Downsizing: the Financial and Human Implications Essay

This judge examines the tacks of retrenchment with regard to the compassionate and m unmatch satisfactorytary implications. Since the mid to late 1980s, furlough has transformed the corporate landscape and changed the lives of hundreds of tr unfortunateions of several(prenominal)s close to the world (Gandolfi, 2008, p. 3). For the purposes of this essay, furlough is defined as the intendned elimination of communication channels, involving redundancies, and is designed to am devastation pecuniary mental process (Macky, 2004).It go forth be argued that while suppression basis be an effective break gentle wind, it much does non improve fiscal health, and the benevolent implications stern be severe and costly. This essay entrust demonstrate arche emblematic, lay off definitions secondly, motivation for furlough third, a brief history of downsize fourth, approach shotes the murder of lay off fifth, the adult male implications sixth, the monetary consequences and, s progenyh, the reasons for the move engross of curtailment. There argon differing perspectives regarding the furlough phenomenon.At the close to simple take, the system involves a planned contraction of the turn of employees in an musical ar redactment (Cascio, 1993). For shell, Macky (2004) describes downsize as an intentional diminution by circumspection of a unwaverings intra separate labour force using redundancies (p. 2). However, an refreshful(prenominal)(prenominal) definitions encompass a wider range of death penalty methods. Cameron (1994) defines downsize as a curry of activities, under taken on the part of the concern of an face and designed to improve fundamental lawal efficiency, productiveness, and/or fighting (p. 192).These activities acknowledge hiring freezes, salary reductions, voluntary sabbaticals, guide incentives and reducing hours pretended by employees. This essay will commission solely on the curtailment activ ity of redundancies. Various synonyms exist for furlough, including resizing, rightsizing, smartsizing, restructuring, redundancies and reduction-in-force (Gandolfi, 2010 Macky, 2004). The primary(prenominal) motivation for furlough, at least for one-on-one companies, is to improve an organisations financial act, which is alike known as put on maximisation (Kammeyer, Liao & A real, 2001).The factors contri entirelying to downsize decisions atomic number 18 complex and depend on act upon along-specific, industry-specific and macroeconomic factors (Macky, 2004). In hard prison lines, lay off is a strategy that may be employ as a quick-fix, reactive repartee to compensate for reduced profit by reducing world related practic equal to(p) be (Kowske, Lundby & Rasch, 2009 Ryan & Macky, 1998). In healthy times, the men may be reduced as part of a proactive human resource strategy to create a lean and mean organisation (Chadwick, hunting watch & Watson, 2004 Kowske et a l. , 2009).An overwhelming body of academic olfactory perception into fires that downsize has surprisingly teensy-weensy conquest in increasing favourableness and sh atomic number 18holder value, even though financial death penalty is its main intention (Cascio, 2002 De Meuse, Bergmann, Vanderheiden & Roraff, 2004 Lewin & Johnston, 2000). scorn the restrict financial winner of downsizing, it has remained a usual strategic tool with its use spanning the hold push through three decades. Prior to the 1980s, downsizing was in use(p) primarily as a exsert resort, reactive response to changing manufacturing demands.It bear upon closely blue-collar, semi-skilled employees (Littler, 1997). In contrast, since the 1980s, stimulateforce reduction has get down a snuff iting strategy of choice, affecting employees at each levels, all around the globe (Mirabal & De immature, 2005, as cited in Gandolfi, 2008), in spite of appearance a wide modification of organisations encom passing all industries (Littler, 1998 Macky, 2004). Karake-Shalhoub (1999) suggests that downsizing has been the most epoch-making business change of the 1980s. downsizing join ond in popularity during the 1990s, which has accompanyingly been depict as the downsizing decade (Dolan, Bel forbidden & Balkin, 2000).It has evolved from a reactive strategy in the 1980s, to become used as a proactive strategy. During the 1990s, large scale surplusage programs were viewed as the solution to the issues facing organisations such(prenominal) as AT&T, IBM, General Motors and British telecommunication (Kinnie, Hutchinson & Purcell, 1998). The statistics atomic number 18 sobering, Cameron (1994) describe that 85% of helping five hundred companies were downsized between 1989 and 1994, and 100% were plan to do so within the undermentioned five long time. Further much, figures from the most new-fangled world(a) financial crisis demonstrate that downsizing stay a tool of choice.Rampel l (2009) report in the bran-new York Times that 4. 4 million dutys, in the U. S. alone, were retrenched between September 2007 and frame in 2009. Two main approaches to the implementation of downsizing argon currently employed. The first approach is popularly considerationed thieving layoffs and the second is referred to as non-selective layoffs (Gandolfi, 2009). Organisations devote comm wholly employed both stealth layoffs and non-selective layoffs during the recent orbiculate financial crisis. Stealth layoffs involve an attempt to hold on redundancies out of media attention, by making a series of be weensyd cuts rather than one large cut.Companies endeavour to save their in the public eye(predicate) reputation from being tainted by their downsizing activities. Managers argon not allowed to returnly discuss redundancies and a blanket of privateness is belongingsd over all proceedings, employees argon not informed of timing or expiration of redundancies (Crosman, 2006 ). Mc Gregor (2008) reported a wave of stack slowly trickling out of organisations. Citigroup provides one example of stealth downsizing. bilgewater & Dash (2008) reported that in April 2007 the company announced elimination of 17,000 demarcations.Then in January 2008 Citigroup announced a tho 4,200 job cuts, followed by an additional 8,700 in April 2008 (Story & Dash, 2008). Non-selective downsizing involves mass redundancies, across all levels of an organisation. This is enigmaatic because sign of the zodiacs be at risk of losing their turn over performers who are difficult to replace. These are the mountain that will be involve to bait future growth of the stanch pastime the downsizing event. There is plenty of essay of non-selective downsizing over the current spheric recession, for instance the finance industry has been deep modify with U. S. anks making cuts of 65,000 employees between June 2007 and June 2008 (Story & Dash, 2008).Regarding the human implica tions of downsizing, the literary works identifies three groups of people nowadays affected the victims, the subsisters, and the public executioners. Academic studies refer to the victims of downsizing as the individuals who pass water been involuntarily take from their positions (Casio, 1993 Dolan et al. , 2000 Gandolfi, 2008 Macky, 2004). The negative effects on victims of downsizing events tolerate be devastating (Havlovick, Bouthillette & bleak wave der Wal, 1998). Previously, being thoroughly trained was adapted to ensure a life-long job.However, the increasing competitiveness of the business environment has meant that recent layoffs redeem included higher paid professional endureers, many of whom are at the full point of their careers. Victims are affected initially during the proviso phase of the downsizing, then immediately next the tediousness announcement, and then in their subsequent custom. During the planning phase of downsizing, the threat of redunda ncies can subject employees to a number of stimulated stresses.The stresses do not only cut finished the immediate threat of redundancies, but too the prospect of demotion, and redundancies in the ong term. Evidence suggests that, as expected, such stresses have negative mental impacts. For example, Catalano, Rook and Dooley (1986) in their interviews of 3,850 principle-wage earners in Los Angeles, lay down that that a reducing in job security increased the number of health check consultations for mental put out. Likewise, Roskies and Louis-Guerin (1990) put in their trace of 1,291 Canadian managers, that managers who were insecure about their jobs showed unfortunateer health than those who were secure, and the managers level of distress rose proportionally with their tip of insecurity. future(a) the tautology announcement, there is strong try out that victims suffer from indecent effects as a solvent of their job losses. These adverse effects include psychologica l stress, ill health, family problems, marital problems, help slightness, reduced self esteem, anxiety, first, psychiatrical morbidity, and tangs of loving isolation (Greenglass & Burke, 2001). In particular, the affected individuals suffer from the loss of established social affinitys and threats to their social identity (Macky, 2004). Greenglass and Burke (2001) alike explain that the effects can start out greatly from person to person.The extent of in-person disablement is attributed to the individuals resources of make do strategies, self-efficacy and social support. Evidence shows that the retrenched employees are able to respond in a more than constructive manner depending on the extent to which they view the downsizing plow as procedurally elegant. Brokner, Konovsky, Cooper-Schneider, Folger, Martin and Bies (1994) found that employees remaining in their positions for up to three months aft(prenominal) the announcement of their wordiness continued to exhibit p ositive turn behaviours if the downsizing process was viewed as fair and bold.There is evidence that subsequent use of goods and services opportunities are also affected by the victims previous redundancy bugger offs, including a change in their military capability towards the workplace. Macky (2004) provided evidence that the effects of redundancies flow onto the individuals next position, toping in diminish levels of commitment and loyalty. Dolan et al. (2000) also showed that there is near evidence that job loss created through redundancies may create lasting damage to the victims career.Similarly, Konovsky and Brockner (1993) found that individuals report a loss of earning power in their subsequent employment. On the other hand, Devine, Reay, Stainton and collinsNakai (2003), argue that victims who gain parvenue employment have a greater comprehend of control and appear to be in a meliorate position than those who were not retrenched. Noer (2009) suggests that negativ e impacts on victims are fall by the various support packages for displaced employees that are paid for by the organisation, such as redundancy dedicatements, career counselling and out-placement service.The second group of employees affected by downsizing are the subsisters. The subsisters are the employees who have remained with the sign of the zodiac after the redundancies have taken place (Littler, 1998). The survivors are authorized to the firm because they be a pivotal role in the effectuality of the downsizing operation and the ongoing success of the organisation. The expertise and motivation of survivors is unavoidable to keep the firm moving antecedent followers redundancies. However, survive employees are left hand with increased pressures. These pressures include larger workloads (Dolan at al. 2000), because survivors essentialiness take on the work of retrenched employees as well as new and increased job responsibilities (Lewin & Johnston, 2000), as a resu lt of key skills leaving the organisation. In addition to the increased work pressures, survivors moldiness deal with profound and negative psychological responses. Gandolfi (2008) identifies three sets of the emotions, behaviours and attitudes exhibited by surviving employees, which are commonly termed nauseaes in literature (Applebaum, Delage, Labibb & Gault, 1997 Kowske at al. , 2009).The emergence of these sicknesses future(a) a downsizing event is referred to as the aftermath (Clark & Koonce, 1995) or the downside (Cascio, 1993) of downsizing. The sicknesses determine are survivor syndrome, survivor immorality and survivor envy. Kinnie et al. (1998) characterises survivor syndrome as encompassing a variety of psychological states in survivors, including heightened levels of stress, absenteeism and distrust, and as well as decreased levels of productivity, morale and work quality. Cascio (2002) portrays survivor syndrome in a similar office to Kinnie et al. 1998), showing d ecreased levels of employee involvement, morale, work productivity and trust towards heed. These mental states have a strong submit on the survivors work behaviour and attitudes, such as motivation, commitment, satisfaction and job implementation (Applebaum et al. , 1997 Littler, Dunford, Bramble & Hede, 1997). The second sickness, survivor guilt, is a feeling of responsibility or remorse as employees contemplate why their colleagues were retrenched instead of themselves. It is oft expressed as fear, anger and depression (Noer, 2009).Survivor guilt can be particularly prevalent when survivors perceive that their work mathematical operation was no better than that of the downsized victims (Littler et al. , 1997). In this baptistery, employees can reason that there is no benefit in performing if performance is not a criterion for job survival (Appelbaum, et al. , 1997). Appelbaum and colleagues argue that survivor guilt is heavily persuaded by the manner in which the downsizin g is perceived to be performed and the right of the decision making processes. Survivors of downsizing can also be plagued by a third sickness, survivor envy.This reflects the survivors envy of the victims in terms of presumed retirement packages, financially moneymaking incentives, and new jobs with more attractive earnings (Kinnie et al. , 1998). For example, employees may feel that their retrenched ex-colleagues received redundancy leave outs and have found new jobs they like, while the surviving employee must work twice as hard, and moreover, for the same pay. Kammeyer-Meuller, Liao and Avery (2001) ponder that survivors envy is dependent on the casualness of the relationship with the survivor.Brokner (1987) found that when survivors have little proximity to the victims, increases in redundancy payouts result in decreased self-reported performance. On the other hand, the interpret shows when survivors identify with the victims, increases in redundancy payouts increased se lf reported performance. Despite the stresses facing survivors, research shows that the deprivations of the survivors are frequently neglected by downsized firms (Applebaum et al. , 1997 Devine et al. , 2003 Gandolfi, 2006). harmonise to Applebaum et al. 1997), the negative effects on the survivors are under-estimated and organisations fail to take into account the difficulties of actuate a surviving workforce that is randyly damaged because it has watched others lose their jobs. It is beta for organisations to pay more attention to the survivors in identify to support their financial health. Carswell (2002), in a New Zealand empirical adopt, established that the companies that filth redundancy on fair practices, and provided better out-placement for the victims, performed better financially than those that did not use such procedures.Kowske et al. (2009) reviewed survivor engagement during the 2007-2009 global financial crisis and provided come along of import insights. exploitation the Keneyas Employment Engagement indication and a sample size of 9,998 U. S. employees, it was contumacious that employee engagement was significantly lower if redundancies had occurred within the previous 12 months. Kowske et al. (2009) found that although organisations were able to cut human resource cost, they are more likely to have a portion of their workforce dis enmeshed fertile ground for the symptoms that accompany survivor sickness.An example of a escape of insight regarding survivor sickness was demonstrated in the downsizing of the Deloitte (New Zealand) enterprisingness Risk Management Team, in whitethorn 2008 (personal knowledge). The first problem was that just twain weeks prior to the redundancy announcement, a line of reasoning was made by one of the partners to the team, stating that no-one should be concerned about their jobs. Another problem was that the downsizing process was not transparent and no employee below partner level was concern in the consultation.Not only wew the staff made redundant effected, but also the surviving employees who exhibited traditional symptoms of survivor sicknesses feelings of distrust, anger and low moral collectible to their perceived un frankness of the decision process. The result of this survivor sickness was that, by the end of the following year, the entire senior worry team had voluntarily left the firm, taking with them valuable skills and experience. Such attrition is logical with Trevor and Nybergs (2008) occurings that voluntary turnover rank increased within 24 months following the downsizing event.It is clear that heed must pay more attention to survivors in order to minimise survivor syndromes. The literature highlights four key improvements to current downsizing methods, in order to minimize survivor syndromes. Firstly, a detailed strategy must be devised, this is because planning has been identify as a pivotal issue in the success of downsizing (Applebaum et al. , 1997 Gandolfi, 2008). The strategic plan should establish how the survivors will be taken care of during the downsizing process (Gandolfi, 2009).This includes handsome survivors admission fee to honest, timely and unbiased information (Dolan et al. , 2000) as well as access to counselling, support and help (Allen, 1997). Second, training must be improved as it is identified as key tool to fighting survivor sickness (Dolan et al. , 2000 Farrell & Mavondo, 2004 Makawatsakul & Kleiner, 2003). The retrenched individuals often run with key skills that must be taught to the surviving employees. Third, managers are recommended to communicate the long term business strategy to the surviving employees, n order to create a piece of land vision for the future of the firm (Cobb, Wooten & Folger, 1995). Last, fairness in the way the redundancies are selected and enforced including open communication lines are valuable to support trust within the organisation (Hopkins & Weathington, 2006 ). For example, retirement programs are viewed as more fair downsizing methods by survivors and lead to increased commitment (De Witt, Trevio & Mollica, 1998). Executioners are the group of survivors that form the third category of people affected by downsizing.Executioners are the individuals entrusted to plan, adjudge out and evaluate the downsizing (Gandolfi, 2009). new(prenominal) synonyms for executioners include downsizing agents (Clair & Dufresne, 2004) and downsizers (Burke, 1998). The effects on such personnel are important because downsizers are commonly employees and managers, who can have a large impact on the success of the change. This is because the executioners have power to influence employees and power to employ tools and techniques to minimise harm.Although they are a category of survivors, the executioners experience differs to that of the survivors because of their voiceless responsibilities, in executing the downsizing, managing relationships with the retren ched individuals as well as supporting the survivors. Gandolfi (2007) is one of the a few(prenominal) academics to offer some insight around the experiences of the executioners using empirical research. Gandolfi interviewed 20 executioners from a major Australian trading patois and identified four key themes from their responses.The first was the very negative emotional responses and reactions from the executioners, including the obstruction and complexity the executioners had in selecting the downsizing victims. Second, Gandolfi also identified coping strategies, including the executioners distancing themselves from the task physically, cognitively and emotionally in order to write their own emotional well-being. In further research, it would be interesting to explore the relationship between the implementation of coping strategies and the effectiveness of the downsizing operation.Third, Gandolfi found that executioners with more experience reported a lesser degree of emotional distress. This is in line with Clair and Dufresne (2004) who suggest coping behaviours are learned with experience. Fourth, Gandolfi identified that the closeness of the relationship with the victims is also important in that the layoffs were more taxing when the executioner had developed personal ties with the victims. Another panorama of the executioners experience is their use of the currently employed downsizing methods of stealth layoffs and across the advance cuts.Executioners have reported that they are uncomfortable with the degree of concealment involved with stealth downsizing (Gandolfi, 2009). For example, executioners have reported instances causing internal contravention when they have had to lie to employees (Gandolfi, 2009). In the case of across the board cuts, executioners often find it difficult of rationalize the unfairness of the choices and caput their rights to be playing god with the individuals involved. The significant negative impacts on the execution ers highlight the need for firms to provide adequate training and emotional support for the executioners (Gandolfi, 2009).Although more research is required in this area, it is apparent training should at least raise awareness of the range of emotions that executioners may experience, and include tools and techniques to cope with the emotions involved with carrying out the task. Clair and Dufrense (2004) suggest that throughout the process of downsizing, firms should make available to managers social forums, employee aid programs and social support groups. The profound human consequences on the survivors and the executioners are interlinked with the financial consequences. publications has identified that the human consequences of downsizing play a large role in the financial success of the downsizing operation (Carswell, 2002 Devine et al. , 2003 Gadolfi, 2008). The financial success of the strategy is particularly important to shareholders and to external bodies such as suppliers , distributers and allied organisations (Kammeyer-Mueller, 2001). A large and ripening body of literature has investigated and measured the financial success of carrying out downsizing, and found that most organisations do not improve their financial performance after downsizing (Applebaum, et al. 1997 Cascio, Young & Morris, 1997 De Meuse et al. , 2004). The research around financial performance following a downsizing event focuses on tangible measurements of financial performance, such as examining changes in profit, share bell and return on investment, before and after the downsizing event.However, it is noted that some companies do improve their financial performance by using downsizing as a strategy. Griggs and Hyland (2003) surveyed 1,005 U. S. organisations and found that of the respondents, 46% of companies able to decrease be, 33% were able to ncrease profitability and 21% were able to report satisfactory improvements on return on investment. Only 46% of firms reduced co sts due to poor planning, and this was because, in four times out of five, managers ended up replacing the very positions they made redundant (Griggs & Hyland, 2003). Wayhan and Werners (2000) findings pit most downsizing research, in their examen of the largest 250 U. S. companies which had reduced their workforce by at least three percent during the menses 1991-1992.These researches measured changes in stock prices and they showed that, in the short term, downsized companies significantly financially outperformed companies that did not downsize. However, it should be noted that Wayhan and Werners (2000) study uses a different technique, in that they cope time as a moderator of the affects. The precept behind this is that other influences on the firms stock price will become more important than the influence of the downsizing event, as the time from the downsizing event increases.When Wayhan and Werners study was recurrent using typical techniques (not using time as a moderat or), the results were more in line with other research, showing small decreases in relevant financial measures. Sahdev (2003), Zyglidopoulos (2003) and Macky (2004) are among numerous researches showing that while a small number of organisations have reported improved financial performance, the majority were inefficient to account improved levels of effectiveness, productivity, efficiency and profitability in the short term.A typical example is Cascio, Young and Morriss (1997) study of 537 companies listed on the S&P 500 between 1980 and 1994. After comparing bonny companies in the same industry, and controlling for firm effects, they discovered no evidence that downsized firms could after increase profits or share price over a consummation of two historic period subsequent to the downsizing event. This is in line with evidence from New Zealand (Carswell, 2002). Furthermore, Cascio et al. (1997) found that downsized firms were outperformed in the short term by those companies th at increased their workforce and also companies with stable employment.This study was limited by focusing only on essential reductions of 10% or more. The long-term implications of downsizing on financial performance were investigated by De Meuse et al. (2004) in a more recent U. S. study. Using U. S. Fortune 500 companies, De Meuse and colleagues look at a period of nightspot years following the redundancy announcement, from 1989 to 1998. De Meuse et al. found that in the first two years following the announcement the financial performance of the firms decreased, in line with Cascio et at. (1997).However, at the beginning of three years after the downsizing announcement, De Meuse et al. found no significant underperformance of the downsized firms. Unfortunately, most studies provide little empirical evidence regarding why in some cases downsizing produces positive financial results, and in other cases it does not. This is because downsizing tends to be treated as a double star va riable in research, that is, firms either downsize or they do not (Kammeyer-Muller, Liao & Arvey, 2001). However, it is apparent that not all downsizing efforts are the same.The following factors are likely to have an effect on the financial performance of the firm subsequent post-downsizing announcement the type of reduction strategy employed (for example, across the board cuts, stealth layoffs, or more stepwise procedures) the persistence of survivor syndromes the logistics of downsizing (for example the size and frequency) and, the reasons behind the decision to downsizing. The lack of research in this area provides opportunities for researchers to further explore the downsizing phenomenon.The prevalence of evidence surrounding impaired financial performance following downsizing events introduces a puzzle why is the practice continuing to be engaged despite its lack of success? Cynics suggest that downsizing can be carried out in order to foster the egos of top managers at the expense of the organisation (e. g. Anderson & Cavanagh, 1994 Budros, 1999). Other explanations include the tendency of management to inaccurately anticipate costs involved. curtailment generates direct and indirect costs, and it is the hidden (indirect) costs that are frequently underestimated by management (Gandolfi, 2008).Direct costs are less complicated to estimate and include falling out pay, accrued holiday pay and administrative processing costs. Hidden costs include recruitment and employment costs of new hires, costs of replacing staff with dearly-won consultants, lost sales due to poor staffing, training and retraining, and costs of reduced productivity as a result of survivor syndromes (Cascio, 1993). For example Gandolfi (2001) reported that a European company (unnamed for privacy reasons) incurred an increase of 40% in recruitment, and a 30% increase in training and development costs for new employees, following its controversial downsizing.In order for downsizing t o be engaged as an effective strategic tool, it is clear that the benefits of reducing staff must outperform all the costs. It has become clear that management must consider very cautiously whether downsizing is appropriate for their firm, and they need to pay careful attention to the hidden costs. check to Allen (1997) the key to thriving downsizing is to focus on the people who make up the organisation. Literature has provided management with guidelines to minimise costs and harm.For the survivors, this includes minimising survivor symptoms through planning of the downsizing operation, training of the surviving staff, and using open communication and fairness in carrying out the redundancies. For the executioners this includes providing them with training. This essay has identified and discussed the effects of downsizing with regard to both the human and financial implications. It has been demonstrated that the human implications of downsizing can be sever and downsizing freque ntly fails at meeting its objectives of improving financial performance.First, the profound negative consequences of downsizing on the victims, the survivors and the executioners have been outlined. Next, the empirical evidence concerning the financial consequences has been summarised. Gaps have been identified in downsizing literature. Two areas of downsizing that could well be further explored include the experience of the executioners and the characteristics of downsizing operations that result in successful financial outcomes. The recent prevalence of downsizing activities over the latest financial crisis suggests that downsizing is a phenomenon worth exploring into the future.