HR Group, founded in Edmonton Alberta in 1993, is a partnership of highly experienced management consultants who specialize in organizational effectiveness and human resource management, and promote participative, lean, and cost-effective management practices. All partners are Certified Human Resource Practitioners with extensive senior level experience in both the private and public sectors.

Downsizing: An Outcome, Not a Process

Reprinted from “Productive Workplaces” (April, 2009), the HR Group newsletter.

Times are tough again and, as usual, downsizing has started in earnest. Microsoft is laying off 5,000; Intel 6,000; Caterpillar Inc. 20,000; Sprint Nextel Corp. 8,000; Home Depot Inc. 7,000; Pfizer Inc. 19,000; Ericsson 5,000; BHP, the worlds largest miner, 6,000; Clear Channel Communications, the largest U.S. broadcaster, 1,850; Harley Davidson 1,100; and the list grows longer and the cuts get deeper every day. Banks are failing and bankruptcies are increasing at a huge rate. When economic times get tough, one would logically expect that staff would be cut with declining sales and a reduced demand for production. But shouldn’t one also expect that the process would be a logical one based on organizational analysis and needs, rather than a broad based slash to the human resources line items of the budget? Shouldn’t one expect, for example, that there would be some analysis of required staff competencies that need to be retained; some thought given to the ability to rehire when the economy rebounds; some analysis of where the cuts are most logically required; some analysis of whether or not there are cost saving alternatives; and some input from all departments as to the most effective means of reaching the desired expense reduction? But you hardly ever hear of any analysis; only some apparently arbitrary number of staff layoffs that has been plucked out of the air or rather off the balance sheet.

The problem with downsizing is that it is a simplistic knee jerk reaction to what is usually a far more complex problem. It is purely a financial balance sheet approach with no logical analysis other than to reduce the numbers on the operating expense side of the ledger. Sales revenue is down X number of dollars, so one must cut the same amount from the expense side, and since staffing frequently comprises by far the largest percentage of operating expenses, staff are laid off. The finance department, together with some senior staff, determine how much money needs to be trimmed from the operating budget and then notifies the rest of the organization that everyone has to “share the pain” and cut the same percentage from their budgets. This is frequently considered the “fair” approach to layoffs.

In reality it is grossly unfair to all staff, and does little to help the organization in either the short or the long term. Yes, it does ensure that the organization remains financially viable in the immediate future, but what does it do to service, to quality, to staff motivation, to staff planning and development, and most importantly what does it contribute to lasting organizational effectiveness? Is laying off countless thousands of employees going to do much to really help General Motors? If you do really need to lay off staff in order to remain financially viable then do so with some logical and rational review of the organization that determines where and how the layoffs should be effected and what other measures can be taken that leave the organization in the best shape for future recovery and productivity.

Needless to say, an organization should always be operating at peak effectiveness, but in reality very few do and many are inefficient especially when the economy is booming. Ever increasing sales during the boom times tend to make organizations complacent and mask their inefficiency. When asked about organizational effectiveness during an economic boom, many reply that they are making good money so why should they change or why should they even concern themselves about whether or not they can operate more efficiently.

It is interesting to note that it is primarily the manufacturing sector that has taken the initiative to implement “lean” enterprise and “lean” management techniques in the past number of years. This is probably because this sector of our economy has faced increasing competition from the world wide economy. The energy sector, on the other hand, has not faced such competition and, in many cases, is not operating nearly as efficiently as it could and still has bloated bureaucratic hierarchies and traditional inefficient production processes.

The biggest problem, for example, for the Big Three U.S. automakers has been their continued reluctance to adopt modern manufacturing techniques and modern management styles. It is true that they have not accurately anticipated consumer demand for smaller and more fuel efficient vehicles, but this is primarily due to their antiquated management hierarchy and resultant management style, as well as their traditional manufacturing processes, which make it very costly and time consuming to change from one model to the next. This is also the primary reason for the inherent lesser quality of their products compared to the Japanese automakers. GM’s management structure, started in the 1920s by Alfred P. Sloan, used to be in many textbooks on organizational development as an example of the traditional hierarchical approach to corporate management with a top down culture and very little if any horizontal communication and cooperation. This immense, unresponsive, and unyielding structure was still in effect in the 1980s.

Toyota, on the other hand, implemented the Toyota Production System, which included lean manufacturing. They also adopted the use of the Toyota 5S System, now an integral part of lean manufacturing techniques, as well as the 14 principles of the Toyota Way. They engaged all staff in a highly participative management style and delegated responsibility and accountability down to the plant floor.

It was interesting to note that even the Dragon’s Den, when recently asked by the CBC where the government’s economic stimulus should be applied, unanimously agreed that the Big 3 should get no government bailout despite the pleas of Buzz Hargrove. They said that the automakers must remodel and restructure or die. At the same time, ironically, it has been announced that Toyota has finally surpassed GM in worldwide sales.

Rather than a knee jerk reaction to downsize, now is an opportune time for any organization to undertake a thorough review of their organizational structure, their management style, and their overall organizational effectiveness. This should be done with the full participation of all staff. They are the ones doing the work and have the best knowledge of where improvements in efficiency and cost savings can be had. They also need to have a stake in the outcome and some commitment to any resultant restructuring through their participation.

The review can look at numerous other means of achieving greater cost effectiveness such as:

  • Adopting a flatter organizational structure with greater staff participation, less silos, and greater horizontal communication and cooperation.
  • Improving production processes by adopting lean enterprise techniques and other up-to-date methods.
  • Cross training staff for greater flexibility and cost effectiveness in staffing.
  • Implementing better use of available technology. Canada lags behind many other countries in the money spent on corporate Research and Development.
  • Merging departments and abolishing those that are redundant.
  • Eliminating overlap, duplication, and redundancy in all areas.
  • Analyzing work methods, policies, and procedures and eliminating cumbersome bureaucracy.

These are just some of the areas that should be examined before there is any determination to layoff any number of staff. What is also required is a willingness to layoff those management and supervisory staff that are really redundant in a flatter and more participative workplace, where greater responsibility and accountability is delegated to the individual employee.

Downsizing is portrayed as a rational process that organizations undertake to remain viable, especially in tough times. It is not, however, a process and certainly not a rational one; it is purely the outcome of a narrow minded and highly simplistic approach to a complex problem. Worst of all, it avoids the self-analysis and tough decisions that really can assist the organization to survive and prosper at all times.