At first glance, corporate downsizing could appear to be a logical pathway to improved profitability during poor economic conditions. Dr Wayne Casio in his 2002 book, “Responsible Restructuring” cites research which offers some surprising results to the contrary. Drawn from an 18-year study of leading companies, this research indicates that the most  profitable companies were those where employee turnover remained less than 5% in any particular year and those which were on a path of growth. In stark contrast, organisations that were downsizing appeared at the bottom of the profitability bucket. So, downsizing as a strategy in isolation may not yield the profitability outcomes businesses may hope for.

Downsizing may not be the right strategy if, on balance, the negative consequences of employee redundancy outweigh the short term benefits as the following examples illustrate:

• Redundancy communicates a message of permanent separation from an organisation, so the decision to declare a position redundant creates a significant barrier to re-instating that talent in the near term and represents a significant depletion of knowledge and experience
• Downsizing is likely to carry forward uncertainty and fear for those who remain. Loyalty is tested, stress levels increase, trust declines and productivity is compromised.
• Downsizing represents a threat to the continuity of  day to day operations. Customer responsiveness and productivity may suffer as employees learn new processes and adjust to a different team dynamic.
• Fewer resources mean the business is less adept at responding to the needs of the market and possible loss of market share when the economy turns around
• The cost of redundancy can be high, particularly where it concerns long serving employees and unionised workforces. These costs are exacerbated if these employees are returned to the workforce on temporary contracts when conditions improve.
• Remember how difficult it was to find a good employee? Especially in recent years when talent was scarce. This cycle of redundancies and layoffs is only temporary. We will return to full employment again before you know it. Do you really want to make it even more difficult for yourself than you have to when the war for talent resumes?

This excerpt has been taken from Di Worrall’s new FREE email Report: Downsizing with Dignity: the Manager’s Guide to Downsizing and Redundancies. You can subscribe to the complete series at:

http://www.humanresourceschange.com.au/change-management-news-articles/downsizing_redundancies.html

Being mindful of the pitfalls of large scale downsizing and employee redundancy was the clear message that Heather Ridout, Chairman of the Australian Industry Group gave to business in a recent 7.30 Report Interview. Heather is not a lone voice in the wilderness on this topic. In the wake of weekly announcements that big business is shedding staff in mammoth proportions, other business and political leaders are joining a growing voice around the world warning of the consequences of these knee-jerk reactions to sustain short-term business viability.

One message is particularly clear. Forget for the time being who may be responsible for the current economic instability. While governments install bail out packages for the worst affected and revise monetary policies to encourage spending, the extent to which our economies travel headlong towards recession, is largely in the hands of business leaders.

Saul Eslake, Chief Economist of Australia’s ANZ bank is highly vocal on this issue when he reminds business that one of the definitive indicators of declining economic strength, is the unemployment rate. An indicator which is in the main controlled by the business sector.

While organisational restructuring and employee redundancies are a legitimate source of cost savings, there are a range of potential alternative measures to achieve cost control and efficiencies that business can explore before travelling down the path of downsizing and cutbacks.  

This leaves us with 2 messages for riding out the short term economic storm, and leaving our longer term legacy in tact: cost control before cost cutting; and employee redundancy as a last resort strategy and not the first.   

Di Worrall is an author, social commentator and change management consultant. For a FREE subscription to the newsletter – Creating a Climate for Change click on the following website  http://www.worrallassociates.com.au/

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