The concept of Downsizing – boon for organizations, bane for employees

Technological innovation, market conditions, business downturns, competition and economic slowdowns warrants even large organizations to conduct restructuring or downsizing. It represents a shift in management ideology from emphasizing on growth to that of focusing on productivity as a means of enhancing financial performance (Kee & Turpin, 1994), enabling business to focus their resources towards achieving competitive advantage. However, few organizations use this as a solution to their deteriorating financial performance (Kee & Turpin, 1994).

In September 1995, AT&T Bell Labs announced restructuring of core business which meant close to 8500 jobs deleted from its work force. Shortly thereafter, on January 1996, AT&T’s management announced a further downsizing in workforce to the tune of 48,500 employees over the next 3 years. However, the effect of such large downsizing activity had its effect on nearly 78,000 employees. This case presents the current industrial trend adopted by organizations in the face of global or regional recession. It is only when organizations notice a large shift in market conditions or business downturns or recessions that they start to focus on underutilized resources and the immediate reaction to cut of these resources from being carried on as liabilities. Human Resource is one such easily identifiable resource, which suddenly becomes a great liability to organizations that was otherwise termed as assets.

Will it be possible to avoid the process of downsizing or restructuring? The answer to this question is again based on group perception. From the employer’s perception, cutting variable cost will be essential to maintain that competitive edge to survive in the changing times. If competition had been determined as a reason for downsizing then it is inevitable for this variable cost to be reduced as the primary source to enhance the competitive edge. An employee may argue that a reduction in fixed assets which add relatively less value, may be cut down to bring about the same financial revival or competitive edge that is required.

Economic reports on US markets had not reported any major crisis in 1995. On the contrary, the S&P market indices showed a 37.43% rise. (Roberts, 2006). Then why a successful monopolistic company AT&T had to undertake the condemnable act of downsizing? AT&T was enjoying huge profits riding on its market position, however, the management started to see the change in external factors that could lead to downfall in near future, if corrective measures were not in place. Likely new market legislations, probable competition from new firms and rapid changes in information technology sector couple with the laggard performance by its employees when compared to competitors, lack of innovative products and major decline in motivation levels were sending clear signals to AT&T’s management on fast approaching collapse.

As part of restructuring AT&T identified 3 core businesses that needed objective based focus which lead to the formation of 3 separate publicly held companies which meant a loss of 8,500 jobs. However, “tacit admission” by management that the purchase of NCR was a mistake and introducing further massive layoff in January 1996 indicates adoption of poor communication and leadership styles. From an AT&T employee viewpoint this surely indicates that in September 1995 itself the top management of AT&T was well aware that the restructuring would result in more layoffs than it announced, earlier. AT&T’s management had made a gross mistake in not announcing the 40,000 job cuts in September itself. This shows the ineffective communication on the part of AT&T management. Moreover, the management has turned out to be insensitive to employee’s emotions by announcing a major layoff immediately after the December, 1995 vacations.

Handling the situation differently:

Every action in an organization should be backed by a thorough analysis and strong planning on the sequence of operations (Sommer, 2003). AT&T should have placed importance to planning, considering a thorough analysis had already been undertaken, when they decided for reorganizing the core business into 3 separate profit centers. It is not possible that the management had viewed the requirement of 40,000 – employee layoff after the initial announcement of restructuring in September 1995. Alternatively, if the layoff announced in January 1996 was the result of intuitive thinking post September 1995 announcement –the management had largely failed on its thorough analysis of their revised business plan.

Ineffective communication and bad timing had lead to AT&T facing negative reactions from all the stakeholders in the organization (Robbins, Judge, & Sanghi, 2009). As goes the public relations adage “Tell the truth, tell it all and tell it fast” (Sommer, 2003), AT&T in September, 1995 should have not only announced the restructuring but also should have clearly stated the downsizing program clarifying all apprehensions from every section of stakeholders. The detailed communication would have created an environment for each of the stakeholder to ponder over various possibilities and be prepared when the actual termination notices are served, thus delivering value to its corporate social responsibility towards its employees (Marken, 2001).

Communicating the right Vs right decision:

Downsizing is a boon to organizations with hard negative connotations from other stake holders. A decision of downsizing / layoff should be arrived at after a thorough analysis of all underutilized resources had been completed. There are many ways of conducting this exercise. Robert Kee and Rick Turpin in their research have identified, defined and elaborated on the use of Linear Programming, an operations research tool, in identifying the underutilized resources (Kee & Turpin, 1994). If layoffs are inevitable, then the management has be understanding and be sensitive to employee’s emotions, requirement and dignity. The management should set procedures in implementation of restructuring and downsizing program.

• Make a thorough analysis of underutilized resources. Effective use of office space can also reduce fixed cost, avoiding the necessity for employee layoffs (Davis, 1996).
• Identify different venues for re-organizing the human resource – remember, human resource is very scarce under pressing circumstances. When market takes an upward turn, these experienced employees should be available. Employees carry the scar of ill treatment or poor treatment. Infosys, an Indian IT major, offer its employees to volunteer for philanthropic activities while being eligible to draw 50% of their salaries during lean period in business.  
• If re-organizing of human resource is not possible, start will identifying the jobs to eliminate – based on job performance levels, work remaining etc.  
• Prepare a thorough rationale behind the requirement of downsizing which should be used as part of the announcement.  
• Downsizing to be planned across the levels in the organizations. It should not be concentrated on lower levels alone. 
• Refine the list of employees to be terminated and have it wetted by a legal counsel working on employment laws.  
• Choose the proper part of the year, day and time of the day.  
• Make the announcement (either public or internal) loud, clear and in full. No part of the downsizing program should be left behind. Be prepared for some tough questions.  
• Have the managers trained in the process of downsizing.  
• HR personnel have a critical role to play in this entire exercise. HR personnel to plan for physical security, arrange for security of company property, intellectual property and other company security requirements.  
• Start downsizing activity from top and move towards the bottom of the organization.  
• Start the downsizing activities in all the locations/department on the same day and at the same time.  
•  Create a congenial atmosphere for exiting employees to sink in the damaging news.  
• Make the meetings one-on-one if numbers are small or subdivide into small groups if the numbers are large.  
• Allow employees to take sufficient time to clear their belonging.  
• Make sure the management is available to every employee (exiting or staying) for answering any queries with regards to layoff.

Conclusion:

Tang and Fuller conclude that effective human resource planning and staffing program can avoid organizations from getting into the muck of downsizing program, thus doing more with as less as possible. However, in globally liberalized economies, competition plays a major role in identifying the core business activities in the face of a downturn in businesses. Building on the strengths and relieving of underutilized or underperforming liabilities is essential for business to sustain and survive in global markets. In the wake of this restructuring, downsizing, layoff, reduction – in – force and demassing are techniques used by organizations in bringing down the cost and focusing on productivity thus enhancing its financial performance. Hence, if layoffs are inevitable the employer has to create a congenial environment for the process by recognizing the employee’s needs in post termination employment support.

Bibliography

1. Davis, M. (1996, January 3). AT&T Downsizing Offers Lessons to Corporate America Says E&Y Kenneth Leventhal. Business Wire, p. 1.
2. Kee, R., & Turpin, R. (1994). Linear Programming as a Decision Aid for Downsizing. Journal of Managerial Issues, 6 (2), 241. 
3. Marken, G. A. (2001). Corporate Communications: It's All About Delivering Value. Public Relations Quarterly, 46 (1), 39. 
4. Robbins, S. P., Judge, T. A., & Sanghi, S. (2009). Organizational Behavior (13 ed.). New Delhi, India: Dorling Kindersley (India) Pvt. Ltd.
5. Sommer, R. D. (2003). How to Implement Organizatinal Resizing. In K. P. De Meuse, & M. L. Marks (Eds.), Resizing The Organization: Managing Layoffs, Divestitures and Closing Maximizing Gains while Minimizing Pains (1 ed., pp. 246-274). San Francisco: Jossey-Bass.
6. Tang, T. L.-P., & Fuller, R. M. (1995). Corporate Downsizing: What Managers Can Do to Lessen the Negative Effects of Layoff. SAM Advanced Management Journal , 60 (4), 12.
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