“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