Downsizing - HRM PDF

Strategic Options and HR Implications Downsizing Prepared by: Ralch A. Downsizing What is Downsizing? A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance (Robbins & Pearce, 1992). A reduction of the workforce...

Strategic Options and HR Implications Downsizing Prepared by: Ralch A. Downsizing What is Downsizing? A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance (Robbins & Pearce, 1992). A reduction of the workforce is one of only several possible ways of improving profitability or reducing costs. Downsizing Why do Firms Downsize? Reduce costs Reduce layers of management to increase decision making speed and get closer to the customer Sharpen focus on core competencies of the firm, and outsource peripheral activities Generate positive reactions from shareholders in order to improve valuation of stock price Increase productivity Downsizing Objectives: Reduce Cost – refers to the process of decreasing expenses and improving efficiency within an organization or operation. Streamlines operations – Making processes more efficient to cut down on waste and redundancy. Negotiating with suppliers - Securing better rates for materials or services. Adopting new technologies – Using automation and software that optimize productivity and reduce labor or operation cost. Reducing Energy consumption – Implementing energy –saving measures that cut utility cost. Outsourcing – delegating certain task to third parties that can complete task at a lower cost. Minimize Overhead – cutting non-essential expenses related to office space, utilities and other administrative costs. Downsizing Objectives; Replace labor with Technology - Automating processes that were previously handled by human workers through the use of machinery, software, or artificial intelligence. Increased Efficiency - Machines and software can often perform tasks faster and with greater consistency than human workers. Lower long-term costs - Although the initial investment in technology can be high, it often reduces costs over time as it can replace repetitive and labor-intensive tasks. Enhanced Accuracy - Automation can minimize errors that occur with human intervention, improving the quality and reliability of outputs. Scalability - Technology can handle larger volumes of work without the need for proportional increases in human resources.  Downsizing Objectives Mergers and Acquisition - refer to the processes by which companies consolidate or transfer ownership through various types of financial transactions. 1. Merger A merger occurs when two companies agree to combine and form a new, single entity. Typically, both companies are of relatively similar size, and they collaborate to pool their resources, reduce competition, and increase market share. Example: If Company A and Company B merge, they might become Company AB or adopt a completely new name. 2. Acquisition An acquisition happens when one company takes over another and becomes its new owner. The acquired company may either continue to operate as a separate entity or be absorbed into the acquiring company. Example: If Company A acquires Company B, Company B becomes a subsidiary or is integrated into Company A.  Reasons For Merger and Acquisition Growth and Expansion: Entering new markets, gaining new customer bases, or expanding product lines. Synergies: Combining resources to increase operational efficiency and reduce costs. Market Power: Strengthening competitive positioning and enhancing influence in the industry. Alternatives to Downsizing Employment Changes in Pay/Benefits Training Policies Job Design Policies Attrition Transfers Pay freeze Retraining Hiring freeze Relocation Cut overtime Cut employees Job Sharing pay Cut interns Demotions Use vacation & Cut temps leave days Voluntary Pay cuts time off Profit sharing Reduced work or variable pay hours Downsizing Need to reduce costs Involuntar Alternatives Voluntary y To Layoffs Quits Separation s Early Voluntary Workforce Layoffs Retirements Reductions Outplacement Downsizing Effects: Overall Mixed effects on firm performance: some short-term costs savings, but long-term profitability & valuation not strongly affected. Firm’s reputation as a good employer suffers. Example: Apple Computer’s reputation as good employer declined after several layoffs in 1990s. Downsizing forces re-thinking of Employment Strategy. Lifelong employment policies not credible after a downsizing. Example: IBM abandoned lifelong policy after several layoffs in early 1990s. Downsizing Effects: Employee Morale Employee motivation disrupted: increase in political behaviors, anger, fear - which is likely to negatively impact quality of customer service Violation of psychological contract, leads to cynicism, lowered work commitment, fewer random acts of “good will” “Survivors” experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings Downsizing Effects: Workforce Quality Many senior employees leave due to application of early retirement incentives: result is loss of institutional memory. The use of voluntary workforce reductions (buyouts) results in the most marketable employees leaving (“stars”) -- difficult to control since all employees must be legally eligible to qualify. Early retirements & voluntary reductions often result in too many people quitting, and some are hired back as consultants at higher cost to firm. Downsizing Effects Downsizing Works Best When: Changes in Strategy, Organization structure and Culture accompany job cuts of downsizing Weak business units and plant closures are used as basis of reductions, rather than across the board cuts affecting all units (including healthy ones) Major Techniques and strategies of Downsizing Attrition: Natural reduction of workforce that occurs when employees leave the organization due to retirement, death or resignation. Voluntary retirement: Encourage employees to retire early with full or reduced pension benefits before the stipulated retirement age. Buyout benefits: Buyout is a technique that includes offering lumpsum payment to encourage employees (eligible/not eligible for voluntary retirement or regular retirement) to voluntarily leave the organization. Involuntary Separation :may be defined as the separation of an employee from service for involuntary reasons other than resignation, not reflecting any discredit on the employee. Leave without pay: Leave without pay is granted to employees with reduced benefits, but with the guarantee of job when they return at the end of their leave period Survivor Survivor – an employee remaining with an organization after a downsizing Three Types of Downsizing Strategies  Three Types of Downsizing Strategies Workforce reduction - a short-term strategy to cut the number of employees through attrition, early retirement or voluntary severance packages, and layoffs or terminations Work redesign - a medium-term strategy in which organizations focus on work processes and assess whether specific functions, products, and/or services should be changed or eliminated  Three Types of Downsizing Strategies Systematic change - a long-term strategy that changes the organization’s culture, attitudes, and employees’ values with the goal of reducing costs and enhancing quality  Downsizing Alternatives 1. Cutting non-personnel costs e.g. Office supplies etc. 2. Cutting personnel costs. e.g. Salaries, bonuses, overtime pay, pension, and other benefits. 3. Providing incentives for voluntary resignation or early retirement. 4. Hiring freeze 5. Mandatory vacation 6. Reduce workweek 7. Reduce overtime 8. Reduce salaries 9. Facility shutdowns 10.Employee input for alternatives to cutbacks HRM Role in Downsizing ❖ Strategic Planning and Execution ❖ Assessment of Workforce Needs: HRM helps determine which positions or functions are redundant and how workforce reductions align with the organization’s long-term strategy. ❖ Developing a Downsizing Plan: HR professionals collaborate with senior management to create a clear plan that outlines the scope, timing, and process of downsizing. ❖ Communication Management ❖ Transparent Communication: HRM ensures open and honest communication with employees regarding the reasons for downsizing, the process, and how decisions will be made. ❖ Individual Notifications: HR professionals often play a direct role in conducting termination meetings, ensuring that these discussions are handled with empathy and respect. HRM Role in Downsizing ❖ Legal and Ethical Compliance ❖ Adhering to Labor Laws: HRM ensures compliance with local, state, and federal employment laws, including requirements for notice periods ❖ Fair Selection Process: HR must ensure that the criteria for layoffs are objective and non-discriminatory, helping avoid legal challenges and maintaining trust. ❖ Support for Affected Employees ❖ Severance Packages: HRM designs and administers fair severance packages that may include financial compensation, continued health benefits, and other resources. ❖ Outplacement Services: HR may facilitate career counseling, resume workshops, and job search assistance to help affected employees' transition smoothly into new opportunities.