Downsizing and Rightsizing
Downsizing refers to the permanent reduction of a company's workforce and is generally associated with corporate reorganization, or creating a "leaner, meaner" company. For example, the database developer Oracle Corporation reduced its number of employees by 5,000 after acquiring rival PeopleSoft. Downsizing is certainly not limited to the U.S.; Jamaica Air cut 15 percent of its workforce in an effort to trim expenses and anticipated revenue shortfalls.
Downsizings such as these are also commonly called reorganizing, reengineering, restructuring, or rightsizing. Regardless of the label applied, however, downsizing essentially refers to layoffs that may or may not be accompanied by systematic restructuring programs, such as staff reductions, departmental consolidations, plant or office closings, or other forms of reducing payroll expenses. Corporate downsizing results from both poor economic conditions and company decisions to eliminate jobs in order to cut costs and maintain or achieve specific levels of profitability. Companies may lay off a percentage of their employees in response to these changes: a slowed economy, merging with or acquiring other companies, the cutting of product or service lines, competitors grabbing a higher proportion of market share, distributors forcing price concessions from suppliers, or a multitude of other events that have a negative impact on specific organizations or entire industries. In addition, downsizing may stem from restructuring efforts to maximize efficiency, to cut corporate bureaucracy and hierarchy and thereby reduce costs, to focus on core business functions and outsource non-core functions, and to use part-time and temporary workers to complete tasks previously performed by full-time workers in order to trim payroll costs.
The following sections discuss trends in downsizing, the growth of downsizing, downsizing and restructuring, criticisms of downsizing, support for downsizing, and downsizing and management.
TRENDS IN DOWNSIZING
As a major trend among U.S. businesses, downsizing began in the 1980s and continued through the 1990s largely unabated and even growing. During this time, many of the country's largest corporations participated in the trend, including General Motors, AT&T, Delta Airlines, Eastman Kodak, IBM, and Sears, Roebuck and Company. In the twenty-first century, downsizing continued after a sharp decline in the stock market early in the century and followed by continued pressure on corporate earnings in the aftermath of the September 11, 2002, terrorist attacks. Downsizing affects most sectors of the labor market, including retail, industrial, managerial, and office jobs, impacting workers in a wide range of income levels. Table 1 compares the number of temporarily downsized workers with the number of permanently downsized workers. While layoffs are a customary measure for companies to help compensate for the effects of recessions, downsizing also occurs during periods of economic prosperity, even when companies themselves are doing well. Consequently, downsizing is a controversial corporate practice that receives support and even praise from executives, shareholders, and some economists, and criticism from employees, unions, and community activists. Reports of executive salaries growing in the face of downsizing and stagnant wages for retained employees only fan the flames of this criticism. In contrast, announcements of downsizing are well received in the stock markets.
However, economists remain optimistic about downsizing and the effects of downsizing on the economy when the rate of overall job growth outpaces the rate of job elimination. A trend toward outsourcing jobs overseas to countries with lower labor costs is a form of downsizing that affects some U.S. employees. These jobs are not actually eliminated, but instead moved out of reach of the employees who lose their jobs to outsourcing. Some economists, however, suggest that the overall net effect of such outsourced jobs will actually be an increase in U.S. jobs as resulting corporate operating efficiencies allow for more employment of higher-tier (and thus higher-wage) positions. Regardless of whether downsizing is good or bad for the national economy, companies continue to downsize and the trend shows few signs of slowing down.
THE GROWTH OF DOWNSIZING
The corporate downsizing trend grew out of the economic conditions of the late 1970s, when direct international competition began to increase. The major industries affected by this stiffer competition included the automotive, electronics, machine tool, and steel industries. In contrast to their major competitors—Japanese manufacturers—U.S. companies had significantly higher costs. For example, U.S. automobile manufacturers had approximately a $1,000 cost disadvantage for their cars compared to similar classes of Japanese cars. Only a small percentage of this cost difference could be attributed to labor costs; however, labor costs were among the first to be cut despite other costs associated with the general structure of the auto companies and their oversupply of middle managers and engineers. Auto workers were among the first to be laid off during the initial wave of downsizing. Other U.S. manufacturing industries faced similar competitive problems during this period, as did some U.S. technology industries. Companies in these industries, like those in the auto industry, suffered from higher per-unit costs and greater overhead than their Japanese counterparts due to lower labor productivity and a glut of white-collar workers in many U.S. companies. To remedy these problems, U.S. companies implemented a couple of key changes: they formed partnerships with Japanese companies to learn the methods behind their cost efficiencies and they strove to reduce costs and expedite decision-making by getting rid of unnecessary layers of bureaucracy and management. Nevertheless, some companies began simply to cut their workforce without determining whether or not it was necessary and without any kind of accompanying strategy. In essence, they downsized because they lacked new products that would have stimulated growth and because their existing product markets were decreasing.
DOWNSIZING AND RESTRUCTURING
Downsizing generally accompanies some kind of restructuring and reorganizing, either as part of the downsizing plan or as a consequence of downsizing. Since companies frequently lose a significant amount of employees when downsizing, they usually must reallocate tasks and responsibilities. In essence, restructuring efforts attempt to increase the amount of work output relative to the amount of work input. Consequently, downsizing often accompanies corporate calls for concentration on "core capabilities" or "core businesses," which refers to the interest in focusing on the primary revenue-generating aspects of a business. The jobs and responsibilities that are not considered part of the primary revenue-generating functions are the ones that are frequently downsized. These jobs might then be outsourced or handled by outside consultants and workers on a contract basis. Eliminating non-core aspects of a business may also include the reduction of bureaucracy and the number of corporate layers. Since dense bureaucracy frequently causes delays in communication and decision-making, the reduction of bureaucracy may help bring about a more efficient and responsive corporate structure that can implement new ideas more quickly. Besides laying off workers, restructuring efforts may involve closing plants, selling non-core operations, acquiring or merging with related companies, and overhauling the internal structure of a company. The seminal work on restructuring or reengineering, *Reinventing the Corporation,* by Michael Hammer and James Champy, characterizes the process as the "fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance such as cost, quality, service, and speed." While discussion of reengineering is common and reengineering is often associated with downsizing, Hammer and Champy argue that reengineering efforts are not always as profound. Hence, these efforts frequently have mixed results. Downsizing and reengineering programs may result from the implementation of new, labor-saving technology. For example, the introduction of the personal computer into the office has facilitated instantaneous communication and has thus reduced the need for office support positions, such as secretaries.
CRITICISM OF DOWNSIZING
While companies frequently implement downsizing plans to increase profitability and productivity, downsizing does not always yield these results. Although critics of downsizing do not rule out the benefits in all cases, they contend that downsizing is over-applied and often used as a quick fix without sufficient planning to bring about long-term benefits. Moreover, downsizing can lead to additional problems, such as poor customer service, low employee morale, and bad employee attitudes. Laying workers off to improve competitiveness often fails to produce the intended results because downsizing can lead to the following unforeseen problems and difficulties:
- The loss of highly-skilled and reliable workers and the added expense of finding new workers.
- An increase in overtime wages.
- A decline in customer service because workers feel they lack job security after layoffs.
- Employee attitudes that may change for the worse, possibly leading to tardiness, absenteeism, and reduced productivity.
- An increase in the number of lawsuits and disability claims, which tends to occur after downsizing episodes.
- Restructuring programs sometimes take years to bear fruit because of ensuing employee confusion and the amount of time it takes for employees to adjust to their new roles and responsibilities.
Some studies have indicated that the economic advantages of downsizing have failed to come about in many cases, and that downsizing may have had a negative impact on company competitiveness and profitability in some cases. Downsizing has repercussions that extend beyond the companies and their employees. For example, governments must sometimes enact programs to help displaced workers obtain training and receive job placement assistance. Labor groups have reacted to the frequency and magnitude of downsizing, and unions have taken tougher stances in negotiations because of it. Instead of laying employees off, critics recommend that companies eliminate jobs only as a last resort; not as a quick fix when profits fail to meet quarterly projections. Suggested alternatives to downsizing include early retirement packages and voluntary severance programs. Furthermore, some analysts suggest that companies can improve their efficiency, productivity, and competitiveness through quality initiatives such as Six Sigma, empowering employees through progressive human resource strategies that encourage employee loyalty and stability, and other such techniques.
SUPPORT FOR DOWNSIZING
Advocates of downsizing counter critics' claims by arguing that, through downsizing, the United States has maintained its position as one of
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Downsizing refers to the permanent reduction of a company's workforce and is generally associated with corporate reorganization, or creating a "leaner, meaner" company. For example, the database developer Oracle Corporation reduced its number of employees by 5,000 after acquiring rival PeopleSoft. Downsizing is certainly not limited to the U.S.; Jamaica Air cut 15 percent of its workforce in an effort to trim expenses and anticipated revenue shortfalls.
Downsizings such as these are also commonly called reorganizing, reengineering, restructuring, or rightsizing. Regardless of the label applied, however, downsizing essentially refers to layoffs that may or may not be accompanied by systematic restructuring programs, such as staff reductions, departmental consolidations, plant or office closings, or other forms of reducing payroll expenses. Corporate downsizing results from both poor economic conditions and company decisions to eliminate jobs in order to cut costs and maintain or achieve specific levels of profitability. Companies may lay off a percentage of their employees in response to these changes: a slowed economy, merging with or acquiring other companies, the cutting of product or service lines, competitors grabbing a higher proportion of market share, distributors forcing price concessions from suppliers, or a multitude of other events that have a negative impact on specific organizations or entire industries. In addition, downsizing may stem from restructuring efforts to maximize efficiency, to cut corporate bureaucracy and hierarchy and thereby reduce costs, to focus on core business functions and outsource non-core functions, and to use part-time and temporary workers to complete tasks previously performed by full-time workers in order to trim payroll costs.
The following sections discuss trends in downsizing, the growth of downsizing, downsizing and restructuring, criticisms of downsizing, support for downsizing, and downsizing and management.
TRENDS IN DOWNSIZING
As a major trend among U.S. businesses, downsizing began in the 1980s and continued through the 1990s largely unabated and even growing. During this time, many of the country's largest corporations participated in the trend, including General Motors, AT&T, Delta Airlines, Eastman Kodak, IBM, and Sears, Roebuck and Company. In the twenty-first century, downsizing continued after a sharp decline in the stock market early in the century and followed by continued pressure on corporate earnings in the aftermath of the September 11, 2002, terrorist attacks. Downsizing affects most sectors of the labor market, including retail, industrial, managerial, and office jobs, impacting workers in a wide range of income levels. Table 1 compares the number of temporarily downsized workers with the number of permanently downsized workers. While layoffs are a customary measure for companies to help compensate for the effects of recessions, downsizing also occurs during periods of economic prosperity, even when companies themselves are doing well. Consequently, downsizing is a controversial corporate practice that receives support and even praise from executives, shareholders, and some economists, and criticism from employees, unions, and community activists. Reports of executive salaries growing in the face of downsizing and stagnant wages for retained employees only fan the flames of this criticism. In contrast, announcements of downsizing are well received in the stock markets.
However, economists remain optimistic about downsizing and the effects of downsizing on the economy when the rate of overall job growth outpaces the rate of job elimination. A trend toward outsourcing jobs overseas to countries with lower labor costs is a form of downsizing that affects some U.S. employees. These jobs are not actually eliminated, but instead moved out of reach of the employees who lose their jobs to outsourcing. Some economists, however, suggest that the overall net effect of such outsourced jobs will actually be an increase in U.S. jobs as resulting corporate operating efficiencies allow for more employment of higher-tier (and thus higher-wage) positions. Regardless of whether downsizing is good or bad for the national economy, companies continue to downsize and the trend shows few signs of slowing down.
THE GROWTH OF DOWNSIZING
The corporate downsizing trend grew out of the economic conditions of the late 1970s, when direct international competition began to increase. The major industries affected by this stiffer competition included the automotive, electronics, machine tool, and steel industries. In contrast to their major competitors—Japanese manufacturers—U.S. companies had significantly higher costs. For example, U.S. automobile manufacturers had approximately a $1,000 cost disadvantage for their cars compared to similar classes of Japanese cars. Only a small percentage of this cost difference could be attributed to labor costs; however, labor costs were among the first to be cut despite other costs associated with the general structure of the auto companies and their oversupply of middle managers and engineers. Auto workers were among the first to be laid off during the initial wave of downsizing. Other U.S. manufacturing industries faced similar competitive problems during this period, as did some U.S. technology industries. Companies in these industries, like those in the auto industry, suffered from higher per-unit costs and greater overhead than their Japanese counterparts due to lower labor productivity and a glut of white-collar workers in many U.S. companies. To remedy these problems, U.S. companies implemented a couple of key changes: they formed partnerships with Japanese companies to learn the methods behind their cost efficiencies and they strove to reduce costs and expedite decision-making by getting rid of unnecessary layers of bureaucracy and management. Nevertheless, some companies began simply to cut their workforce without determining whether or not it was necessary and without any kind of accompanying strategy. In essence, they downsized because they lacked new products that would have stimulated growth and because their existing product markets were decreasing.
DOWNSIZING AND RESTRUCTURING
Downsizing generally accompanies some kind of restructuring and reorganizing, either as part of the downsizing plan or as a consequence of downsizing. Since companies frequently lose a significant amount of employees when downsizing, they usually must reallocate tasks and responsibilities. In essence, restructuring efforts attempt to increase the amount of work output relative to the amount of work input. Consequently, downsizing often accompanies corporate calls for concentration on "core capabilities" or "core businesses," which refers to the interest in focusing on the primary revenue-generating aspects of a business. The jobs and responsibilities that are not considered part of the primary revenue-generating functions are the ones that are frequently downsized. These jobs might then be outsourced or handled by outside consultants and workers on a contract basis. Eliminating non-core aspects of a business may also include the reduction of bureaucracy and the number of corporate layers. Since dense bureaucracy frequently causes delays in communication and decision-making, the reduction of bureaucracy may help bring about a more efficient and responsive corporate structure that can implement new ideas more quickly. Besides laying off workers, restructuring efforts may involve closing plants, selling non-core operations, acquiring or merging with related companies, and overhauling the internal structure of a company. The seminal work on restructuring or reengineering, *Reinventing the Corporation,* by Michael Hammer and James Champy, characterizes the process as the "fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance such as cost, quality, service, and speed." While discussion of reengineering is common and reengineering is often associated with downsizing, Hammer and Champy argue that reengineering efforts are not always as profound. Hence, these efforts frequently have mixed results. Downsizing and reengineering programs may result from the implementation of new, labor-saving technology. For example, the introduction of the personal computer into the office has facilitated instantaneous communication and has thus reduced the need for office support positions, such as secretaries.
CRITICISM OF DOWNSIZING
While companies frequently implement downsizing plans to increase profitability and productivity, downsizing does not always yield these results. Although critics of downsizing do not rule out the benefits in all cases, they contend that downsizing is over-applied and often used as a quick fix without sufficient planning to bring about long-term benefits. Moreover, downsizing can lead to additional problems, such as poor customer service, low employee morale, and bad employee attitudes. Laying workers off to improve competitiveness often fails to produce the intended results because downsizing can lead to the following unforeseen problems and difficulties:
- The loss of highly-skilled and reliable workers and the added expense of finding new workers.
- An increase in overtime wages.
- A decline in customer service because workers feel they lack job security after layoffs.
- Employee attitudes that may change for the worse, possibly leading to tardiness, absenteeism, and reduced productivity.
- An increase in the number of lawsuits and disability claims, which tends to occur after downsizing episodes.
- Restructuring programs sometimes take years to bear fruit because of ensuing employee confusion and the amount of time it takes for employees to adjust to their new roles and responsibilities.
Some studies have indicated that the economic advantages of downsizing have failed to come about in many cases, and that downsizing may have had a negative impact on company competitiveness and profitability in some cases. Downsizing has repercussions that extend beyond the companies and their employees. For example, governments must sometimes enact programs to help displaced workers obtain training and receive job placement assistance. Labor groups have reacted to the frequency and magnitude of downsizing, and unions have taken tougher stances in negotiations because of it. Instead of laying employees off, critics recommend that companies eliminate jobs only as a last resort; not as a quick fix when profits fail to meet quarterly projections. Suggested alternatives to downsizing include early retirement packages and voluntary severance programs. Furthermore, some analysts suggest that companies can improve their efficiency, productivity, and competitiveness through quality initiatives such as Six Sigma, empowering employees through progressive human resource strategies that encourage employee loyalty and stability, and other such techniques.
SUPPORT FOR DOWNSIZING
Advocates of downsizing counter critics' claims by arguing that, through downsizing, the United States has maintained its position as one of
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