Alternatives to downsizing

by 19 Aug 2009

Downsizing is taken as an unpleasant but real fact of todays corporate life. However it need not be so. Franco Gandolfi examines some of the perils of downsizing, and presents some viable alternatives to retrenchment

Organisations need to change rapidly. Given the unrelenting market pressures and pace of change, leaders find that they can no longer ponder and mull over decisions before taking action. Organisations must be nimble in considering and acting upon changes to staffing needs. Questions that HR leaders must ask include: What mix of skills do we need today? What skills are we likely to need in the future? Do we have the right number of people employed today? How will these numbers change in the future? How do our staffing costs compare to our competitors?

Admittedly, these questions are very difficult, yet essential. HR managers who fail to address these issues will be forced to react quickly when a crisis occurs. ‘Shoot-from-the-hip’ responses almost always result in a reduction in force. Empirical evidence suggests that downsizing is a risky and dangerous gamble. In fact, less than half of downsized organisations have seen improvements in productivity, efficiency, and profitability following the conduct of downsizing.

There appears to be no good way to downsize. Studies indicate that in over half the cases, it does not meet its intended goals. And many companies find that they must rehire staff within a year. Morale and productivity often plummet. Among employees who remain after downsizing, more than half report increased stress. And the risk of violent behaviour of people laid off is six times that of their employed counterparts.

In a study of 531 large corporations, three-quarters reported having cut payrolls. Of the 85 per cent that sought higher profits, only 46 per cent saw any measurable increase. 58 per cent sought higher productivity, but only 34 per cent saw even a slight increase. 61 per cent wanted an increase in customer service but only 31 per cent achieved it.

Unfortunately, downsizing has become a part of modern-day corporate thinking. But there are alternatives to downsizing. The thirteen following alternatives address either long-term staffing needs or provide short-term expense reduction options.

The alternatives

Many of the alternatives rest upon two important pillars:

They share the pain. According to Wayne Cascio, the ‘they share the pain’ pillar is a significant factor in the success of alternatives. ‘Sharing the pain’ means that no-one – from executive to maintenance worker – is immune from the strategies for saving money.

Strong human resources initiatives. HR departments must be proactive in developing career assessment, training and development, placement opportunities as well as creative wage and benefit packages.

Long-term staffing alternatives

Hiring linked to vision. The organisation identifies what skills it will need in order to meet its vision and goals. During job interviews, HR and department managers need to ask questions specifically related to skills it will need now and in the future. This strategy helps assure that organisations are recruiting and hiring people who can meet future challenges.

Cross training. By understanding the skill mix of staff today and linking it to the anticipated skills needed in the future, the organisation allows individual employees to determine what they need to do in order to remain gainfully employed. It also gives the learning and development department a clear mandate regarding the type of skills training they need to make available to staff. In Competing for the Future, authors Prahalad and Hamel suggest that businesses identify their core competencies and build strategies based on these fundamental building blocks. This provides a foundation for the organisation and employees to build a career development process that matches what the organisation needs.

Succession planning. The organisation needs to identify the types of management and technical skills it needs in various positions. The HR department ought to work with line managers to identify likely candidates so that they can begin preparing them for positions once they become vacant. Often, succession planning is left to chance. Baseball provides a good analogy for effective succession planning. With its farm systems, players move up from A to AA to AAA as their skills increase and as openings occur.

Redeployment within the organisation. Redeployment can be linked to ‘alternative placement’, but it seems to be used most often within the organisation. Successful redeployment requires a sophisticated career management process so that managers and employees are aware of open positions. It also requires career assessment and development activities that allow people to get ready for positions. One company linked individual career planning to corporate objectives so that people could see how their plans fit into overall direction. It allowed individuals who wished to remain within the company to make career development and placement decisions that increased their chances of succeeding.

Creating value-added and revenue-enhancing opportunities. This is an ‘employee buyout’ within the organisation. A group of employees create a new business or line of service that the company can market. 3M, for example, is a leader in this form of entrepreneurship. Of course, the company does not enter this agreement lightly. When Ford was about to sell the name Mustang to a foreign automaker, engineers asked Ford for a chance to reintroduce a Ford version of the car. Leaders said they would agree if the engineers could demonstrate that the car could be built to certain stringent quality specifications and manufacturing time that rivalled their most efficient operations. On their own time, the engineers developed plans that met these requirements.

Cost-saving strategies

A comprehensive model. A number of car manufacturers have adopted a series of steps they use as an alternative to downsizing. If the first step does not achieve the needed savings, they move to the next.

• Compensation: 50 per cent of compensation is set, the remaining 50 per cent is determined by profit or productivity measures

• Hours: Cut the number of hours

• Wages: Cut salaries

• Placement: Make arrangements with other employers who will agree to take displaced workers

Reduced hours. A policy is established that either places everyone in a particular job category on a flexible working arrangement or creates a flex-pool made up of volunteers from the department. The goal is to reduce the number of hours worked by each employee. Job sharing is a variation of flexitime and has been used successfully in many organisations. People divide a job between them with each person receiving proportionate benefits.

Lower wages. Wages are lowered in order to save money. Wage reduction programs vary. A typical element is that everyone in the institution is part of the wage reduction program. Additionally, executive compensation is reduced by the highest percentage, followed by middle management, with non-management staff suffering the smallest percentage of loss. This is usually a temporary program instituted to get through a downturn or until other reductions such as attrition can take place.

Attrition. Attrition, or waiting for people to retire or leave on their own, can work in two different ways: natural attrition, where positions are not filled as people leave. This can work in an organisation where turnover is sufficiently high to gain the savings quickly. The other way is to offer voluntary early retirement or other packages to people within a certain category, such as a particular position or years of service. If this offer does not result in sufficient savings, it is extended to a broader pool.

Alternative placement. The organisation makes arrangements with similar institutions or suppliers for placement. A variation of this occurred at AT&T after the company said it would downsize. AT&T ran ads letting other technology companies know that there were many talented men and women available for positions. Although they have been accused of using this as a public relations gimmick, it has resulted in a significant number of requests for more information about potential candidates.

Leave of absence. People are offered a leave of absence with full benefits for a specified period of time to help an organisation to weather a downturn. Although people are promised a job upon completion of the leave, it may not be the same job or at the same pay level. This alternative must be used as a temporary measure to help an organisation through a crisis.

Employee buyouts. Some organisations have allowed employees to buy the operation that was slated for closing and set up their own business.

Shared ownership. An alternative to wage cuts is concessions for equity. In other words, trading pay increases or pay cuts in return for company stock. This requires a high degree of employee participation in decision-making. Employee ownership seems to falter when people are owners in name only, but are shut out of the decision making process.

Downsizing. The final alternative is downsizing – the last resort. Downsizing means that the organisation makes a decision to terminate people against their will. Although sometimes described as ‘getting rid of dead wood’, the sweep of downsizing is much broader. If an organisation really does have a lot of dead wood, should not those in charge who allowed this condition to persist be the ones to go?

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