Can Downsizing Be Positive?

February 16, 2010 / General /

By Ryan Quinn

A question that often surfaces in discussions about Positive Organizational Scholarship with managers is, “What if you have to downsize my department–there is no other option. Is there any way to do this in a positive way?” In answering this question, it is worthwhile to consider a couple of cases.

The first case I have in mind was told to me by a friend who used to be the CEO of a Employee Assistance company. One of his clients was a four-generation family firm that purchased a national firm in the same industry that was eight times larger. After the acquisition, a financial analysis indicated that the only feasible way to manage the company financially would be to shut down the company’s legacy flagship plant. This pant had been a mainstay in the community for 150 years, where the CEO’s family were personal community leaders. Employees in the plant worked alongside grandparents, parents, aunts and uncles, and cousins. But the case for shutting down the plan was incontrovertible. Thus, the CEO (and my friend, who was working for him) had to decide how to go about shutting down the plant.

A second case was told to me by the manager of the business books division of a major publishing company. This manager’s company was acquired by another major publishing company that also had a large business books division, so many of the products and people in these two divisions were redundant–at least in the eyes of outsiders–and everyone could see “downsizing” written on the wall. My colleague, however, believed that his division had a unique value proposition that could not be easily discerned by outsiders, and that it would be a loss to the company as well as to the employees if they were downsized. He had no authority to influence decisions, though, so he had to wonder if there was anything he could do about it.

Research on Downsizing Positively

As it turns out, there is extensive research on downsizing in organizational scholarship, and some of it has even been done by scholars who take a positive approach. For example, in one study Kim Cameron, David Bright, and Arran Caza found that when employees saw the companies they work for as virtuous (focusing specifically on forgiveness, trust, integrity, compassion, and optimism), the companies performed better, even in spite of downsizing and the human and organizational problems that downsizing tends to cause [1]. Other studies provide evidence of what virtuous downsizings may look like in practice. For example, David Schweiger and Angelo DeNisi conducted a field experiment, in which they treated two nearly-identical plants from the same company differently after a merger was announced [2]. One plant received almost no information other than the announcement that a merger would soon be complete. The other plant received a “realistic merger preview,” that detailed likely outcomes for employees’ jobs, salaries, and other concerns. The employees who received a preview–even though the preview admitted that all of the consequences of the merger would not and could not be known yet, performed better, were more likely to stay with the company, were more committed, were more satisfied, had more positive perceptions about the company’s trustworthiness, honesty, and caring, and experienced less stress, uncertainty, and absenteeism.

Communication is just one of many domains in which organizations that make explicit efforts to practice virtue during downsizing can make downsizing less painful. Karen Mishra, Gretchen Spreitzer, and Aneil Mishra summarize a number of steps that managers should take throughout a downsizing process that will help minimize the negative effects and maximize the positive effects of downsizing on an organization [3]. They organize these by stages in the downsizing process:

When making the decision to downsize:

  1. Downsizing should only be a last resort
  2. Craft a relistic and positive vision of what should come out of the downsizing

When planning the downsizing:

  1. Assign the planning and execution to a cross functional team
  2. Identify all stakeholders
  3. Use experts (e.g., outplacement specialists, financial consultants, psychological counselors)
  4. Train managers how to communicate and execute the downsizing
  5. Give employees information on the state of the business

When making the announcement:

  1. Explain the rationale
  2. Announce the downsizing
  3. Notify employees of the decision in advance
  4. Be specific and time the announcement well
  5. Let employees take the day off on the day of the announcement

When implementing the downsizing:

  1. Be honest.
  2. Over-communicate
  3. Help downsized employees find other jobs
  4. Announce new information as it becomes available
  5. Be fair
  6. Be generous to laid-off workers
  7. Let voluntary separations occur
  8. Involve employees in the implementation
  9. Make career counseling available
  10. Train the survivors to handle changes in the work that will occur

Execution

In the first section of this blog, I described two cases relaed to downsizing. In the first case, which involved closing a plant that had been the company’s headquarter’s community for four generations, the CEO and his colleages managed the situation in a way that was largely consistent with Mishra, Spreitzer, and Mishra’s recommendations. They genuinely cared about their employees and their livelihood. They tried to come up with any other option they could before resorting to downsizing. The delivered honest and timely information to their employees. They provided outplacement and counseling services to every employee who wanted it. And they were as generous as they could possibly be throughout the process. Although there was an unavoidable mourning period that accompanied the plant closing, the employees acted as respectfully toward the managers as the managers acted toward them. All or almost all of the employees found other jobs and felt positively toward the managers and the founding family. The company closed the plant successfully and went on to manage its larger business well. Overall, all or almost all of the stakeholders felt like the process was managed as well as it possibly could be, and were pleased with the results.

Although it is true that sometimes there is no alternative to downsizing, as was the case in the plant closing, it is also true that many times managers believe that there is no alternative to downsizing when there is.  My second case illustrates this point. When my colleague in the business books division of the acquired company learned about the acquisition and about the high probability of an impending downsizing, he flew across the country to meet with his counterpart in the acquiring organization. Then he took a risk. He told the other manager some of his strategy. This was a risk because the other manager could have just taken this information and implemented it in his own division, making my colleague and his division more redundant in the process. My colleague took this risk, however, because he believed that his division had a unique strategy and because he knew that trust requires risk.

Fortunately, my colleague’s counterpart in the acquiring company recognized what my colleague was doing, respected him for it, and reciprocated. He shared some information about his division’s strategy. As each of them continued to reciprocate, they were flooded with new ideas, like moving some of the products into international markets. When they were done, they had developed a joint strategy for growing both of their businesses that would not require either of them to do much downsizing of either their people or their products. Thus, when the executives at the company announced the integration plans, almost every other division in the organization faced cost-cutting and downsizing, while the business books division was focused on opportunities and growth.

In my experience, when I talk to managers about downsizing, their instinctive reaction is to look at their financial statements, see of the cost of labor in untenable, and downsize accordingly without considering other options. We have come to redefine synergy from “2 + 2 = 5″ to “downsizing. This story suggests that executives might do well to see what kind of opportunities for growth and innovation may exist if they were to re-combine ideas in their people’s heads before they downsize. And it suggests that middle managers, rather than wait for the executives to tell them what to do, could take initiative and create value for the company so that downsizing does not need to be considered as an option.

[1] Cameron, K.; Bright, D.; Caza, A. (2004). “Exploring the Relationships Between Organizational Virtuousness and Performance.” American Behavioral Scientist, 47(6): 1-24.

[2] Schweiger, D. M. & DeNisi, A. S. (1991). Communication with Employees Following a Merger: A Longitudinal Field Experiment. Academy of Management Journal, 34(1): 110-135.

[3] Mishra, K. E., Spreitzer, G. M. & Mishra A. K. (1998). Preserving Employee Morale during Downsizing. Sloan Management Review, Winter: 83-95.