Layoff and Strategic Downsizing Decisions Essay

INTRUDUCTION Downsizing is a permanent reduction of workforce through layoffs and other means. Organizations usually downsize to save payroll costs and prevent bankruptcy during tight economic conditions. Downsizing, when done right, makes the organization more efficient, lean, and mean .On the other side, a faulty approach to downsizing can cause the organization to run the risk of losing key talent and intellectual capital, and becoming dysfunctional by breakdown of hierarchies and systems. The criteria adopted for who stays and who goes largely determines the success of the downsizing intervention Many organizations, especially traditional ones, in a bid to ensure impartiality and objectivity adopt the LIFO or â€Å"Last in First Out† principle whereby those who joined the organization last become the first to leave. The rationale of making seniority the basis of downsizing is that newer employees have spent less time in the organization and are less committed or acquainted with the fin er nuances of its running. Also, the organization would have invested lesser time and resources training such employees compared to older employees. other organizations make the combination of competence and performance, or the ability to do required tasks well, the basis of retaining an employee during downsizing. A fresh performance appraisal should precede downsizing, or the last appraisal can be the basis for determining who goes and who stays. Those at the bottom of the appraisal list usually get the layoff notice first. While making performance the primary selection criteria for downsizing and restructure is apparently a just and equitable method, two major concerns remain The soundness and objectivity of the performance appraisal method adopted. A poorly designed performance appraisal method that does not assess the true indicators of performance might churn up a wrong list, causing the danger of the organization dispensing with true performers and retaining people who cleverly mask or cover up their in efficiencies. Whether the performance or competence ofthe employee remains relevant for the organization. The expendability of the person to the organization is another sound basis for determining the selection criteria for downsizing and restructure. This approach primarily considers the value added by the employee to the organization more than any other factor. Regardless of the performance of an  employee, an employee might remain critical for the functioning of the organization, or conversely not needed. For instance, with technology taking roots, most companies do not require specialist stenographers or typists, no matter how skilled or efficient they may be in their work. Similarly, closing down the marketing arm of the business and outsourcing the marketing effort might lead to the lay-off of all marketing executives, no matter how skilled or successful they may be. Organizations would, however, do well to identify people with good generic skills, and the right attitude and commitment, and retain them in other jobs even if the jobs they remain competent in become irrelevant to the organization. The commercial interests of the organization notwithstanding, legal considerations play an important role in determining who goes and who stays during downsizing. The federal Worker Adjustment and Retraining Notification Act (WARN) requires employers to give employees, state and local officials a 60 days’ notice to mass layoffs when reducing their workforce by 33 percent or more, or laying off 500 employees within a 30-day period. WARN further requires employers of unionized employees to give the union 60 days’ notice before lay-off of their members, and provide individual notice to non-unionized employees. DEFINITION OF DOWNSIZING Downsizing occurs when a company permanently reduces its workforce. Corporate downsizing is often the result of poor economic conditions and/or the company’s need to cut jobs in order to lower costs or maintain profitability. Downsizing may occur when one company merges with another, a product or service is cut, or the economy falters. Downsizing also occurs when employers want to â€Å"streamline† a company – this refers to corporate restructuring in order to increase profit and maximize efficiency. Downsizing results in layoffs that are often followed by other restructuring changes, such as branch closings, departmental consolidation, and other forms of cutting pay expenses. In some cases, employers are not fired, but instead become part-time or temporary workers (to trim costs). ACTIVITIES OF DOWNSIZING It undertaken to improve organizational efficiency, productivity and competitiveness that affect the size of the firm’s workforce the costs and  the work processes. DOWNSIZING STRATEGIES: There are 3 types of strategies. These are below: 1.workforce reduction: 2.work redesign 3.systematic change 1. Workforce reduction: Typically a short term strategy aimed at cutting the number of employees through such programs as attrition, early retirement or voluntary severance packages and layoffs or terminations. Whils a number of these approaches allow for a relatively quick reduction of the workforce, the problem is that their impact is often short term and in many organizations. 2. Work redesign: Often a medium-term strategy in which organizations focus on work processes and assess whether specific functions, products and services should be changed or eliminated. this strategy which is frequently combined with workforce reduction, includes such things as elimination of functions, groups or divisions. 3. Systematic change: Long term strategy characterized by changing the organizations culture and the attitudes and values of employees with the ongoing goal of deducting costs and enhancing quality. By its very nature this strategy takes considerable time to implement. RESTRUCTURING HOW COMMON IS WORKFORCE REDUCTION AND?: The issue that comes up regularly involves how common workforce reduction in Canada. In a national study of major Canadian organization conducted in 1992 and in 1998, it was found that 56% of respondents permanently reduce the workforce over two year period ending in 1992, while 50% cut the number of employee during two year period prior to 1997-1998 about 31% of employee reduced in both 1992 and 1998 5% precent of organization did not engage in workforce. Three recent studies found 45% of participants reported that their organization permanently reduced workforce in two years. Among  organizations reducing the workforce average reduction was around 15% of the workforce. Similarly, when investing how the workforce reductions were carried out; combining the result from the studies revealed that about 355 of reductions were by attrition, 45% by voluntary severance or early retirement; and 40% by layoffs. Compared 1990s, these results suggest that organization s are relying less on layouts and more voluntary services. WHY DO ORGANIZATIONS DOWNSIZE? There are several reasons why organizational decide to downsize the workforce. Some of the factors most commonly mentioned include the following: Declining profits Business downturn or increased pressure from competitors Merging with another organization, resulting in duplication of effort Introduction of new technology The need to reduce operating costs The desire to decrease levels of management Getting rid of employee â€Å"deadwood† Simply put, many organizations engage in downsizing because managers believe that cutting people will result in reduced cost (with cost being more predictable than future and improved financial performance. In addition, labour cost is often seen as easier to adjust relative to other expenditures. Although executives often perceive that reducing the number of people in the organization will lead to lower overhead cost, reduced bureaucracy ,better communication, improved decision making, increased innovative activity and higher productivity, there is considerable evidence that workforce reduction programs often fail to meet their objectives, as has been observe by Cascio: Study after study shows that following a downsizing, surviving employees become narrow-minded, self-absorbed, and risk averse. Morale sink, producing drops, and survivors distrust management. Some organizations drastically reduce the workforce and employ a severe reduction strategy despite increasing demand and a favourable competitive enviroment.This development, which has been mentioned by HR managers in personal interview, may be due to a variety of reasons, including a decision to follow the lead of other firms engage in cutback management and increase awareness of the need of operate in a lean and mean  fashion. THE DOWNSIZING DECISION: For many organizations, going through a downsizing is a very painful and difficult experience. A 1994 article Business week profiled Robert Thrasher, executive vice-president at Nynex and the individual responsible for cutting labelled the â€Å"corporate assassin†. In speaking about downsizing Thrasher commented. This is tough, ugly work. The stress is palpable .I’m vilified throughout the company .that’s tough thing to carry around. â€Å"More recently, Robert Burtlon of Moore Corporation, when discussing his role in a cost cutting plan at a previous company, stated.† I don’t get frustrated any more. I just fire people.† Too often, organization embarks on a downsizing program without careful consideration of whether there are feasible alternatives to downsizing. Studies after study reveals that many downsizing are not well planned frequently ignore the linkage between downsizing and the strategic direction of organization, and underestimate the impact of downsizing on the organization and its human resource. ALTERNATIVES TO DOWNSIZING: Downsizing can be a costly strategy for organization to pursue and as a result, it is desirable to investigate whether alternatives to downsizing exis.In a number of instance, organizations discover that pursuing different alternatives to downsizing may eliminate the need to reduce the workforce or allow for a less severe downsizing strategy. Some of the alternatives include: 1. Cutting no personnel costs (e.g, through energy conservation, planned capital expenditures, leasing of capital equipment, reductions in travel or club memberships) 2. Cutting personnel costs (e.g, through a hiring freeze, job sharing, a reduction in work hours, reduced benefits, and wage concessions) 3.Providing incentives for voluntary resignation or early retirement Although this list is not complete, it emphasizes the need to consider other ways to manage costs within an organization One organization, road communications inc, asked each member of its staff to take one week of unpaid leave during the summer months. According to senior partner mia wedgbury , it let us keep our core team together while reducing cost. And  it went over well with the staff because it precluded layoffs. another organization acxion corporation cut the pay of each employee earning more than 25000 dollar by 5% but also gave the employee the option to by company stock that would be matched one-foe one by the firm INPLACEORMENT AND OUTPLACEMENT ISSUES: Outplacement Issues .Inplacement Refers To A Career Management Approach Inappropriately Placed Workers Into a Restructured organization ,while outplacement focuses on the provision of a program In Examining The Downsizing Decision, It Is Necessary To Consider Both Inplacement And of counseling and job-search assistance for workers who have been terminated. In making career management decisions, organizational decision makers may opt for an inplacement program or termination with outplacement In a survey of Canadian manufacturing firms completed in 2000, organizations that had gone through downsizing were asked to report on the benefits they provide to displace workers. These results are provided in figure11.2 .The most common benefits were severance pay, continuation of employee benefits, outplacement retraining assistance or family counseling PLANNING FOR DOWNSIZING: If downsizing is essential, the key issues that need to be considered: Determining how many people will lose their job and who will be let go (ie. based on seniority or performance) Determining how reduction will be carried out. For example, to what extent will the organization use attrition, early retirement or voluntary severance programs and layoff or termination. Its possible to consider the approach to workforce reduction from the perspective of employee? As indicated in figure 11.3,the approaches to workforce reduction vary in the degree of protection to employees and the cost to employee Determining the legal consequences. For example organizations often ignore or are unaware of legal requirements when downsizing the workforce .some areas of law to be aware of include the law of wrongful dismissal,employment  standards legislation, trade union law ,existing collective agreement provisions, and human right legislation. for instance, there may be a very narrow line between voluntary and involuntary termination, and with the termination of older workers, there exists a possibility of an age discrimination claim Designing current and future work plans .this issue represents a key challenge for the organization and is frequently neglected Implementing the decision. Implementation includes such elements as severance payments, outplacement counseling, the communication of the termination decision, timing if the decision, issues, and communications with remaining employees Performing follow-up evaluations and assessment of downsizing effort Figure 11.3 Approaches To Workforce Reduction Workforce Degree of Reduction protection to Implementation Approach Example Employee Time Attrition Hiring Freeze High Show Voluntary Early Retirement Redeployment Voluntary buyout Work sharing Involuntary Transfer Redeployment Demotion Imposed job sharing Layoff with Retraining Assistance job counseling Advance notice Layoff without Termination Low First Assistance No advance notice No Severance PROCESS OF DOWNSIZING: There are 6 processes. These are below: 1. Develop an RIF team to plot initial strategy. 2. Plan the goals and timing of the RIF. 3. Perform an overall workforce analysis. 4. Review employment policies, individual contracts of employment. 5. Ensure compliance with the Worker. 6. Special considerations for unionized employers. 1. Develop an RIF team to plot initial strategy: Nobody likes the prospect of a downsizing – especially employees who may feel particularly vulnerable to being laid off – and the mere mention of the word can trigger widespread hysteria and morale problems. At the early stages of the initial strategy phase, a company should limit discussion of downsizing to a trusted core of high-level management personnel and consultants. For large companies considering large-scale layoffs, the RIF team ideally should include the chief financial officer, the chief executive officer, the chief operating officer, a senior-level human resources or employee relations executive, an upper-level payroll specialist, an employment law attorney, and a public relations consultant. 2. Plan the goals and timing of the RIF: The first task is to determine the magnitude of savings that need to be realized from a layoff. This task is part of an overall cost-cutting plan, which could implicate other costs and expenses in addition to those related to personnel. Second, the RIF team should consider ways to realize the desired savings, such as subcontracting; consolidation of divisions, operating units or functions; the sale of the company or a work unit; and shutdowns. 3. Perform an overall workforce analysis and an analysis of each proposed termination: The most complicated and difficult aspect of the RIF process is determining which employees will be laid off. The most common legal challenges to layoffs are administrative charges and lawsuits premised on discrimination based on age or other legally protected characteristics. Accordingly, it is crucial for an employer to be able to give legitimate, nondiscriminatory reasons for every termination decision. Those reasons need to be easy to articulate and logically consistent. 4. Review employment policies, individual contracts of employment, separation benefits and stock-option agreements under which affected employees may claim rights or benefits: The RIF team should perform a due-diligence review of potential liabilities and verify whether, by policy or contract, the company has limited its ability to lay off employees. Likewise, where a collective bargaining agreement or policy dictates a priority for reductions in force, or â€Å"bumping rights,† such procedures should be examined. The company should also review policies and agreements to determine eligibility for severance benefits and accrued benefits such as paid time off, vacation or sick leave. 5. Ensure compliance with the Worker Adjustment Retraining and Notification (WARN) Act: Generally, employers with 100 or more employees are subject to the WARN Act. Covered employers are required to give 60 days’ advance written notice of a â€Å"plant closing† or â€Å"mass layoff.† A â€Å"plant closing† is defined as the permanent or temporary shutdown of at least one facility or operating unit that results in an employment loss of 50 or more employees at a single site of employment. A â€Å"mass layoff† is a loss of employment at a single site of employment that affects at least 50 employees and one-third of the covered employer’s work force. a loss of employment of 500 or more workers at a single site of employment. Special considerations for unionized employers: The National Labor Relations Board maintains that, with certain exceptions, employers must bargain with employee representatives over the effects of  layoffs stemming from entrepreneurial decisions such as closing a plant or transferring bargaining-unit work. In the case of layoffs that do not constitute a business closing or a transfer of bargaining-unit work, employers generally must bargain over the effects of such decisions and, depending on contract language, the very decision to lay off employees. ADJUSTING TO JOB LOSS: Workers who have lost their jobs frequently experience tremendous pain. As well, job loss can be very difficult for family members. Furthermore, many downsized employees are very bitter and angry with their former employer. A U.S. study of downsized workers revealed that 67% would never work for their former company again, 54% would not recommend that others purchase the organization’s products or services, and 11% considered going to the media and talking about their layoff experiences. One can start adjusting to job loss by using a little psychology. There have been a lot of studies done on how to deal with loss. Psychologists have found that people often have an easier time dealing with loss if they know what feelings they might experience during the â€Å"grieving process.† Grief doesn’t usually overwhelm us all at once; it usually is experienced in stages. The stages of loss or grief may include: Shock — you may not be fully aware of what has happened . Denial usually comes next — you cannot believe that the loss is true. Relief then enters the picture for some, and you feel a burden has lifted and opportunity awaits. Anger often follows — you blame (often without reason) those you think might be responsible, including yourself. Depression may set in some time later, when you realize the reality of the loss. Acceptance is the final stage of the process — you come to terms with the loss and get the energy and desire to move beyond it. The â€Å"acceptance† stage is the best place to be when starting a job search, but you might not have the luxury of waiting until this point to begin your search. While some people may see a job loss as a challenge which opens up new opportunities, most associate job loss with strong negative emotions. It is important to know that it is natural to have some negative feelings (especially at first) after a job loss, and that most people experience  them. Here are some feelings and experiences that you may have after losing your job: Loss of professional identity: Professionals identify strongly with their careers. Unemployment can often lead to a loss of self-esteem. Being employed brings respect in the community and in the family. When a job is lost, part of your sense of self may be lost as well. Loss of a network: The loss may be worse when your social life has been strongly linked to the job. Many ongoing â€Å"work friendships† are suddenly halted. Old friends and colleagues often don’t call because they feel awkward or don’t know what to say. Many don’t want to be reminded of what could happen to them. Also, when work and social activities mix, such as with company picnics and dinner parties, the job loss can be hard for all family members who participated in such activities. Emotional unpreparedness: Those who have never been unemployed may not be emotionally prepared for job loss and may be devastated when it happens. It is natural and appropriate to feel this way. You might notice that some people you know don’t take their job loss as hard as you have taken it. They might be more prepared for this time of uncertainty. Studies show that those who change jobs frequently, or who are in occupations prone to cyclic unemployment, suffer far less emotional impact after job loss than those who have been steadily employed and who are unprepared for cutbacks. A number of organizational interventions and practices have been identified as helping previously employed workers adjust to job loss and secure new employment. They include the following: Advance notification of layoffs, which gives employees time to dent with the reality of job loss and to seek future employment. Severances pay and extended benefits, which provide an economic safety net. Education and retraining programs, which give individuals time to acquire marketable skills. Outplacement assistance to inform employees of new job opportunities and to improve their ability to â€Å"market† themselves. Clear, direct and empathetic announcement of layoff decisions. Consideration of HR planning practices that represent alternatives to large scale layoffs. There are some benefits of losing a job: Time to reflect Grow new ideas, direction and career plan Get out of a job that was substandard Spend more time with family and hobbies