Downsizing is the process whereby a corporation makes itself smaller in response to changed market circumstances. Although downsizing implies a reduction in assets, it is not (as its critics often maintain) merely a reduction in human assets.

Other terms have been used to distance the concept from its association with ruthless job-slashing—for example, rightsizing and restructuring. In the first IBM annual report after his appointment as chief executive of the huge consulting company Lou Gerstner said: “Shortly after I joined, I set as my highest priority to rightsize the company as quickly as we could.”

Downsizing was at its most intense in the late 1980s and early 1990s. In the United States alone, some 3.5m workers lost their jobs to downsizing in the decade after 1987. The losses had much to do with getting rid of layers of middle managers—a move enforced by increasing competition and the growth of information technology which reduced the need for human ciphers.

Some saw this as a return to organisational structures of times gone by. In a 1988 article, Peter Drucker wrote that one of the best examples of a large and successful information-based organisation that had no layers of middle managers was the British civil administration in India. It never had more than 1,000 members, most of whom were under 30 years of age. Each political secretary (a senior rank) had at least 100 people reporting directly to him, “many times what the doctrine of the span of control would allow”. It worked, added Drucker, “in large part because it was designed to ensure that each of its members had the information he needed to do his job”.

By the late 1990s there was a sharp reaction against downsizing. Companies started asking themselves whether it had gone too far. By then they knew that there was a considerable downside to downsizing. First, it left organisations shell-shocked and demoralised. Those who had job options resigned, and their employer was then frequently forced to rehire in what has been described as a process of “binge and purge”. The short-term benefits to the bottom line from downsizing could be offset by the long-term damage to the loyalty, morale and (possibly) the productivity of those employees who did stay.

In 1995, the American Management Association (AMA) surveyed 1,000 companies on the effects of downsizing. Only 48% of those that had cut jobs since 1990 said that their profits went up afterwards. The AMA survey also found that downsizing failed to improve product quality at most of these companies.

In a special report on the changing structure of the workplace published in October 1994, Business Week magazine warned that the great risk of downsizing was that it simply resulted in fewer people working harder. It did little to change the way that work was done within the corporation. A middle manager at a high-tech company recounted his experience:

“This year, I had to downsize my area by 25%. Nothing changed in terms of the workload. It's very emotionally draining. I find myself not wanting to go in to work, because I'm going to have to push people to do more, and I look at their eyes and they're sinking into the back of their heads. But they're not going to complain, because they don't want to be the next 25%.”

Another apparent downside to downsizing is the loss of a company's innovative ability. In “The Effects of Organisational Downsizing on Product Innovation”, an article published in California Management Review in 1995, Deborah Dougherty and Edward Bowman said that downsized firms lose the ability to carry out a crucial final stage in the process of bringing a new product to market. Downsizing interferes with the network of informal relationships which innovators use to gain support for new product development. Innovative activities no longer connect with the rest of the firm.

The caring company's alternative to downsizing is reallocation. If jobs have to go, it does not mean that employees have to go as well. 3M's policy, for example, is to find similar jobs for excess workers in other divisions. During the 1990s it reassigned 3,500 workers in this way rather than make them redundant. It is able to do this because it is constantly creating new products and new divisions to which these people can be relocated.

Further reading

Burke, R. and Cooper, C., “The Organisation in Crisis: Downsizing, Restructuring and Privatisation”, Blackwell, 2000

Drucker, P., “The Coming of The New Organisation”, Harvard Business Review, Vol. 66, No. 1, 1988

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