Understanding Organisational Downsizing

Downsizing is not always involuntary. It is also used at many stages of the business cycle to create leaner, more efficient businesses.


A company has to provide sufficient information to prove grounds for the discharge and layoff of employees.

In any business, employees are arguably its greatest assets. They run the show and turn in profits. But the show isn’t always glossy and smooth running. And when the going gets tough, as we witnessed in the 2020 Coronavirus pandemic, an organisation takes tough decisions to drift ashore in a turbulent era. One of the most commonly practiced organisational tactics to keep a company afloat is letting employees off the board formally known as ‘downsizing‘. It isn’t a pleasant act, neither for companies nor for employees. 

Let us delve into the details of what downsizing is and how the situation arises for executing this organisational technique. 

Downsizing: What Does it Mean?

By textbook definition, the permanent reduction of a company’s employees by eliminating unproductive labour force and departments is downsizing. Downsizing is a common regulatory practice and is often associated with recessions and business failures. Economically speaking, cutting jobs is the fastest way to cut costs, and downsizing a store, branch, or entire division frees up assets for sale when the company recovers. There are various alternate names for downsizing, like a layoff, reduction in force, and rightsizing.

Example of Downsizing

In one of the largest and real cases, the Taiwanese chipmaker company Taiwan Semiconductor Manufacturing Company (TSMC) laid off about three percent of the 23,000 people from its workforce after its profits declined in the first quarter of 2009, the economic depression. In the second quarter of 2009, the company’s profit increased by 80 per cent and the plant’s load level increased by 40 per cent. As a result, it recruited 700 previously fired employees.

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During a workplace downsizing, when companies lay off workers, this is usually a permanent firing.

But the story doesn’t always end on a positive note like TSMC’s. By downsizing the workforce, employee’s livelihoods get disrupted in a moment, and there are severe consequences for the disruption they face on their whole families. Jobs are eliminated voluntarily by offering employees a buyout, or involuntarily, through a layoff.

Reasons A Company May Downsize

Many reasons can lead a company to downsize its workforce, the most common of which are:

Economic Problems: Poor economic conditions can force businesses to reduce their workforce’s size to maintain operations or profitability.

Industries Demur: When a business is faced with a crisis due to technical or other problems, cost reductions become imperative, and laying off people is one way to do that.

Mergers and Unifications: When two companies merge, or two branches of a single company combine with one, downsizing comes into play. 

Business Readjustment: When a company wants to restructure to “maximize revenue,” there may be reductions in employees to increase revenue and efficiency.

Competition: If a competing company reduces costs by reducing the workforce, the company may be under pressure to compete.

Regardless of the basis for downsizing, when a company reduces its workforce, it should do so using non-discriminatory criteria.

Downsizing of Underperforming Employees

When it comes to the downsizing due to employees’ negligence and incapacity, it should be noted that an organisation may not have reasonable grounds for dismissal. A company has to provide sufficient information to prove grounds for the discharge and layoff of employees. If it is done on a trivial basis, the company can be sued in labour court by the employees.

There is an execution plan in every organisation in which some employees are treated as ‘questionable employees’, and their activities are monitored. During this period, the HR manager, under direct supervision, conducts mandatory inspections. And if the employee under the lens does not improve in a specified period, the company can fire her/him.

How Does Downsizing Work? 

Downsizing is not always a forced measure. It can additionally be used with other business processes to create a more efficient business. Removing any part of processing that does not add value to the final product in an organisation’s production and management philosophy can be eliminated. For example, corporations may be involved in job cuts to stop old skills that may not be necessary for the future.

During a workplace downsizing, when companies lay off workers, this is usually a permanent firing. However, in some cases, employees may be called back after a particular period, as TSMC did in 2009. Dismissals are often accompanied by other changes, such as branch closures or domain connections.

When a business falls apart; the daily workload of other employees can change. Sometimes increased stress leads to loss of professional mettle, and increased responsibility leads to other employees’ exhaustion.

Warning Signs of a Company that might Downsize

Numerous signs indicate to employees that their company isn’t in good shape and is looking to lay off people. Some of the characters are as follows: 

Reduction in new hiring: If new employees are not allowed to join the company, it may mean that the company’s financial situation is terrible.

Closed meetings: Unexpected elections in private sessions can be a sign of trouble.

Economic issues: Companies can feel the pressure if economic stagnation persists in a system. If a company experiences a financial change, like a drop in sales, it’s likely to downsize its employee force.

New company/management: Changes are not always bad, but when companies merge or adopt new action plans, employees remain sceptical.

Tasks Lag: If employees are not given tasks at work, they may want to start looking for a new job.

Policies to Handle Layoffs

When employees are fired, most companies have policies and procedures in place to address these incidents. This usually happens when an employee is invited to a meeting with their immediate manager, human resource manager, and others, depending on their level of work. This meeting is a strategic step for both employees and the employer, who must bear the news. Therefore, it has to be handled carefully.

Downsizing has to be treated with the utmost care for the employee to lead a sympathetic discussion. Besides, the organisation must consider that employees may complain to the company if the reasons are not reliable enough.

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Downsizing is a common regulatory practice and is often associated with recessions and business failures.

Consequences of Downsizing

There is evidence that states that the dismissal of employees can have long-term detrimental consequences for companies. Reducing numbers of employees can increase the likelihood of bankruptcy as productivity, customer satisfaction, and morale are reduced. Shrinking companies more often declare bankruptcy in the future, regardless of their financial health.

Losing employees with valuable organisational knowledge can reduce innovation. The remaining employees may find it challenging to manage load and stress, leaving little time to learn new work skills which may not leave theoretical gains in productivity. Distrust of management is, in fact, a business outcome and low loyalty.

Post Downsizing for Employees

From an employee’s perspective, there are two essential things that s/he has to work on after their company lay them off, i.e.,

Find a new job

When you receive a termination notice, contact your company’s human resources department to determine what benefits you can receive. If you start looking for work, you must claim unemployment benefits. If you are unemployed who were fired due to business dismissals, you must explain this when you are an employer. Removal is much different from removing situations that are not related to you. Employers should be aware of these differences when applying for a job.

Attach a clear statement explaining why you moved elsewhere in the application process. For example, you could explain that your job was cancelled when you outsourced an entire company’s division.

Compensation

In the case of a firing, the organisation pays a transfer salary and pays the employee additional compensation in an accident or job loss. However, if employees are fired for disciplinary violations, employees are not entitled to resign because they violate the Code of Conduct, so they are not liable for compensation. Also, it should be noted that the law requires payment for other comparisons. Few companies comply with this law because even governments that want to keep companies happy do not adhere to the law in a dark economic environment.

Alternatives to Downsizing 

Downsizing is not the only way to reduce costs in times of crisis. In some cases, workers are not laid off but become part-time or part-time employees to reduce costs. At other times, employers may submit employment data to individual employees, reduce employee benefits, or reduce the workweek to retain employees.

In a Nutshell

Downsizing is the changeless reduction of a firm’s labour force by firing unproductive workers or elements. While it is usually implemented during times of hardship and a decline in incomes, downsizing can also create leaner and more propitious companies. Downsizing is not always positive and productive; it can have an antagonistic long-term impact on a company’s foot line. 

Read more about organisational processes and tactics like off-boarding, on-boarding, management systems, etc., on our website.

Aakash Sharma
Aakash Sharma
Aakash writes on Startup Ecosystem, Policies, Legal and Regulatory aspects of business planning. An alumnus of Delhi University, he is assistant editor at Dutch Uncles.

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