CHAPTER 10 Downsizing and Restructuring Chapter Learning Outcomes After reading this chapter, you should be able to: • Appreciate the importance of defining “downsizing” and understand why organizations may decide to downsize. • Be familiar with issues relating to artificial intelligence and job loss. • Recognize the need to address concerns of both the victims and survivors of downsizing. • Know the ethical issues and consequences of downsizing. • Understand what downsizing strategies are effective in enhancing organizational performance. • Comprehend the concept of the “psychological contract.” • Develop an awareness of the importance of HRM in managing the downsizing process. Chapter Summary HR planning plays a key role in the development and implementation of an effective downsizing strategy. The job for life approach has radically changed in the past decade, resulting in a number of new challenges for both employees and employers. It does not appear that the downsizing phenomenon is over, and consequently, HR professionals must have a solid understanding of how to manage the downsizing process. There is considerable evidence that many downsizings fall far short of achieving the goals that management expects. In a number of organizations, downsizing is followed by lower morale, greater conflict, reduced employee commitment, and poorer financial performance. Moreover, many downsizings are carried out without considering the strategic objectives of the organization, and many employers fail to assess how downsizing affects many, including its victims, surviving employees, the organization, customers, and the community. Managing human resources in a time of cutbacks presents several unique challenges to the HRM professional. Class Outline Instructor’s Teaching Notes Students’ Learning Activities The Downsizing Phenomenon Survivor: employees remaining with an organization after a downsizing. Downsizing strategy: strategy to improve an organization’s efficiency by reducing the workforce and redesigning the workforce, redesigning the work, or changing the systems of the organization. Defining Downsizing and Restructuring Downsizing: activities undertaken to improve organizational efficiency, productivity, and/or competitiveness that affect the size of the firm’s workforce, its costs, and work processes. Types of Downsizing 1. Workforce reduction: a short-term strategy to cut the number of employees through attrition, early retirement or voluntary severance packages, and layoffs or terminations, etc. 2. Work redesign: a medium-term strategy in which organizations focus on work processes and assess whether specific functions, products, and/or services should be eliminated. 3. Systematic change: a long-term strategy that changes the organization’s culture, attitudes, and employees’ values with the goals of reducing costs and enhancing quality. The Three Types of Restructuring are: 1. Portfolio restructuring, which involves changes to the organization’s business portfolio (the makeup of the organization’s businesses) . 2. Financial restructuring, which may include financial changes such as reducing cash flow or increasing levels of debt. 3. Organizational restructuring, which is “any major reconfiguration of internal administrative structure that is associated with an intentional management change” program. Why Do Organizations Downsize? Common reasons for downsizing: • Declining profit. • Business downturn or increased pressure from competitors. • Merging with another organization, resulting in duplication of efforts. • Introduction of new technology. • The need to reduce operating costs. • The desire to decrease levels of management. • Getting rid of employee deadwood. Business expert Pfeffer suggests most workforce reduction programs fail to meet their objectives. Layoffs do not even reliably cut costs. When a layoff is announced, people head for the door, then companies often lose people they do not want to lose. Managers also underestimate the extent to which layoffs reduce morale and increase fear in the workplace. The Downsizing Decision and the Sears Closure • In June 2017, Sears (once the largest and most successful department store in the country), announced it would close 59 of its 255 stores and lay off about 2,900 employees (17%). • It would not provide severance pay to laid-off workers, even those who worked for the company for more than 40 years. • Employees were angered when they heard that the company was to pay $9.2 million in bonuses to keep executives and staff members during the restructuring. • A planner at Sears head office said it was due to mismanagement. • Eventually, Sears established a $500,000 hardship fund, which was similar to having employees “beg for their supper.” Alternatives to Downsizing • Cutting personnel costs (e.g., hiring, mandatory vacation, reducing the workweek, reducing overtime, reducing salaries, short-term facility shutdown, obtaining cost-reduction ideas from employees). The Future of Work Artificial Intelligence and Job Loss The Amazon Effect Inplacement and Outplacement Issues Inplacement: reabsorbing excess or inappropriately placed workers into a restructured organization. Outplacement: providing a program of counselling and job search assistance for workers who have been terminated. Some Ethical Considerations • Downsizing is usually legal. • There may be contractual provisions (e.g., terms of a collective agreement) and legal restrictions (e.g., human rights legislation, employment standards, etc.) that restrict how an employer may engage in downsizing. • There is evidence that downsizing may have negative impacts on laid-off employees, survivor employees, and the staff who communicate downsizing. • Downsizing may infringe on principles of distributive, procedural, and interactional justice. • Communication during a downsizing may be mismanaged—there may be abuses of power during the process. • Could be considered a breach of the psychological contract. Planning for Downsizing Consider: • Number of people losing jobs • Determine who will be let go • Determine how the reduction will be carried out • Determine the legal consequences • Determine current and future work plans • Implement the downsizing decision (including communication, timing, security, severance, outplacement) • Perform follow-up evaluation and assessments Adjusting to Job Loss • Advance notification of layoffs • Severance pay and extended benefits • Education and retraining programs • Outplacement assistance • Clear, direct, and empathetic announcement of layoff decisions • Consideration of HR planning practices that represent alternatives to large-scale layoffs The “Survivors” of Downsizing The pain of being downsized is very severe for its impact on the family, a person’s career and self-esteem, and the social costs for the community. Perceptions of Justice 1. Procedural justice—The procedures or “decision rules” used to determine which employees will leave or remain in the organization. 2. Interactional justice—The interpersonal treatment employees receive during the implementation of the downsizing decision. 3. Distributive justice—The fairness of the downsizing decision. Survivor Reaction 1. Negative attitudes and behaviours—Increased sense of job insecurity, fear, stress, and burnout. Lower self-confidence and self-esteem, reduced job satisfaction, etc. 2. Reduced performance capabilities—There is a fear in the organization that the best performers will leave since quality workers are far more attractive to competitors. 3. Lower organizational productivity—Harm done to teamwork and lower productivity. Impact on Downsizers Manager and Human Resources: • Social and organizational isolation • Decline in health and well-being • Increase in family-related problems • Emotionally taxing • Develop mechanisms to distance themselves emotionally, physically, and cognitively from the task Financial Performance and Downsizing Consequences of Downsizing • Lower overall employee satisfaction. • Less favourable employer‒employee relations. • “Serial downsizer” companies had worst scores for employee satisfaction. • Downsizing may have a negative impact on an organization’s reputation for corporate social performance (RCSP), critical to attracting and retaining quality employees, particularly companies with high financial performance. Downsizing Strategies • Cutting the number of people in an organization is not a quick fix. • The reasons for the reduction must be communicated to employees. • The emphasis should be on rightsizing. • Employees can help with identification of inefficiencies and areas where improvements are possible. Strategic Downsizing • Effective downsizing relies on comprehensive planning; credibility of the organization with customers, suppliers, and other stakeholders. • Consideration and compassion both for employees terminated and those remaining should be demonstrated. • Research shows only about 50% of focus is on work redesign. Effective and Ineffective Approaches 1. Downsizing should be initiated from the top but requires hands-on involvement from all employees. 2. Workforce reduction must be selective in application and long term in emphasis. 3. Special attention should be paid both to those who lose their jobs and to the survivors who remain with the organization. 4. Decision makers should identify precisely where redundancies, excess costs, and inefficiencies exist and attack those specific areas. 5. Downsizing should result in the formation of small, semi-autonomous organizations within the broader organization. 6. Downsizing must be a proactive strategy focused on increasing performance. The “New Deal” in Employment and the Psychological Contract Psychological contract: an unwritten commitment between employers and their employees that historically guaranteed job security and rewards for loyal service. Workers need to prepare for a multi-organizational career. It is unlikely that they will remain with the same organization for all of their working lives. To alter the psychological contract, two different approaches are used: accommodation: (working with the existing contract and changing the agreement over time) or transformation (establishing a new employee mindset that requires workers to radically change the old way of doing things). How HR Can Play a Role in Restructuring • Advising on restructuring the organization (work groups, teams, departments, etc.) to maximize productivity and retain quality performers. • Developing skill inventories and planning charts to evaluate the impact of a downsizing on HR needs and capabilities. • Communicating the downsizing decision effectively. • Evaluating the downsizing program after completion. This includes an assessment of who left the organization and who remains. Some key issues include job design and redesign, worker adjustment to change, the need for employee counselling, organizational communication, and a review of the appropriateness of HRM policies and programs (training, compensation and benefits, orientation of employees into the “new” organization, etc.) Labour Relations Issues • Practitioners in unionized environments often face additional challenges when participating in the restructuring process. • There has been a movement in labour relations toward greater cooperation between labour and management and the emergence of new employment relationships. • However, many downsizing programs have destroyed positive labour relations programs. • Should unions participate in management-initiated restructuring efforts? ‒ Yes, if using the interventionist response characterized by early involvement in the restructuring process. ‒ No, if using the pragmatic response in which the union relies on the employer to make workplace changes. • Carefully read and understand collective agreements, especially related to layoff and seniority. Review the chapter-opening vignette, “Downsizing: A Thing of the Past?” which features some downsizing headlines. Ask Students: Why has downsizing become an inevitable outcome in today’s economy? Ans. • Corporations with shareholders always want to be seen as “more efficient,” “better,” “leaner.” • Business trends. Learning Activity Divide the students into groups of three. Assign each group one of the following strategies: workforce reduction, work redesign, or systematic change. Ask each student to review the information on these strategies and share his or her conclusions with the class. Review HR Planning Notebook 10.1—Examples of Words Used to Describe Downsizing. Ask Students: What they think about all these ways to describe downsizing. Learning Activity See Figure 10.1—Restructuring and Organizational Change. Ask Students: What are the most common forms of restructuring? Ans. Workplace restructuring and eliminating tasks. 1. The least common form of restructuring? Ans. Across-the-board cuts. 2. Do the reasons and method that restructuring is performed change over time? Ans. Yes; however, if the business is in decline due to issues such as financial performance, governance, or HR policies and investment, improving flexibility in HR (i.e., hiring contractors, part-time workers, etc.) makes more sense. 3. Why or why not? Ans. The organization has more options to increase labour again if the factors change. Learning Activity Working in groups of four to six, ask students to brainstorm as many reasons as they can for why organizations downsize. Learning Activity Read HR Planning Notebook 10.2—Alternatives to Employee Cutbacks: Some HR Strategies. According to Gandolfi (2008, Ask Students: What short-term and medium-term cost adjustments are recommended? Ans. Short-Term Cost Adjustments • Hiring freeze • Mandatory vacation • Reduced workweek • Reduced overtime • Reduced salaries • Facility shutdowns • Employee input for cost-cutting ideas Medium-Term Cost Adjustments • Extending reductions in salaries • Voluntary sabbaticals • Lending employees • Exit incentives Learning Activity Review Figure 10.2—Benefits to Displaced Workers. Ask Students: What benefits are typically extended to downsized workers? Ans. • Severance pay • Continuation of employee benefits • Outplacement counselling • Extended notice period • Job search support • Job referral service • Family counselling • Retraining assistance Learning Activity Read HR Planning Today 10.1—Can Losing a Job Be a Good Thing? Ask students: What are the benefits of losing a job? Ans. • Time to reflect • Get out of a job that is disliked • More time for family and a better work‒life balance • Eventually get a better job Learning Activity Review HR Planning Today 10.2—Examining Employment Status and Suicide Risk. Discuss that although this might seem drastic, the shock of job loss leaves some people inconsolable and at risk. Ask students what they think can be done to help prevent an employee’s suicide following a downsizing or restructuring. Learning Activity Read HR Planning Today 10.4—Fairness and Commitment After Downsizing. Review HR Planning Today 10.5—Are Employees in a Downsized Organization More Likely to Quit? Ans. 1. Yes, downsizing is associated with a higher quit rate. 2. Higher quit rates are associated with negative consequences. 3. If downsizing cannot be avoided, use helpful practices, e.g., flextime, onsite child care, and defined-benefit plans to reduce causes of quitting. Ask Students: Read HR Planning Today 10.6—Losing a Job and Social Withdrawal. How are downsized workers’ social lives affected? Ans. Approximately 30–35% are less likely to join a social organization while they are out of work, which can affect their mental and physical health. Learning Activity Invite an HR professional who has been involved in a downsizing to come to class to discuss the impact of downsizing on HRM. How Might Canadian Employment Insurance Help Downsized Employees? Employees are eligible for employment insurance (EI) regular benefits if they: • Were employed in insurable employment; • Lost a job through no fault of their own; • Have been without work and without pay for at least seven consecutive days in the last 52 weeks; • Have worked for the required number of insurable employment hours in the last 52 weeks or since the start of your last EI claim, whichever is shorter; • Are ready, willing, and capable of working each day; • Are actively looking for work (keep a written record of employers contacted, including when contacted). https://www.canada.ca/en/services/ benefits/ei/ei-regular-benefit/eligibility.html GE Cutting 12,000 Jobs The company says the job cuts will mostly be outside the United States. The power division’s headcount will be reduced about 18%. Students can read more about GE at http://money.cnn.com/2017/12/07/ news/companies/ge-job-cuts/index.html Management is trying to make the company nimble and focused on its strengths -- health care, power and aviation. GE has put its railroad business up for sale and is looking for a buyer for the part of the company that makes light bulbs. The Change in Employer–Employee Work Arrangements Affecting Employee Attitudes Students can read about the reasons some employees look for new work at http://www.canadianbusiness.com/ innovation/canadian-employees-feel-less- loyal-to-their-companies-than-most/ Important Steps for Downsizing Ask students to read Downsizing Your Organization? Lessons from the Trenches at http://irc.queensu.ca/sites/default/files/ articles/downsizing-your-organization- lessons-from-thetrenches-carol-beatty.pdf for a summary of best practices of organizations and managers who have faced the downsizing challenge and the lessons they have learned. Instructor Manual for Strategic Human Resources Planning Monica Belcourt 9780176798086, 9780176570309
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