The role of leadership during downsizing

by 19 Aug 2009

Downsizing has become a popular tool for many CEOs over recent decades, however it comes with a heavy price. Franco Gandolfi examines the critical role that leaders are likely to play during the process of downsizing, and looks at the impacts upon organisational health

In the early days of the 1990s, the world economy underwent a deep recession and the entire corporate world went into a tailspin. Organisational leaders suddenly realised that their respective organisations had built too much capacity over the years.

The term ‘downsizing’ was first coined in the mid 1970s by Charles Handy, a professor of managerial psychology in London. Handy’s contention was that the technological revolution that was occurring at the time would ultimately affect and in fact transform the lives of millions of workers.

His original forecast has become an amazingly accurate prophecy in that at least since the mid-1980s, employment downsizing has been deemed the preferred route to improve corporate efficiency. Throughout the industrialised world, a vast amount of organisations have employed downsizing as a tool to cut costs and to boost productivity, profitability, and share prices.

The corporate leader who can axe the greatest number of jobs and, with the least emotional content, lay off the maximum number of people is extolled as a turnaround artist. Such organisational leaders, while obtaining ‘godlike’ status to shareholders, are perceived as the personification of terror to employees. Even one of the world’s most successful and celebrated former CEOs, Jack Welch, who reigned in the corporate world for more than two decades, gained the epithet of ‘Neutron Jack’. In the USA, a Business Week article carried the news “Neutron Jack is back … General Electric is planning massive job cuts – on a scale not seen since CEO Welch’s early days in the 1980s”. According to various Wall Street sources and those close to the corporation, General Electric confirmed that it was likely to eliminate at least 75,000 jobs, or more than 15 per cent of the organisation’s entire workforce, during the next two years.

Sadly, organisational downsizing has come to be recognised as a powerful tool in the corporate strategic toolkit. This development has occurred in spite of a growing pool of evidence that clearly demonstrates that the consequences of downsizing are predominantly negative.

Downsizing defined

Downsizing is defined as a deliberate organisational decision to reduce the workforce that is intended to improve organisational performance. Downsizing is an intentional activity that involves but is not limited to personnel reduction with its prime focus on improving the efficiency of the organisation. Typically, downsizing aims at reducing costs, increasing productivity, and restructuring work processes.

In popular usage, downsizing is frequently used as a synonym of layoffs and redundancies. It is also used interchangeably with a range of other terms, such as de-recruiting, de-massing, and re-sizing. Downsizing can be viewed as a conscious and deliberate decision of senior management to reduce the manpower on the payrolls of an organisation with the explicit aim to improve the efficiency, effectiveness, productivity, and competitiveness of an organisational entity.

Leaders have a tendency to take pride in referring to downsizing as creative destruction, whereas downsizing victims view it as a most disruptive and traumatic event. Downsizing survivors frequently express a paradigm shift in their work attitudes. This includes lower levels of organisational trust, commitment and loyalty as well as higher levels of insecurity, intent to leave and low morale. Problems of motivation, skill retention, company image and corporate culture also tend to assail organisations undertaking downsizing activities.

Deciding to downsize

It is essential to have a clear understanding of the leadership process in a situation of decline by establishing the critical role of the leader’s decision to downsize.

Downsizing is often the outcome of organisational reorientation accompanied by the three Rs – reduction, restructuring and reorganising. A process view of leadership requires it to create or fundamentally change organisations. This would involve challenging the status quo, creating a vision, communicating that vision widely, getting people to believe in it, and then empowering them to act.

It starts with vision formulation and moves to maximise the reach and range of the vision aligning organisational members to the vision, and, at least theoretically, ends with allowing, encouraging, and facilitating others to achieve an optimum performance, both in relation to their own potential and also in relation to the needs and mission of the organisation.

At the deepest level, the leadership process is essentially a value creating process. It is expected that that the leadership process should create value not for the organisation per se, but for the various stakeholders of the organisation, the summation of which will put the organisation in a trajectory of competitiveness, stability and sustainability. However central to the process of leadership is the leader. Thus, the expectations of the stakeholders boil down to a single human being, who in the considered judgement of the board of directors, is competent enough to take full charge of the leadership process in the organization and fulfil the manifold expectations from all its stakeholders.

In this context, it needs to be appreciated that in a situation of decline, the goal of value creation becomes all the more critical for the CEO. No CEO is asked to cut manpower, to slash inventory, or to implement new technology. They are simply given the mandate to revive an organisation in decline. How they do this is their problem. Here lies the critical role of the leader’s decision to downsize. It is their and only their decision to cut manpower.

Invariably, most CEOs make the external environment a scapegoat. Viewed from the perspective of the CEO, it is likely that most of them believe that making the organisations leaner and thinner through manpower cuts can enhance organisational value. However, what they fail to realise is that organisational value is enhanced through the summation of the individual value they create for all concerned stockholders of the organisation.

Thus, when a CEO decides to downsize they tend to forget the most important and critical stakeholders of the organisation: the employees. By no stretch of imagination can one construe that downsizing creates value for the employees. Rather, it causes a deep dent in the employees’ morale. Therefore, if it is accepted that the decision to downsize is exclusively the CEO’s prerogative, then it needs to be understood why CEO’s decide upon the extreme measure to downsize instead of seeking alternative ways to deal with excess manpower and making a choice from the available alternatives.

Other options?

Life can be fairly easy and predictable, at least in the short run, if one takes the beaten track. In conditions of decline, the human factor appears to come at the bottom of a leader’s priority list. Hence, thoughtless sanctions of downsizing are presumably natural. The leader does not perceive the spectre of regulatory sanctions looming large in the horizon. To add to the leader’s convenience there is hardly any social sanction either. The dictum of ‘business is business’ gives blanket cover to the leader to justify the decision to downsize. Any manager given the power and position of the CEO can exercise the option of downsizing with equal ease. If a leader equally opts for the easy solution, where does the dividing line between a leader and a manager lie?

One of the key differentiating factors that distinguish leaders is to develop multiple strategies and to make a sub-optimal choice, which in their considered opinion would achieve seemingly unattainable goals in the face of unfathomable odds. By building strategic alternatives leaders provide hope to the organisational members in situation of decline. Employees come to feel that all is not lost and there are still roads to come out of the current state affairs.

Therefore, it is through strategic alternatives that leaders communicate positive feelings and emotions and thereby inspire organisational members to rebuild the organisation again. Leaders bring alive in concrete details the basic management process and strike a fit to the context in which people are the most important part. By exercising choice options leaders reduce ambiguity and the amount of time employees spend worrying about what is going to happen to me?

In a turnaround situation, leaders focus on people while managers focus on processes. It is people who can create and execute change. Processes are mere enablers. Leaders are not required to activate an enabler they are required to stir the imagination and emotion of people. Positive steps like seeking alternative course of action activates positive feelings and emotions while destructive acts of outright downsizing can lead to negative psychological and behavioural survivor reactions at work. Interestingly, one of the world’s most prominent researchers on downsizing, Kim Cameron, compares the exclusive use of workforce reduction strategy to “throwing a grenade into a crowded room”. Certainly, organisations do not require leaders to do that.

Conclusion

Central to the decision to downsize is the actual leader of the organisation. It is argued that a leader’s credibility is at stake if they decide to downsize without seeking alternatives. Clearly, downsizing is an easy way out to divert the stakeholders and public attention to the fact that the CEO is on the right path of turning around the organisation. At the same time, it is commonly forgotten that any manager, given the power and position, has the capacity to resort to the ruthless process of downsizing at the drop of a hat.

Therefore, a real leader would first seek and exhaust all downsizing alternatives and opt for downsizing as a choice of the very last resort.

Most Read