Downsizing in a Crisis

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Downsizing in a Crisis

Out of the many factors leading to the downsizing decision, the major factor is a global crisis which is very contingent.

--BY BASANT P. JOSHI

Downsizing a business operation is not a choice of any business organisation. Sometimes circumstances overshadow the choices.  A good businessman knows when to expand and when to shrink back to the cocoon. Investopedia 2019 defines downsizing as the permanent reduction of a company's labour force through the elimination of unproductive workers or divisions. Downsizing is a common organisational practice, usually associated with economic downturns and failing businesses. Cutting jobs is the fastest way to cut costs, along with this the company frees its branches, divisions or units leading to freeing the assets sometimes for sale or relocate.

The terms downsizing and layoff sometimes are confused. According to Cattie Watson (January 2019) from an American magazine Choron, layoff is defined as an alternative term used to indicate a group of employees who are terminated as part of cost-cutting efforts.  With a layoff, positions are typically eliminated even though the employees who once filled the position are no longer working. The loss of employment may be temporary, and some commitment may be made to employees of a possible rehire at a later date. However, employees are not usually given a future opportunity to do the same job at the same location when a business downsizes. Other terms used to describe downsizing include right-sizing and reduction in force (RIF).

Layoffs are typically common in businesses with temporary or seasonal employees, such as the jobs in cruise lines, hotels and resorts that are linked to a specific tourist season. Engineering and construction jobs in areas where the work needs to stop because of bad weather or natural calamities are subject to layoffs. A layoff may also occur in any industry during an economic downturn due to a loss in business, with the implication that positions may be filled again when business improves.

Today, the entire world is suffering from an invisible enemy, Coronavirus (COVID-19) causing the entire world to stay at home. Both the owners and the workers are living in the cost of a big uncertainty. It seems that there has been a greater risk of permanent closure of the business if rightsizing is not done quickly, however risky. London Daily on 23rd May reported a sad story of a 100-year-old aviation industry which is at stake. Virgin Australia, South African Airways and Eurowings filed for bankruptcy. Norwegian, SAS, Ethiad, Emirates, Lufthansa and many more have planned to ground and are/or firing thousands of employees and pilots. According to a survey, if the coronavirus pandemic persists for the next few months, nearly 7.5 million small and medium businesses are at risk of closing their doors permanently. At this stage, will rightsizing or downsizing save the business? The question is big.

Reasons for Downsizing
Although companies choose to downsize strategically for several reasons, the ultimate goal is to cut down costs.  Out of the many factors leading to the downsizing decision, the major factor is a global crisis which is very contingent. Automation, technological disruption, lower demand for a company’s goods and services, low performing departments, overstaffing, shift of company priorities and cut throat competition are some other reasons for downsizing. Downsizing may also be used to eliminate duplicate positions when two companies merge or when one company buys out another.

Approaches to Downsizing
Downsizing does not have a time bound. A company may take a decision of termination of its employees all at once or over an extended period of time. In normal situations, the downsized positions are not always eliminated, they may be restructured or relocated in other firms or units where there is a demand. But at this stage of a global crisis, the options are fewer. Whatever the approach, downsizing a business typically has a harmful effect on employee morale and profitability.  A recent example of the negative impact of downsizing is Nokia, a Finnish telecommunications company which, in 2008, in an intention to increase profit lines by downsizing, tried to be in the limit by closing a plant in Germany and downsizing 2,300 jobs. The company losses stood at USD 227 million due to an outcome from the proposed downsizing. Three years later, with its mobile phone business collapsing, the company began a restructuring programme that downsized 18,000 employees around the world.

Downsizing Results
Michelle et al (2017) in the Harvard review state that given that downsizings are often part of a larger restructuring plan, managers must ensure that they retain the resources that can decrease the odds of negative outcomes. Most important, firms planning to downsize must focus carefully on their intangible resources, rather than financial or physical ones, because they will be essential if the company loses valuable employees. A study on the history of US businesses over the past few decades shows that the value of the publically traded stock of a company usually rises after an announcement of downsizing or about cutting costs. There is an opinion that an organisation will be leaner and more efficient after peeling employees but generally it doesn’t.

Choron again states an example from Harvard review that despite short-term gains, downsizing may hurt a business more than it helps. Again, a research conducted by Harvard concerning over 5,000 companies dating back to 2010 found that the organisations that downsized within the period were twice as likely to declare bankruptcy afterwards. Although the companies can save some money in the short term by reducing the number of employees, many companies were unable to fill the knowledge gaps left by employees who were let go. Companies that survived downsizing leveraged intangible resources like remaining employee knowledge to revamp operations and streamline processes.

Careful downsizing needs
Although downsizing is not in the wellbeing of an organisation, if it is so imperative to downsize, because the company is at the risk of carrying an overloaded ship and has no options left, then it is important to consider the following points.

1.Strategic planning and alternative revenue models
2.A mental toughness
3.Team communication and motivation
4.Financial plan
5.Reallocation of staff and compensation
6.Management of corporate image
7.Market impact analysis

Joshi is an entrepreneur and educationist. He has been involved in research and development in general management, hospitality, tourism and education sector for the last 20 years. Joshi is currently pursuing his PhD in Sustainability from Atlantic International University, USA. He can be reached at [email protected]

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