Downsizing: When does a company decide to lay off employees?

Downsizing is not always a forced measure, It can also be used with other business processes to create a more efficient business.

During the COVID-19 pandemic, many businesses and companies were forced to cut costs and resultantly had to lay off their employees. The permanent reduction of a company’s employees by dismissing unproductive labour force and departments is what downsizing is described as in a typical scenario.

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

In the wake of the economic depression inflicted by the COVID-19 pandemic, Dropbox Inc on 13 January 2021 announced its COO’s departure and announced that it would cut 11% of its global workforce or 315 people as the file hosting service provider shifts business resources. Post the announcement, the company’s shares fell nearly 6% to $22.26.


"Our Virtual First policy means we require fewer resources to support our in-office environment, so we're scaling back that investment and redeploying those resources to drive our ambitious product roadmap." - Drew Houston, Chief Executive Officer, Dropbox Inc.

In October 2020, the San Francisco-based company had said that remote work due to the COVID-19 pandemic would be a direct experience for its employees and its physical spaces will no longer be for daily individual work.

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’ Challenge: 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, it 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 isn’t necessarily a damaging practice for a business. While it is usually implemented during times of hardship, downsizing can also create leaner and more propitious companies.

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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