Transfer of employees through mergers and acquisitions. The changing strategies of the organization towards smart working patterns like, Lean management and contract based outsourcing etc. , compelled many organizations to downsize. Downsizing, rightsizing, outsourcing, restructuring, streamlining, and re-engineering have been the popular terms used in corporate world to describe the employee cuttings. Though all this could be done under the aim of cost cutting ad to improve profits, the reality in profit making through this tool is a doubt.
The industry reaching to high profits with cost cutting should be able to pay high wages over the next period of times, which is not visible even with the American corporate. Also there is a growing concern on the relation between downsizing and profitability. And the studies reveal that layoffs are not the best cure to raise profits as corporate and economists were thinking about them. So the industry is rethinking about the worthiness of downsizing or layoffs as a strategic tool to be used in the odd circumstances.
De Meuse, Kenneth studied the top 311 American companies involved in downsizing over a period of 12-year period from 1987 through 1998 and found out that downsizing has minimal significance effect on the improvement of profits. The study found correlation with the results of McKinley et al. , 2000 and found that “the relationship between downsizing frequency and financial performance appears small. For those companies which have implemented a series of small job cuts, it appears that it does not have a deleterious effect on financial performance.
This finding may be explained by the institutional perspective”. Also the “magnitude of the downsizing appears to have little effect on the financial performance of a firm, unless the size of the layoff is very large. Contrary to what Cascio (1998) proposed, the financial performance of firms laying off less than three percent of the work force were not significantly different than those companies laying off three percent or more.
It is important to note that companies announcing large-scale (10% or higher) layoffs continued to significantly under-perform those companies with downsizing announcements less than 10%”( De Meuse). The Bain study results revealed that nearly 2,000,000 workers were given layoffs during year 2002 in 20,000 separate events. Though such huge account was targeted for significant cost reduction, it produced many side effects and minimized the overall employee satisfaction as shown in the figure below.
Impact of Downsizing on employee satisfaction Source taken from http://www. bain. com/management_tools/tools_downsizing. asp? groupcode=2 According to Economic theory organizational downsizing has a positive effect on a company’s financial performance, as it enables management to cut costs and eliminate redundancies, and streamline other operations by fund diversification etc. , So far this assumption stayed true as mangers believe it with the result of visible savings in salary expenses for the short period of time.
One of the national survey found that “managers in 75% of those companies which downsized believed performance did not improve” (“Pink-Slip Productivity,” 1992) as cited in De Meuse. There is another study by Cameron et al. (1991) as cited in De Meuse, revealed that “firms in the automobile industry which had implemented downsizing and found that employees did not perceive an improvement in the effectiveness of their company”. Also downsizing is studied with reference to decline in production quality, quantity, and employee morale, Knox et al. , (992) as cited in De Meuse.
Alexis A. Halley ,DOWNSIZING, Available from: http://searchwarp.com/swa68772.htm
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