cascio et at. (1997).However, at the beginning of three years after the downsizing announcement, De Meuse et al. found no significant underperformance of the downsized firms. Unfortunately, most studies provide little empirical evidence regarding why in some cases downsizing produces positive financial results, and in other cases it does not. This is because downsizing tends to be treated as a binary multivariate in research, that is, firms either downsize or they do not (Kammeyer-Muller, Liao & Arvey, 2001). However, it is apparent that not all downsizing efforts are the same.The following factors are likely to have an effect on the financial performance of the firm subsequent post-downsizing announcement the type of reduction strategy employed (for example, across the board cuts, stealth layoffs, or more gradual procedures) the persistence of survivor syndromes the logistics of downsizing (for example the size and frequency) and, the reasons behind the decision to downsizing. The lack of research in this area provides opportunities for researchers to further explore the downsizing phenomenon.The prevalence of evidence surrounding impair financial performance following downsizing events introduces a paradox why is the practice continuing to be engaged despite its lack of success? Cynics suggest that downsizing can be carried out in order to boost the egos of top managers at the expense of the organisation (e. g. Anderson & Cavanagh, 1994 Budros, 1999). Other explanations include the tendency of management to inaccurately anticipate costs involved. Downsizing generates direct and indirect costs, and it is the hidden (indirect) costs that are frequently underestimated by management (Gandolfi, 2008).Direct costs are less complicated to estimate and include severance pay, accrued holiday pay and administrative processing costs. unknown costs include recruitment and employment costs of new hires, costs of replacing staff with expensive consultants, lost sales due to light staffing, training and retraining, and costs of reduced productivity as a result of survivor syndromes (Cascio, 1993). For example Gandolfi (2001) reported that a European company (unnamed for retirement reasons) incurred an increase of 40% in recruitment, and a 30% increase in training and development costs for new employees, following its controversial downsizing.In order for downsizing to be engaged as an effective strategic tool, it is clear that the benefits of reducing staff must outweigh all the costs. It has become clear that management must consider very carefully whether downsizing is appropriate for their firm, and they need to pay careful attention to the hidden costs. correspond to Allen (1997) the key to successful downsizing is to focus on the people who make up the organisation. Literature has provided management with guidelines to minimise costs and harm.For the survivors, this includes minimising survivor symptoms through planning of the downsizing operation, training of the surviving staff, and using open communication and fairness in carrying out the redundancies. For the executioners this includes providing them with training. This essay has identified and discussed the effects of downsizing with regard to both the human and financial implications. It has been demonstrated that the human implications of downsizing can be sever and downsizing frequently fails at opposition its objectives of improving financial performance.First, the profound negative consequences of downsizing on the victims, the survivors and the executioners have been outlined. Next, the empirical evidence concerning the financial consequences has been summarised. Gaps have been identified in downsizing literature. Two areas of downsizing that could well be further explored include the experience of the executioners and the characteristics of downsizing operations that result i n successful financial outcomes. The recent prevalence of downsizing activities over the latest financial crisis suggests that downsizing is a phenomenon worth exploring into the future.