Downsizing for its own sake only delays the inevitable

Downsizing, rightsizing, redundancies, layoffs, restructuring, re-engineering, separations - whatever you call it, we are talking about job losses, the elimination of work where it once existed.

The latest rash of closures and restructurings, including Tellabs in Drogheda (200 jobs), Gateway's announcement of the closure of its Dublin operation, with the loss of 900 jobs, and its exit from the Irish and UK markets, has created fears of further casualties.

Such fears are fuelled by speculation of an economic slowdown, even a recession, as supplier businesses to dot.com companies are facing harsh reality, after the correction to the irrational exuberance of the markets over the e-commerce business model.

Naturally, we regard these unhappy situations from the viewpoint of Ireland Inc and the sad predicament of those directly affected by redundancy. We accept it as inevitable in a deteriorating economic climate.

But, from the company perspective, this is somewhat simplistic and fatalistic. Even when job losses appear unavoidable, the process should be carried out strategically, so that there is some positive final result.

Unfortunately, downsizing does not necessarily produce a satisfactory outcome for the company involved.

Research carried out after mass downsizings during the recession of the late 1980s and early 1990s suggests that less than half of downsized companies actually reduced expenditures and less than a quarter increased productivity. Only a minuscule number achieved improved product quality, market share, or innovation. Research also shows that, in the expectation of improved performance, the market reacts positively to announcements of cutbacks - another instance where market sentiment is not in touch with the actual facts on the ground.

Perhaps downsizing has produced doubtful results because the decision makers who sign up to it regard it as a strategy in itself. Cost cutting by reducing payroll is a kneejerk response.

When unaccompanied by a clear vision of what it is that downsizing is meant to achieve, it will not achieve anything except delay the day of reckoning.

When/why should companies downsize? Arguably, downsizing delivers efficiency and/or effectiveness benefits. Firms aiming for efficiency improvements continue the same activities as before, but with a reduced headcount. Those aiming for effectiveness divest assets to focus on fewer activities.

Researchers have found that downsizing companies which engaged in asset reductions and refocused on activities where they possessed core competences performed significantly better than firms which merely sought efficiency gains from layoffs.

In effect, this is Gateway's approach. It will exit the cut-throat commodity personal computer business in Europe, the Middle East and Africa to concentrate on higher value-added services and solutions in the US market.

We tend to think of downsizing as a response by companies in financial difficulties, especially in declining or volatile industries. In fact, downsizing can be a pre-emptive strategy, used by "healthy" companies. Again, when successful, it is accompanied by asset sales and refocusing. Downsizing crosses all industries.

However, the recent spate of downsizings has happened in waves in certain industries: the high-tech sector, along with mass layoffs on Wall Street and in London finance houses, as IPOs dry up. Some critics claim that certain industry-wide layoffs are carried out in imitation, rather than thought through strategically.

If we are truly heading into another major downsizing era, what specific lessons can we learn from previous downsizing periods?

It is easier to cite mistakes that should not be repeated. Poor results from downsizing occurred when it was applied as a panacea for cost cutting, or as a copycat reaction, without thinking through its negative systemic consequences.

Foremost among these was a collapse in morale and productivity of staff who remained after their colleagues had been downsized out. Joel Brockner and Michael Hitt, two US academics, have each studied downsizing "survivors".

Typically, survivors react by wondering whether they will be next. They consume their energies in trying to escape the next round of cuts, usually by avoiding the risk of creativity.

Often, survivors spend their time seeking another job. Ironically, it is the best people who are most likely to secure alternative employment outside the firm.

The loss of competent individuals carries with it the loss of important skills. Moreover, this is compounded by the breakup of internal networks of people who have worked together over a period of time to create and develop knowledge, the most valuable ingredient for company competitiveness. This endangers the company's future.

Even when downsizing is part of a coherent strategy, it must be executed in a way that does not jeopardise its potential benefits. Mr Hitt and others have identified some especially ineffective downsizing practices.

First, voluntary early retirement programmes. Contrary to the view that early retirements open the way for younger, dynamic, recently trained and probably less expensive staff, such plans often result in skill and memory depletion, apart from the expense of the payoff to the retirees. The voluntary aspect makes it hard to control who leaves, and often results in rehiring retirees on expensive contracts.

Second, placing survivors in jobs for which they are untrained and inexperienced, while reducing training and development budgets are moves that inevitably result in inadequate performance. This is especially damaging when its effects are felt by customers, who may then desert the company at a crucial time.

Third, expecting excessively high work output from survivors. When staff are expected to fill in the gaps left by departed colleagues, even if well-paid for increased productivity, an over-emphasis on accountability and monetary rewards actually increases stress and decreases productivity over the long term. What staff really want is participation, and long-term involvement in the company's future competitiveness. The mistakes of the past signpost how downsizing practices can work positively to build for the future. Observers agree that the following guidelines are useful.

Mass layoffs should be the option of last resort, if other cost-cutting options (reduced work hours, job sharing, internal redeployment to fill vacancies) fail. This minimises the loss of internal networks and access to accumulated knowledge.

Redesign work based around tasks critical to the company's competitive advantage. Target positions, rather than headcount in across-the-board job cuts. Intel is attempting to adopt such a strategic approach, by increasing R&D spending, even as it is cutting 5,000 out of 80,000 jobs.

Avoid euphemisms like "rightsizing" to disguise mass layoffs. Disclosure and meaningful dialogue with staff should take place at all stages, if the survivors are to become active contributors to the firm's future success.

Reduction in layers can be helpful. Coupled with decentralisation, it has the effect of involving survivors emotionally, giving them autonomy to innovate and make decisions quickly.

Skills and knowledge development should be emphasised, even if this requires investment. This will give the company a platform on which to build its future value.

Strategic leadership and vision is possibly the most important ingredient. Paradoxically, companies in the face of a crisis sometimes change leaders along with the downsizing - for example, Baltimore Technologies. In such instances, credible new leaders must be installed quickly, preferably talented individuals from the ranks of the organisation.

If confidence and clarity about the future of the company is not provided at the top, the downsizing pain will surely have been in vain.