Executive Summary
- Downsizing or doing layoffs is a toxic solution. Used sparingly and with planning downsizing can be an organizational lifesaver, but when layoffs are used repeatedly without a thoughtful strategy, downsizing can destroy an organization's effectiveness. How you treat people really matters - to the people who leave and the people who remain.
- One outcome of downsizing must be to preserve the organization's intellectual capital.
- How downsized employees are treated directly affects the morale and retention of valued, high-performing employees who are not downsized.
- Downsizing should never be used as a communication to financial centers or investors of the new management's tough-minded, no-nonsense style of management -- the cost of downsizing far outweighs any benefits thus gained.
Introduction
Make no mistake: downsizing is extremely difficult. It taxes all of a management team's resources, including both business acumen and humanity. No one looks forward to downsizing. Perhaps this is why so many otherwise first-rate executives downsize so poorly. They ignore all the signs pointing to a layoff until it's too late to plan adequately; then action must be taken immediately to reduce the financial drain of excess staff.
The extremely difficult decisions of who must be laid off, how much notice they will be given, the amount of severance pay, and how far the company will go to help the laid-off employee find another job are given less than adequate attention. These are critical decisions that have as much to do with the future of the organization as they do with the future of the laid-off employees.
So what happens? These decisions are handed to the legal department, whose primary objective is to reduce the risk of litigation, not to protect the morale and intellectual capital of the organization. Consequently downsizing is often executed with a brisk, compassionless efficiency that leaves laid-off employees angry and surviving employees feeling helpless and demotivated.
Helplessness is the enemy of high achievement. It produces a work environment of withdrawal, risk-averse decisions, severely impaired morale, and excessive blaming. All of these put a stranglehold upon an organization that now desperately needs to excel.
Avoiding the Pitfalls of Downsizing
Ineffective methods of downsizing abound. Downsizing malpractices such as those that follow are common; they are also inefficient and very dangerous.
Allowing Legal Concerns to Design the Layoff
Most corporate attorneys will advise laying off employees on a last-hired, first-fired basis across all departments. The method for downsizing that is most clearly defensible in a court of law, for example, is to lay off 10 percent of employees across all departments on a seniority-only basis. This way no employee can claim that he or she was dismissed for discriminatory reasons.
Furthermore, attorneys advise against saying anything more than what's absolutely necessary to either the departing employees or the survivors. This caution is designed to protect the company from making any implied or explicit promises that aren't then kept. By strictly scripting what is said about the layoffs, the company is protecting itself from verbal slips by managers who are themselves stressed at having to release valued employees.
This approach may succeed from a legal perspective, but not necessarily from the larger and more important concern of organizational health. First, laying off employees by a flat percentage across different departments is irrational. How can it be that accounting can cope with the same proportion of fewer employees as human resources? Could it be that one department can be externalized and the other left intact? The decision of how many employees to lay off from each department should be based on an analysis of business needs, not an arbitrary statistic.
The concept of laying off employees strictly on the basis of seniority is also irrational. The choice of employees for a layoff should be based on a redistribution of the work, not the date the individual employee was hired. Sometimes an employee of 18 months has a skill far more valuable than one with 18 years' seniority.
See More Pitfalls of Downsizing
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Alan Downs is a management psychologist and consultant who specializes in strategic human resources planning and helping business executives reach their maximum potential. He has authored several books, including AMACOM's Corporate Executions (1995), the much-acclaimed expose on downsizing, The Seven Miracles of Management (Prentice Hall,1998), and The Fearless Executive (AMACOM 2000). Downs is widely sought for interviews by newspaper, TV, and radio broadcasts. He has also written on management topics for numerous national newspapers and trade publications, including Management Review and Across the Board.
