Planning for Downsizing

Last Updated May 2, 2007 7:17 PM EDT

It makes no difference whether you call it downsizing, redundancy, layoffs, or reduction in force. Each of these all-too-familiar terms deals with an unpleasant—and inevitable—aspect of the business cycle. One always hopes that normal attrition—retirement, career moves, and the dismissal of unproductive employees—will avert large-scale layoffs, but because of anything from poor individual business decisions all the way up to global recessions, organizations sometimes find themselves faced with the unpleasant task of cutting back.

Below is a guide to understanding the steps businesses need to take when faced with such a situation. And while it highlights the best way to prepare for putting employees out of work, it also suggests ways companies can stall, or even prevent, the dreaded layoffs.

What You Need to KnowIsn't the term "downsizing" just a euphemism for putting people out of work?

Thankfully no, although that is regrettably the direction in which executives tend to go first. The place to start is on the cost cutting and organizational efficiency side. Only as a last resort should people be the "costs" that are cut. And the reasons for saying so are not merely humanistic; the fact is that downsizing negatively affects both the morale of the remaining staff and company productivity. The bunker mentality that sets in after a large-scale layoff is not conducive to innovation or allegiance.

What can I do to minimize the shock felt by employees if our situation does come down to layoffs?

The essential first step is to set the stage carefully and methodically by communicating openly and often about your company's precarious financial situation and the reasons for it. Initiate programs to reduce expenses and improve efficiency, and make employees central to suggesting and implementing these programs. When the day comes to announce the scheduled layoffs, employees have had months to prepare—and the company has had time to build an adequate support system to assist them.

What's the role of the HR department in the downsizing process?

Human resource managers are often in the unfortunate position of having to break the bad news without having been involved in the early planning stages. More enlightened companies now use HR managers as consultants, involving them in a range of studies, planning, and strategy implementation that affect the organization as a whole. In this way, the people in the organization are more likely to be seen as part of the solution rather than the problem.

What to DoLook for a Better Solution

There are right and wrong ways to deal with downsizing. If you panic and deal with it as a short-term, emergency fix, you will only make matters worse. Rather, come up with a long-term strategy that provides opportunities for overall restructuring and a better way of doing business.

Appoint a steering committee to put together a framework for a downsizing plan that can be implemented in stages.

Involve Everyone

If building a company depends on inside people and outside people, it stands to reason that any fundamental change in the company, including downsizing, should involve the same parties. Employees, vendors, and customers all have a stake in the financial health of the business and need to be included in identifying ways to reduce costs and improve efficiencies. Good communication is essential if downsizing is to proceed with a minimum of problems; it helps to keep a lid on rumors and decreases the likelihood of legal challenges and the risk of liability. Let everyone know the plan and timeline for downsizing, as well as a projected date for turning the corner to becoming financially healthy once again.

Look Further Ahead

If management looks beyond next month into next year, the prospects for survival improve. Identify the company's new mission, core competences, and sales targets instead of counting heads. Look at how to structure and streamline the organization around new goals and objectives.

During this time of restructuring, the executive and management staff must convey optimism. They must be highly visible and upbeat in their communication about the role of downsizing in the overall restructuring of the organization. Some employees may lose their jobs, but those who remain must be motivated to come together and support the new vision, and it is the leadership's responsibility to instill that vision.

Contain Costs

The input from employees, the steering committee, vendors, customers and management will, one hopes, agree to consider cuts in all areas of the business long before considering cuts in the workforce. Here are some places to begin:

  • restrict or eliminate overtime;
  • implement a hiring and wage freeze;
  • cut travel and entertainment expenses;
  • reduce or eliminate recruitment activities;
  • reduce benefits, introduce employee co-pay for insurance premiums;
  • offer unpaid leave or implement a shortened work week;
  • discontinue use of temporary and part-time workers and re-allocate their work;
  • lay off non-producers and new hires still within their probationary period;
  • allow job sharing and cross-training; shift affected staffers to vacant positions in other parts of the company;
  • consider early retirement and attractive severance packages.
Consider Savings and Efficiencies In Other Areas
  • Put off capital expenses and equipment upgrades for another quarter or year.
  • Eliminate excessive meetings and unnecessary new programs.
  • Analyze work flow, response times, protocol, and procedure for excess fat.
  • Look at materials consumption—supplies, paper, electricity.

Implement small changes first—those that employees can easily accommodate and that have the least impact on them. This will have a positive effect on both morale and their willingness to cooperate.

Review Employment Needs

Armed with your vision for a restructured, smaller and more efficiently organized company, develop a new organizational structure around a core of positions that are essential to the smooth functioning of the newly organized company. Review existing jobs and decide which are core and which can be eliminated. Develop a system for reviewing—and a set of legally-justifiable criteria for selecting—which current employees best fit the organization's future needs, and what cross-training may be necessary to prepare this smaller group of employees to take on even more responsibility.

Be Fair

If the time comes for you to reduce the number of employees, be meticulous about how you do it. If done badly, it can result in costly administrative and legal battles that will deplete resources better used on restructuring the organization.

Research carefully the laws and regulations that apply to downsizing—many class actions suits stem from ill-considered and ill-timed layoffs. Besides the laws dealing with discrimination, also review the Employment Retirement Income Security Act (ERISA, 1974) and the Worker Adjustment and Retirement Notification Act (WARN, 1988). Be sure to have a firm understanding of legal and tax implications before acting on your plan; involve outside resources if your own staff lacks the background needed.

Support Everyone Who Is Laid Off

When announcing layoffs, give plenty of advance notice. Talk individually and privately with everyone affected and inform each his or her rights as an unemployed person. Also consider providing some benefits, for example, an early retirement plan or severance pay, extended benefits, counseling, and out-placement services such as résumé writing, networking skills, or resource lists.

Remember the Survivors

The people who have survived the job cuts may need even more attention than those who have left. If the downsizing has not been handled fairly and humanely, the remaining staff members may withhold their support and creative energy.

Besides managing the rumor mill and implementing education and cross training, managers must also find ways to engage and reenergize employees—especially the natural leaders and high producers. Consider integrating a new system of job performance appraisals into an upgrade of the compensation plan. If a smaller number of employees is expected to pick up a heavier workload and work more efficiently, they must understand that they will be rewarded accordingly.

What to AvoidYou Fail to Carefully Plan the Downsizing

At best, downsizing done improperly will mean you will lose the trust and loyalty of your remaining employees. At worst, those you have laid off can sue you. In either case, the organization risks having to fight battles on two fronts, and the chances for successfully restructuring the organization diminish severely.

Make sure that the responsibility for designing and implementing the downsizing plan is assigned to people who are up to the task—that they have the training, time, skills, appetite, and resources to do the job properly. Failure in this effort could prove disastrous for the company. Success lies in the preparation, positioning, communication, and careful execution of a well-considered plan.

You Don't Solve Old Problems

Reducing the number of employees without considering the rest of the organization only puts the old problems on the shoulders of fewer people. Downsizing must include a complete review of the organization's inefficiencies and redundancies. The effort must include an analysis of the systems by which products and services are produced. Every effort must be made to reinvent those systems to be smaller and smarter than before.

You Leave the Downsizing in the Hands of Management

Without knowing why the company has started cutting benefits and jobs, employees will suspect the worst. A cross-level and cross-function team of employees—as well as customers and vendors—must take part in the effort to solve the company's problems in order for the effort to have employee support. Without support, productivity will drop off, followed by profitability, company valuation, and investor confidence.

Where to Learn MoreBooks:

DeMeuse, Kenneth, and Lee M. Mitchell (eds.). Resizing the Organization—Managing Layoffs, Divestitures & Closings. New York: John Wiley, 2002.

Weiss, Donald H. Fair, Square and Legal: Safe Hiring, Managing and Firing Practices to Keep You and Your Company Out of Court. 3rd ed. New York: AMACOM, 1999.

Web Sites:

Hrnext: www.hrnext.com

Jackson Lewis: www. jacksonlewis.com

The Society for Industrial and Organizational Psychology: www.siop.org