Preserving Employee Morale during Downsizing

“The real question is how downsizing is done, rather than whether to downsize. Companies that downsize through buy-outs and attrition, that help their workers get new jobs, and that sometimes provide outplacement services, end up much better positioned than companies which simply wield the ax. [They have] a better chance of retaining the loyalty of the surviving workers. Trust is one of the most valuable yet brittle assets in any enterprise. So over the long term, it’s far better for companies to downsize in a humane way.” — Robert Reich1

Companies began downsizing in the late 1970s to cut costs and improve the bottom line. Today, companies with record profits carry on the quest to become lean and mean. More than 3 million jobs have been eliminated each year since 1989, for a loss of 43 million jobs since 1979. Government budget cuts alone have resulted in more than 1.1 million lost jobs in the defense industry since 1987, with another 700,000 cuts expected through 1998.2 To put these numbers in perspective, 50 percent more people have been victims of layoffs than victims of violent crime.

Downsizing has become almost a way of life for U.S. companies. In fact, a first round of downsizing is generally followed by a second round a short time later: 67 percent of firms that cut jobs in a given year do so again the following year.3 Unfortunately, many companies have found that the expected payoffs from downsizing (higher productivity, better stock performance, and more flexibility) have been sparse.

In this paper, we explore the reasons that many of the expected gains from downsizing have not been achieved. Drawing on findings from an ongoing research program on effective strategies for downsizing, we argue that maintaining the trust and empowerment of survivors is essential to minimize costs and realize the expected gains. The research program began in the late 1980s and draws on extensive interviews with top managers who have implemented downsizings, surveys of employees who have both been laid off and survived downsizings, and in-depth case studies of companies that have successfully downsized.

The Dark Side of Downsizing

The promised payoffs of downsizing have been mixed at best. One study found that (1) a 10 percent reduction in people resulted in only a 1.5 percent reduction in costs, (2) the average downsized firm’s stock price rose 4.7

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References

1. “If You Are Going to Downsize, Says U.S. Labor Secretary Robert Reich, Do It Gently,” interview, Sales & Marketing Management, volume 148, September 1996, pp. 118–123.

2. These figures are taken from:

W.F. Cascio, Guide to Responsible Restructuring (Washington, D.C.: U.S. Department of Labor, Office of the American Workplace, 1995), p. 5;

J. Cole, “Axes to Continue to Fall in Defense Industry,” Wall Street Journal, 14 March 1995, p. A2; and

New York Times Special Report, The Downsizing of America (New York: Random House, 1996), p. 5.

3. Cascio (1995), p. 5;

Cole (1995), p. A2; and

New York Times Special Report (1996), p. 5.

4. Cascio (1995), p. 5.

5. M.F.R. Kets de Vries and K. Balazs, “The Downside of Downsizing,” Human Relations, volume 50, January 1997, pp. 11–50.

6. Cascio (1995), p. 5.

7. “HR Paints a Bleak Portrait of Downsizing Survivors,” HR Focus, volume 70, May 1993, p. 24.

8. See, for example:

J. Brockner, T.R. Tyler, and R. Cooper-Schneider, “The Influence of Prior Commitment to an Institution on Reactions to Perceived Unfairness,” Administrative Science Quarterly, volume 37, June 1992, pp. 241–261; and

J. Brockner, M. Konovsky, R. Cooper-Schneider, R. Folger, C. Martin, and R.J. Bies, “Interactive Effects of Procedural Justice and Outcome Negativity on Victims and Survivors of Job Loss,” Academy of Management Journal, volume 37, April 1994, pp. 397–409.

9. For a review of survivor responses to downsizing, see:

S.W. Kozlowski, G.T. Chao, E.M. Smith, and J. Hedlund, “Organizational Downsizing: Strategies, Interventions, and Research Implications,” in C.L. Cooper and I.T. Robertson, eds., International Review of Industrial and Organizational Psychology (New York: Wiley, 1993), pp. 262–332.

10. Kets de Vries and Balazs (1997).

11. For an elaboration of the requisites of contemporary organizations, see:

R.L. Daft and A.Y. Lewin, “What Are the Theories for the ‘New’ Organizational Forms?,” Organizational Science, volume 4, November 1993, pp. i–vi;

W.H. Davidow and M.S. Malone, The Virtual Corporation (New York: HarperCollins, 1992); and

L. Hirschhorn and T. Gilmore, “The New Boundaries of the ‘Boundaryless’ Company,” Harvard Business Review, volume 70, May–June 1992, pp. 104–115.

12. L.J. Bassi and M.E. Van Buren, “ASTD Human Resource and Performance Management Survey” (Alexandria, Virginia: American Society of Training and Development, 1996).

13. Our depiction of trust is based on the work of:

A.K. Mishra, “Organizational Responses to Crisis: The Centrality of Trust,” in R.M. Kramer and T.R. Tyler, eds., Trust in Organizations: Frontiers of Theory and Research (Thousand Oaks, California: Sage, 1996), pp. 261–287;

R.C. Mayer, J.H. Davis, and F.D. Schoorman, “An Integrative Model of Organizational Trust,” Academy of Management Journal, volume 20, July 1995, pp. 709–734; and

J. Gabarro, The Dynamics of Taking Charge (Boston: Harvard Business School Press, 1987).

14. Our depiction of empowerment is based on work by:

D.E. Bowen and E. Lawler, “Empowering Service Workers,” Sloan Management Review, volume 36, Summer 1995, pp. 73–84; and

G.M. Spreitzer, “Psychological Empowerment in the Workplace: Dimensions, Measurement, and Validation,” Academy of Management Journal, volume 38, October 1995, pp. 1442–1465.

15. W.F. Cascio, “Downsizing: What Do We Know? What Have We Learned?,” Academy of Management Executive, volume 7, February 1993, pp. 95–104.

16. B.H. Sheppard and M. Tuchinsky, “Micro-OB and the Network Organization,” in Kramer and Tyler (1996), pp. 140–165.

17. These findings from our own research are supported by other researchers and the popular press, notably:

H.M. O’Neill and D.J. Lenn, “Voices of Survivors: Words That Downsizing CEOs Should Hear,” Academy of Management Executive, volume 9, November 1995, pp. 23–33; and

D.M. Noer, Healing the Wounds: Overcoming the Trauma of Layoffs and Revitalizing Downsized Organizations (San Francisco: Jossey-Bass, 1995); and

K. Labich, “How to Fire People and Still Sleep at Night,” Fortune, 10 June 1996, pp. 65–72.

18. Some of these findings are based on research by:

K.S. Cameron, S.J. Freeman, and A.K. Mishra, “Best Practices in White-Collar Downsizing: Managing Contradictions,” Academy of Management Executive, volume 5, August 1991, pp. 57–73; and

M.A. Hitt, B.W. Keats, H.F. Harback, and R.D. Nixon, “Rightsizing: Building and Maintaining Strategic Leadership and Long-Term Competitiveness,” Organizational Dynamics, volume 23, Autumn 1994, pp. 18–32.

19. At each stage of the research process, our goal was not solely to find agreement among top managers, employees, or industry experts. Indeed, disagreement among perspectives often provided the impetus for developing new sets of research questions. We first conducted semistructured interviews with top managers in a few representative organizations in one industry to capture perspectives on their companies’ downsizing strategies and outcomes. We interviewed top managers in thirty organizations in the auto industry four times during a two-year period beginning in 1988 to identify typical strategies used to downsize. We then triangulated and elaborated on these perspectives more broadly by surveying approximately 2,000 executives and lower level employees from a larger sample of organizations within the same industry.

20. Cameron, Freeman, and Mishra (1991). See also:

K.S. Cameron, S.J. Freeman, and A.K. Mishra, “Downsizing and Redesigning Organizations,” in G. Huber and W. Glick, eds., Organizational Change and Redesign (New York: Oxford University Press, 1993), pp. 19–65.

21. Cameron, Freeman, and Mishra (1993).

22. Interviews with another 35 top managers and surveys of more than 500 top managers representing 92 different organizations in the automotive industry revealed the primacy of trust and empowerment in effective downsizing. See:

A.K. Mishra and K.E. Mishra, “The Role of Mutual Trust in Effective Downsizing Strategies,” Human Resource Management, volume 33, number 2, pp. 261–279. See also:

Mishra (1996).

23. We reviewed both the popular business press and the academic literature on downsizing. We also conducted interviews and survey research in other industries to identify practices that preserved trust and empowerment and to validate our previous findings in a different industry. We interviewed senior executives, managers, and employees in the aerospace, automotive, consumer products, tobacco, and steel industries who have been involved with, or who managed, previous downsizing activities, including facility rationalizations, plant closures, and reductions. We also surveyed more than 1,000 employees from two aerospace organizations that were at different stages of downsizing. We draw our key findings from the final stage of research conducted across industries.

24. We constructed the first case from more than a half-dozen interviews during several years with the plant manager, two visits to the plant where one of us talked to a cross-section of employees, and a formal survey of all employees at the plant. In the second case study, two of us toured the main facility where we talked with a cross-section of employees and interviewed a vice president, the director of human resources, and several other employees. Building on the case studies and drawing from the final research, we identified some general steps for preserving trust and empowerment. A panel of twelve practitioners with downsizing experience from the aerospace industry reviewed the initial steps and provided constructive criticism. We solicited additional feedback from human resource and manufacturing executives. Each group helped to make sense of our findings through their own perspectives, which were grounded in the experience of managing downsizings.

25. Kets de Vries and Balazs (1997).

26. C.D. Bruton, J.K. Keels, and C.L. Shook, “Downsizing the Firm: Answering the Strategic Questions,” Academy of Management Executive, volume 10, May 1996, pp. 38–45.

27. T. Teal, “Not a Fool, Not a Saint,” Fortune, 11 November 1996, pp. 201–204.

28. Kets de Vries and Balazs (1997).

29. A.J. Kinicki, “Personal Consequences of Plant Closings: A Model and Preliminary Test,” Human Relations, volume. 38, March 1985, pp. 197–212.

30. See K. Labich, “How to Fire People and Still Sleep at Night,” Fortune, 10 June 1996, pp. 65–72.

31. New York Times Special Report (1996), p. 99.

32. See, for example: J.T. Addison and P. Portugal, “The Effect of Advance Notification of Plant Closings on Unemployment,” Industrial and Labor Relations Review, volume 41, October 1987, pp. 3–16; and

T.J. Murray, “For Downsizers the Real Misery Is Yet to Come,” Business Month, volume 133, February 1989, pp. 71–72.

33. J.J. Keller, “AT&T Tries to Put New Spin on Big Job Cuts,” Wall Street Journal, 18 March 1995, p. B1.

34. New York Times Special Report (1996), p. 214.

35. P. Thomas, “Restructurings Generate Rash of Age-Bias Suits,” Wall Street Journal, 29 August 1996, pp. B1, B13.

36. T. Petzinger, Jr., “Goerg Bauer Put Burden of Downsizing into Employees’ Hands,” Wall Street Journal, 10 May 1996, p. B1.

37. W.H. Wagel, “New Beginnings for Displaced Workers: Outplacement at GE,” Personnel, volume 65, December 1988, pp. 12–18.

Acknowledgments

The authors wish to thank Susan Cohen and Jack Gabarro for helpful comments on an earlier version of this paper.