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"Downsizing After 15 Years" Published: Sunday, May 9, 1999 By: Ing. Ramón Luis Rivera

The words that describe the 1990s are turbulence, uncertainty, ambiguity, pressure change and innovation. Organizations of all sorts, professionals of all kinds are copying with conditions that make performance and success more difficult, complex and elusive in nature. These new realities create the need to design new structures for achieving organizational high performance. The management challenge is how to overcome the temptation of employing downsizing (reducing the size and scale of the organization) as the only route to improve organizational efficiency and effectiveness.

A profound research of 3,000 companies over the last 15 years suggests that layoffs may not produce expected results. Findings are alarming and require careful reflection while making the decision to pursue such a painful path. The study conducted by Wayne F. Cascio (a distinguished Professor of Management at the University of Colorado at Denver) and Clifford E. Young (also a distinguished Professor of Marketing of the same University) was commissioned by the U.S. Department of Labor and examined 3,628 companies.

Five key findings emerged from the study and they deserved profound consideration. First, low profitability companies were most common dowsizers of at least 5% of their workforces, while high profitable companies were the least common downsizers of 5% or more. Second, manufacturing firms accounted for the greatest incidence of mayor downsizings. The average percentage of firms by industry that downsized more than 5% of their workforces across the 15 years period was manufacturing (25%), retail (17%), and service (15%). Third, of the 3,628 in the sample, 2136, or 59%, fired at least 5% of their employees at least once during the 15 years period. Fourth, one-third of the companies downsized more than 15% of their workforce at least once during the period. And fifth, during the two most recent recessions (1985-1986, and 1990-1991), more than 25% of all companies, regardless of size, cut their workforce by more than 5%.

The conclusion of such a study was that there was no significant, consistent evidence that the employment of downsizing led to improve financial performance. Performance improvement appears to depend on the reason for the downsizing. The suggestion is that laying off employees to improve financial performance may not lead to the intended improvement in the base of the company`s financial improvement unless it is accompanied by a thoughtful restructuring of the firm`s assets.

Finally, there is another interesting paradox in the attempt to make a company "lean and mean", while maintaining flexibility to pursue new business opportunities. In order to act entrepreneurially a company must have the flexibility to take advantage of emerging prospects. But to a great extent, flexibility depends on the organization having some excess capacity, slack or strategic redundancy. In order to increase production or service when demand increases, a manufacturing plant needs to have some excess production capacity. To take advantage of new investment opportunities, it needs unused financial resources. This refers as much to people as it does to any other resources. The warning is that even if the firm has physical and financial resources, its ability to utilize those resources will depend on its human resources talent. It may be advantageous to preserve human resources even in slower periods to support flexibility.

 


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