Downsizing is substantially shrinking a company’s workforce by laying off a large number of people at once to save money and establish a more efficient and productive workplace. Downsizing is more closely tied to the state of the business than terminating, which is mostly based on the employee’s behavior.
Downsizing is not a new occurrence during the COVID-19 crisis. During economic downturns, corporations have done it numerous times. Companies downsize not only during economic downturns but also in good times to streamline their personnel and boost production while cutting expenses and modifying structures.
The feasibility of this organizational style has always been a point of contention. Researchers and businesspeople often disagree regarding the benefits and drawbacks of downsizing. Downsizing advocates claim that the procedure reduces additional costs, maintains financial stability, and keeps the business on course. Firms and startups often have no choice but to downsize to stay afloat.
Vincent Talbot, founder of 99 CarStereo believes that downsizing can also assist in the elimination of unnecessary departments, as well as the integration of functions and hence the creation of lean management. This results in fewer wasteful expenses and a higher total profit. Downsizing focuses on low-performing staff while retaining the best. As the workforce shrinks, management finds it easier to conduct team-building and teach employees. Downsizing makes the decision-making process more efficient, and following downsizing, top management that had previously been absent from daily activities will now actively participate.
Downsizing critics, on the other hand, object to its negative consequences, such as how it impacts performance and productivity, particularly among the surviving employees, and how it produces stress, burdensome tasks, and a dread of being laid off. Downsizing companies also lose market credibility since vendors regard a downsizing company as being in a bad financial situation and would be hesitant to move their venture that way.
David Farkas, founder of The Upper Ranks claims that downsizing can also have a detrimental impact on decision-making and communication since it becomes more difficult to execute projects smoothly when the structure changes. The lack of information and competence is the most dangerous disadvantage of downsizing. Companies invest a lot of time and money in educating their employees, and downsizing can hurt the skill sets and expertise acquired over time.
- Downsizing Can Hurt Public and Investor Relations: Even if it’s the only way to stay afloat, the public and investors will look at your company negatively if you downsize. Laying off employees, for example, may be perceived as unjust by the public, especially if the workforce cutbacks result in ex-employees engaging in harmful activity.
Finance expert and founder of FinanceJar, Elena Jones, claimed that if you have investors, your downsizing will indicate that your company is in jeopardy, resulting in more scrutiny. The same can be said for potential investors who might be put off by your need to minimize expenditures.
- Laying off Workers May Cause Day-to-Day Operational Issues: Your business will not require the same production and service skills if you downsize. Finding your company’s new balance, on the other hand, will take time.
Furthermore, you may experience unpredictably high demand that your smaller personnel is unable to meet. While seasonal or contract workers can help alleviate the impact of the fewer workforce on output, it’s an issue you’ll have to address sooner or later.
- Forgetting to be human when laying off staff could exacerbate the situation: According to Kathryn McDavid, CEO of Editor’s Pick, some managers forget to be human in the process of striving to do everything “perfectly.” It’s astonishing how many people stick to a script during notification meetings because they’re afraid of saying something incorrect. It’s even more remarkable how often they overlook the pleasantries, such as expressing gratitude for everything the employee has done for the team or affirming the individual’s abilities. It’s critical to show empathy when delivering such heartbreaking and often frightening news as layoffs.
It’s also crucial to assist employees in preserving their dignity. That’s why, except under exceptional circumstances, having a security guard lead an employee out the door should be avoided.
- Downsizing Can Affect Employee Performance: According to research published in the Harvard Business Review, downsizing reduces the creativity of surviving employees. This is a major concern for business owners when creative problem-solving is required.
Although this does not mean that you would be doomed to stagnation if you downsize your firm, you should consider how to mitigate the negative effects of reducing your remaining staff.