Downsizing is the process of laying off multiple employees in the organization at the same time due to reasons like reducing cost per employee, organizational restructuring, elimination of positions, unforeseen challenges, etc.
In this blog, let us discuss in detail-
- What is Downsizing in organization?
- Benefits of downsizing in organizations
- Example of Downsizing
- What are three types of downsizing strategies?
What is Downsizing in Organization?
Downsizing in organization became the buzz word around global recession period, COVID era, merger and acquisitions and others.
Downsizing basically involves the reduction in headcount to reduce total operational cost. It could be in the form of voluntary separation, early retirement programs or involuntary termination through layoffs.
Difference Between Downsizing and Layoff
Downsizing and layoffs are related concepts but have different meanings. Layoff can be said to be one of the ways of downsizing the workforce. Downsizing is a comprehensive organisational strategy aimed at permanently reducing the headcounts for a specific purpose while layoff refers to permanent or temporary dismissal of employees majorly at the times of economic downturns.
In layoffs, firing existing employees is a necessary step, however, in downsizing, a company may or may not fire existing employees.
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Benefits of Downsizing in Organizations
Downsizing is a heart wrenching roller-coaster ride for HR professionals. Pre, during and post you might feel emotionally exhausted but at the same time you have to be available for your remaining workforce and help them understand the consequences of downsizing.
However, if you can get through the downsizing process with as less layoffs or none, it could benefit in the following ways-
- Cost Optimisation: Majorly organisations downsize for reducing costs and increase their profitability by minimising excess workforce, cutting off unnecessary expenses and eliminating additional perks
- Improve Efficiency: Many companies re-evaluate their workflows, operations and processes when downsizing their workforce. After that they focus on core functions and turn down on other non-essential tasks.
- Well-Defined Roles and Responsibilities: With limited employees in company, HR professionals can strategically define roles and responsibilities, leading to focused resources and tasks
- Responsive to Market Trends: When company downsize their headcount, they showcase their agility and flexibility to adopt market changes and economic conditions
- Better Financial Health: Financial stability can be improved by downsizing as it would lead to minimising expenses. This could result in improved credit ratings, borrowing power and strengthened position in the industry
- Enhance Innovation: When the workforce is reduced, there might be better collaboration and communication between the teams, thereby they could focus on better ways of working as well as on innovative methods
Examples of Downsizing Strategies
As downsizing strategies have been implemented so many times in previous years, below we share some examples with you:
- General Motors: In the late 2000s, General Motors downsize their organisation to cope with the global financial crisis and subsequent bankruptcy. They closed several manufacturing units, laid of thousands of workers, restructure their processes and more to manage their financial health and remain balanced at time of crisis
- IBM: In the mid-1990s, IBM incorporated a major downsizing process to maintain their position amid skyrocketing competition and constantly changing technological landscape. Their downsizing exercise included major layoffs and selling of business units
- Hewlett Packard (HP): HP has undergone multiple downsizing exercises amid 2000s and 2010s and especially in 2012 that became the buzz at that time as it included the layoffs of around 27,000 jobs.
- British Airways: When the unprecedented event of COVID knocked the workplace doors worldwide, many companies underwent [SS1] [SS2] downsizing exercise including British Airways. They had to downsize because the travel industry was severely impacted. The same forced them to ultimately reduce their revenues and business operations. At that time, they eliminated almost 1200 jobs.
In 2023, due to multiple reasons and slowed down global market trends, many tech giants like Google, Amazon, Microsoft and more implemented downsizing exercise.
What are Three Types of Downsizing Strategies?
Majorly downsizing strategies are categorised in three types:
- Voluntary Downsizing, when organisations incentivize employees to leave their jobs.
Incentivization may include early retirement packages, payouts for unused leaves and more.
This strategy is generally implemented when companies want to reduce workforce size with no or minimal disruption.
- Involuntary downsizing, when organisations do not offer any incentive before laying off their employees
This strategy is generally implemented when organisation is in a crisis situation, and they quickly want to take actions to reduce headcount. Involuntary downsizing might be really disruptive and comes with tons of repercussions if not implemented carefully.
- Right Sizing, when a company focuses on minimising costs by eliminating positions that are not necessary.
This could be the annual affair or periodic exercise of companies while planning their budgets, targeting a focused approach or restructuring organisation. This strategy is generally balanced and less disruptive.
Downsizing and Human Resource Management
During the downsizing process, future-forward HR professionals like you play a major role acting as the bridge between C-suite, leaving and remaining employees. You have to break the news, ensure it is not too harsh on the employees leaving, motivate your present workforce and strategise to completely optimize the results of downsizing exercise.