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13 Myths and Facts About Downsizing

What you think you know about layoffs might hurt your business.

October 17, 2002
Related Topics: Downsizing, Recruitment
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MYTH # 1: Jobs are secure at firms that are doing well financially.

FACT: Preemptive layoffs by large firms are common.
    Today’s job cuts are not solely about large, sick companies trying to savethemselves, as often the case in the early 1990’s (e.g. IBM, Sears). They arealso about healthy companies hoping to reduce costs and boost earnings byreducing head count (e.g. Goldman Sachs, AOL). They are about trying to preempttough times instead of simply reacting to them. These layoffs are radical,preventative first aid.

    On the other hand, small companies, especially small manufacturers, tend toresist layoffs because they are trying to protect the substantial investmentsthey made in finding and training workers.

MYTH # 2: Companies that are laying off workers are not hiring new ones.

FACT: Companies are tailoring their complements of skills.
    When it comes to layoffs, appearances can be deceiving. At the same time asfirms are firing some people, they are hiring others, presumably people with theskills to execute new strategies. Walmart.com laid off more than 20 employees atits online enterprise in early 2001, but subsequently added as many new hiresand even grew by more than 25 percent. Hewlett-Packard shed some marketing jobswhile adding new positions in sales and consulting. Fully one-third ofbusinesses that downsized since 1994 wound up restoring some of the eliminatedpositions, and nearly 50 percent created positions to meet emerging needs,according to recent study by career services firm Lee Hecht Harrison.

    According to the American Management Association’s year 2000 survey of itsmember companies, companies that employ one-quarter of American workforce, 36percent of firms that eliminated jobs in the previous 12 months said they hadalso created new positions. That’s up 31 percent in 1996. The Society forHuman Resources Management found similar results in a 2001 survey.

    As companies lose workers in one department, they are adding people withdifferent skills in another, continually tailoring their workforces to fit theavailable work and adjusting quickly to swings in demand for products andservices. What makes this flexibility possible is the rise of temporary andcontract workers. On a typical day they allow companies to meet 12 percent oftheir staffing needs. On peak days that figure may reach 20 percent.

MYTH #3: Downsizing employees boosts profits.

FACT: Profitability does not necessarily follow downsizing.
    Data from the S&P 500, 1982-2000, showed clearlythat profitability, as measured by the return on assets, does not necessarilyfollow downsizing, even as long as two years later. Survey data support thisconclusion.

    Thus the 2001 Layoffs and Job Security Survey, conducted by the Society forHuman Resources Management, reported that only 32 percent of respondentsindicated that layoffs improved profits. Even massive staff cutbacks at firmssuch as Eastman Kodak, Apple Computer, and AT&T have not produced increasedearnings years later.

MYTH #4: Downsizing employees boosts productivity.

FACT: Productivity results after downsizing are mixed.
    The American Management Association surveyed 700 companies that had downsizedin the 1990s. In 34 percent of the cases, productivity rose, but it fell in 30percent of them. These results are consistent with those reported in anotherstudy of 250,000 manufacturing plants by the National Bureau of EconomicResearch.

    That study concluded that the productivity-enhancing role of employmentdownsizing has been exaggerated. While some plants did downsize and post healthygains in productivity, even more (including many of the largest facilities)managed to raise output per worker while expanding employment. They contributedabout as much to overall productivity increases in manufacturing as did thesuccessful downsizes.

MYTH #5: Downsizing employees has no effect on the quality of products orservices.

FACT: For most employers, downsizing employees does not lead to long-termimprovements in the quality of products or services.
    Poor labor relations has affected product quality in one tire-manufacturingplant at Bridgestone/Firestone. However, that example alone does not address thequestion “Does employment downsizing per se affect product quality?” In its1996 survey on corporate downsizing, job elimination, and job creation, theAmerican Management Association reported that over the long term, that only 35percent of responding companies increased the quality of their products andservices after laying off employees.

    However, among those that did increase profits. While there is a strongrelationship between improvements in the quality of products and services andincreases in profits, downsizing the workforce is not the way to get there.

MYTH #6: Downsizing employees is a one-time event for most companies.

FACT: The best predictor of whether a company will downsize in a given yearis whether it has downsized the previous year.
    One of the clearest trends is that downsizing begets more downsizing, asongoing staff reductions are etched into the corporate culture. On averagetwo-thirds of firms that lay off employees in a given year do so again thefollowing year. Among companies that laid off employees since 2000, according tothe 2001 Layoffs and Job Security Survey, 45 percent rehired laid-off employeesfull time, and 17 percent rehired laid-off employees as consultants. Fully 56percent have hired new employees since the layoff.

MYTH #7: Since companies are just “cutting fat” by downsizing employees,there are no adverse effects on those who remain.

FACT: For the majority of companies, downsizing has had adverse effects onthe morale, workload, and commitment of “survivors.”
    It has often been said that employee morale is the first casualty in adownsizing. Survey data bear this out. Right Associates found that 70 percent ofsenior managers that remained in downsized firms reported that morale and trustdeclined. Study after study found similar results. A recent national surveyfound the following among survivors: feel overworked (54 percent), areoverwhelmed by workload (55 percent), lack time for reflection (59 percent), don’thave time to complete tasks (56 percent), and have to multitask too much (45percent).

    Between 1993 and 1995, an Australian bank, identified simply as Onebank,implemented a “restructuring improvement program” (yielding the ominousacronym RIP). It’s objective was to improve the banks competitiveness byreducing costs, instigating a sales culture, and installing new technology. RIPeliminated 350 branches and 10,000 employees, although 4,500 new jobs werecreated in central processing sites. RIP involved a “spill and fill” processin which all staff lost their jobs and had to compete for the jobs remaining inthe new structure. It was like a giant game of musical chairs, with about 20percent fewer chairs than people.

    An academic’s survey of the bank’s middle managers (to which a remarkable80 percent responded) revealed an almost complete turnaround in attitudestowards their careers. The survey found a decline in the managers’ commitmentat all levels: to their job, to their branch or department, and, most of all, toOnebank and its goals. This is true even through 83 percent considered RIPessential for the long-term future of the bank, and 76 percent said they werefully committed to making it a success.

How had the restructuring changed the nature of the managers’ jobs? Morethan 30 percent of the managers said they now had more staff reporting to them,64 percent had increased responsibility, 69 percent had a wider range of duties,77 percent worked longer hours, 83 percent experienced increased street, and 85percent had increased workload overall.

    Against all that, however, only 37 percent said they’d received a salaryincrease. Is it any surprise that 49 percent felt a decreased sense ofcommitment to Onebank or that 64 percent experienced decreased job satisfaction?Asked about their level of commitment and their views on working for the bank,the managers offered 8 positive and 390 negative comments

MYTH #8: Most employees are surprised to learn they’ve been laid off. Theyask, “Why me?”

FACT: Downsized employees often express sympathy toward an employer’sreasons for layoffs, and many refuse to personalize the experience.
    From the perspective of the employees, layoffs have a new character. Moremanagers are briefing employees regularly about the economic status of theircompanies. This raises awareness and actually prepares employees for what mighthappen to them. To many, the layoffs seem justified because of the slowdown ineconomic growth, the plunge in corporate profits, and the dive in stock prices.While it used to be (and still is) traumatic to be laid off even once, someemployees can now expect to go through that experience twice or even three timesbefore they reach 50.

MYTH #9: At outplacement centers, laid-off employees tend to keep tothemselves as they pursue jobs.

FACT: Outplacement centers have become America’s new hiring halls--gatheringplaces for those between assignments.
    There seems to be a new matter-of-factness about downsizing. As the managingprincipal of the New York office of outplacement firm Right Associates put it,“These people are not ashamed, but they do feel dislocated, and there isanger. They were on track and now they are trying to get back on track.”

    Right has redesigned its offices to accommodate this new trend. Instead ofenclosed offices and cubicles, where the downsized of the 1990’s kept tothemselves as they perused jobs, there are many more glass walls and opengathering places where the downsized of the 21st century get to know each other.They socialize, and they even re-create office buzz. Said the managingprincipal, “It took a while to recognize this had become important.”

MYTH #10: The number of employees let go, including their associated costs,is the total cost of downsizing.

FACT: In knowledge-based or relationship-based businesses, the most seriouscost is the loss of employee contacts, business foregone, and lack ofinnovation.
    In knowledge- and relationship-based businesses, the company’s mostimportant assets walk out the door every night. The Economist magazine notedthat people are not interchangeable. They all have different skills and addvalue in different ways. “Down-sizing can have a devastating impact oninnovation, as skills and contacts that have been developed over the years aredestroyed at a stroke.”

    Knowledge-based businesses, from high-technology firms to financial servicesindustry, depend heavily on their employees--their stock of human capital--toinnovate and grow. They are “learning organizations”--collections ofnetworks in which inter-relationships among individuals (i.e., social networks)generate learning and knowledge. This knowledge base constitutes a firm’s “memory.”

    Downsizing is especially hazardous to learning organizations. Because asingle individual has multiple relationships in such an organization,indiscriminate, nonselective downsizing has the potential to inflictconsiderable damage on the learning and memory capacity of organizations. Thatdamage is far greater than might be implied by a simple tally of the number ofindividuals let go.

    When one considers the multiple relationships generated by one individual, itis clear that restructuring that involves significant reductions in employeescan inflict damage and create the loss of significant “chunks” oforganizational memory. Such a loss damages ongoing processes and operations,forfeits current contacts, and may lead to foregone business opportunities.Which kinds of organizations are at greatest risk? Those that operate in rapidlyevolving industries, such as biotechnology, pharmaceuticals, and software, inwhich survival depends on a firm’s ability to innovate constantly.

MYTH #11: Violence, sabotage, or other vengeful acts from laid-off employeesare remote possibilities.

FACT: They are less remote than you think, and the consequences may besevere.
    The good news is that the 2001 Layoffs and Job Security Survey, conducted bythe Society for Human Resources Management, reported that 86 percent ofcompanies have not experienced discrimination charges, and 93 percent have notexperienced workplace violence. The bad news, however, is that the most commonprecipitator of workplace violence is a layoff or firing.

    What do Xerox, Fireman’s Fund, and the US Postal Service all have incommon? They have employees who died violently while at work. Violence disruptsproductivity, causes untold damage to those exposed to the trauma, is related toworkplace abuse of drugs or alcohol and absenteeism, and cost employers millionsof dollars. In a stressed-out, downsized business environment, people aresearching for someone to blame for their problems. With the loss of a job orother event the employee perceives as unfair, the employer may become the focusof a disgruntled individual’s fear and frustration. Under these circumstances,some form of workplace aggression--that is, efforts by individuals to harmothers with whom they work, or have worked, or their organization itself--islikely.

    In France, laid-off workers at bankrupt householdappliance maker Moulinex SA threatened to blow up their factory if their demands for more severance pay werenot met. A sign in black marker at the entrance to the plant said it all: “Moneyor BOOM!” Their demands were met. The French labor ministry and the unionsagreed on a deal to give workers who were with Moulinex for more than 25 years aseverance bonus of 12,200 euros (about $10,785) and the rest of the workers4,600 to 7,600 euros (about $4,050 to $6,690).

    Among white-collar workers, the cyber saboteur has a emerged as a new threatamong disgruntled ex-employees. Recently axed workers have posted a company’spayroll on its intranet, planted data destroying bugs, and handed over valuableintellectual property to competitors. Although exact numbers are hard to comeby, computer security experts say it is fast becoming the top technical concernat many companies.

    Of course, fired workers have exacted revenge on their former employers inthe past. But this time, they’re capable of great damage, because more thanever, companies depend on computer networks that are vulnerable to electronicsabotage. With more than 30,000 Web sites filled with hacking tools that anygrade-school child could use, today’s brand of getting even is far easier foralienated workers to pull off. It’s also far more costly for companies. TheFBI estimates the cost of the average insider attack at $2.7 million.

MYTH #12: Training survivors during the and following layoffs is notnecessary.

FACT: Training survivors is critical to success subsequently.
    The American Management Association survey on corporate downsizing, jobelimination, and job creation clearly supports this conclusion. In firms inwhich training budgets increased after downsizing, 63 percent reported thatproductivity increased over the long term, and 69 percent reported that profitsincreased. In firms in which training budgets decreased after downsizing, only34 percent reported that productivity increased over the long term, and only 40percent reported that profits increased. A similar pattern also emerged over theshort term.

    One explanation for these results is that two-thirds of reported jobeliminations are connected to organizational restructuring or business processreengineering. Workers who receive training are far more likely to improve theirproductivity, which, in turn, leads to increases in profits.

MYTH #13: Stress-related medical disorders are more likely for those laid offthan those who remain.

FACT: Workers at downsized companies are just as likely to suffer adversehealth consequences.
    Among employees who remain after a downsizing, more than half reportincreased job stress and symptoms of “burnout.” The physical toll on workerstranslates into a financial toll on employers. Based on an analysis of 3,896disability cases, Northwestern National Life Insurance Company calculated thatthe average cost of rehabilitating an employee disabled because of stress was$1,925 ($2,850 in 2001 dollars). If he or she is not rehabilitated, companieswill need to hold in reserve an average of $73,270 ($108,450 in 2001 dollars) ormore to cover payments for employees disabled by job related stress.

    Another study of 300 large to midsize firms was conducted jointly by CignaInsurance Company and the American Management Association. Over the five-yearperiod of the study, stress-related disorders among workers at downsizingcompanies showed the greatest increase among all kinds of medical-relatedclaims, including those for mental health and substance abuse, high bloodpressure, and other cardiovascular problems. The percentage increases acrosscompanies varied from 100 to 900 percent--that is, as much as a ninefoldincrease. The same survey revealed that although supervisors comprise 5 to 8percent of the American workforce, this group is at a greater risk of being laidoff and of developing stress-related disability.

    While research has revealed a variety of negative health consequencesassociated with layoff victims, this is not necessarily true for those whoaccept voluntary buyout packages. In a recent Australian study, 71 individualswho had accepted voluntary buyout packages (after 7 to 44 years of service, withan average of 25 years) were contacted 2 to 7 years after leaving their firms.Almost 90 percent were married, and about half had dependant children.Surprisingly, 61 percent considered their health to be about the same, and 29percent considered it to be “better” or “much better.”

    Other research has shown that one’s financial situation is a major factorin how people perceive and respond to job loss, both physiologically andpsychology. Financial incentives, which often accompany voluntary severanceagreements, may well moderate the ill effects of job loss. As one set of authorsnoted, “evidence is mounting that events viewed as uncontrollable andundesirable are more likely to be associated with psychological and physicaldistress.” The findings of this study suggest that rather than consideringthemselves as “victims,” individuals who are offered voluntary buyouts maysee themselves as having the opportunity to make choices about their futureprospects that are not available to the “survivors.” As a result, theyexperience less distress later on.

    Reprinted with permission from“Responsible Restructuring, Creative andProfitable Alternatives to Layoffs,” by Wayne F. Cascio, Berrett-KoehlerPublishers, Inc., 2002.

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