Rightsizing and Downsizing

The process of making a company or organization a more effective size, especially by reducing the number of people working for it is called rightsizing.

Rightsizing is a process of bringing an organization to an optimal size. The main purpose of rightsizing is to minimize the company’s cost to optimize its profits.

Downsizing gives a chance to the company for scaling its operations down to a more realistic and manageable size.

During periods of growth, companies tend to add personnel and equipment that serves immediate business purpose. Downsizing should be looked upon as a business decision and not as a personal decision.

A: Learn about:- 1. Meaning of Rightsizing 2. Significance of Rightsizing 3. Methods 4. Challenges 5. Suggestions for Effective Rightsizing.

B: Learn about: 1. Objectives of Downsizing 2. Process of Downsizing 3. Areas Affected 4. Impacts.

Rightsizing and Downsizing of an Organization or Company

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Rightsizing – Meaning, Significance, Methods, Challenges and Suggestions

Meaning:

In today’s constantly changing world, corporate are often forced to take tough decision, which may at times include closing down a particular business process. This poses an equally challenging situation where top manager has to right size the organization as well as handle survivor’s syndrome. The process of corporation reorganizing or restructuring their business by cost cutting, reduction of workforce or reorganizing upper level management is called rightsizing.

The primary goal of rightsizing is to get the company moulded properly to achieve the maximum profit. Although the word rightsizing is used in some organizations as a euphemism for downsizing as it sounds less drastic. Rightsizing is a proactive and needs to be a constant part of the process of managing an organization. It is basically related to the business strategy of downsizing or trimming redundancy in a workforce through layoffs.

The main purpose of rightsizing is to minimize the company’s cost to optimize its profits. In the process of rightsizing, the organization should first look at market needs and trends in technologies, alternative approaches and new ideas.

According to Cambridge Dictionary, “The process of making a company or organization a more effective size, especially by reducing the number of people working for it is called rightsizing.”

According to the Free Dictionary, “Rightsizing is a process of bringing an organization to an optimal size.”

Downsizing can be disruptive to on-going operations because people need to spend time undoing and redoing things that used to work. Even though employees going through it feel like they have failed somehow but downsizing is not at all personally related to any employee.

Further downsizing has nothing to do with how well the employees have done or how smart they are. The best way to respond to forced downsizing is usually to just live through it and get it over with as quickly and completely as employees possible can.

Downsizing should be looked upon as a business decision and not as a personal decision.

Downsizing gives a chance to the company for scaling its operations down to a more realistic and manageable size. During periods of growth, companies tend to add personnel and equipment that serves immediate business purpose.

So it is natural that a company business model or customer base will shift during the organization’s evolution and downsizing provides the chance to the company to bring its size down to something that can more efficiently serve its customers and remain profitable. It forces an organization to re-evaluate its business processes and rewrite its business plan accurately according to the current business status.

Downsizing also suffers from certain limitations or has some adverse effects on the organizations like, with downsizing misses out on the collective experience of the staff members that are let go. The company decision making is affected because the opinions and input of those departing employees will be missed.

If downsizing is due to outsourcing, then disgruntled former employees can be a source of public relations issues for the company. They can damage the company’s public reputation and that can lead to a drop in revenue.

On the other hand, the process of rightsizing is not immune to the external forces and like downsizing it does not wait for things to happen to the organization. Rightsizing is thus a proactive action and not the reaction to the external forces. Thus, rightsizing is a broader mix of cost cutting strategies whereas downsizing focus is on labor reduction.

Further with rightsizing several maneuvers are used for creating synergy like reducing operation costs, removing unnecessary jobs and reorganizing management structures. Rightsizing focus more on the performance of employees involved directly in production whereas downsizing typically centers on high earning employees in the middle level management.

Significance of Rightsizing:

1. Rightsizing managers know where things are probably headed, which help them in making more effective hiring decisions and provides direction for training/retraining current employees who want to learn new skills to prepare for the future.

2. Rightsizing help the managers to know their priorities and provides them a better chance to create an organization structure that is conducive to success.

3. Rightsizing help the management in taking the decision in relation to how many people and efforts are required for any set of activities. It provides the staff profile and resource plan as an outcome i.e. the information regarding how many personnel are required in each area in organization is provided by the rightsizing.

Methods/Techniques of Rightsizing:

There are four basic analytical techniques available with the organizations for rightsizing:

1. Ratio Analysis:

Ratio analysis is a very common technique, which is used by most of the organizations for rightsizing. It is a set of comparison. Ratio is used for the calculation of span of control for each position in the organization. It gives the organization, a clear picture of how many persons are required as per the workload of each department.

2. Activity Analysis:

It is a study of the amount of time that each person spends on their main activities. What people actually do and what their job description say they do, which are gathering dust in a drawer somewhere. Job titles are of little additional help. So the observation method can be used for calculating time spend by the personnel on their job. This will provide the information in relation to the requirement of optimum number of personnel in the organization.

3. Driver Analysis:

Driver analysis is an extension of ratio and activity analysis. This method studies the reasons or drivers behind the efforts of personnel. Because any change in these factors will lead to the change in the efforts of personnel. For example drivers for a call centre are the number of calls, flow of calls, service levels demanded, skill needed etc. These drivers will provide the details of number of personnel actually needed in the system.

4. Mathematical Modeling:

This technique is the complex of all the above techniques. Under this, mathematical models are developed for the calculation of exact and accurate number of personnel required in the organization.

Challenges in Rightsizing:

1. High Attrition:

Rightsizing most of the times leads to job insecurity among existing employees, which results in high attrition. Managing rightsizing well is all the more important as attrition of employees from high profit area or department is harmful for organization. So it is necessary for the management to ensure that rightsizing should not lead to the high attrition in the organization.

2. Offer Drop Out:

In case the news of rightsizing is communicated to media or posted on social sites, it may affect the decisions of candidates who are offered to join and can also lead to offer drop out. Further the clients can also cancel their project as organization secures several projects on the grounds that they have professionals.

3. Increase in Recruitment Cycle Time:

Rightsizing negatively affects the brand image of the organization. It poses lot of challenges on employer in recruitment and selection of new resources as candidates resist joining an organization which goes through such exercise.

4. Breach of Physical Security:

Affected employees also sometime show their resentment by causing physical damage to the organization. They resort to the activities like destruction of the organization’s asset or property.

5. Breach of Data Security:

Information is an important asset for all organization without which one cannot operate. Affected employees sometime leak out the important information to the competitors, which can lead to a further loss to the organization. Thus employee resentment often poses threat to data security as well.

6. Legal Suite:

Rightsizing, if not managed in a proper manner can pose a potential threat from legal perspective also.

7. Existing Clients:

Since all the employees are customer facing, another challenge is to ensure that no wrong message or miscommunication goes to the existing clients which could affect business relation with them.

Suggestions for Effective Rightsizing:

1. Establishing the Bridge:

The Connector – The organization can establish a stronger communication bridge. It should ensure proper communication with the employee about the business situation and keep them aware of what is happening. The rightsizing manager should explain the affected employees about the business situation and keep them aware of what is happening.

The organization should explain them the rationale and kind of support they will provide if things change. The communication with the affected employee can be made through their leaders whom they respect and trust.

2. Internal Redeployment:

Some of the affected employees can be placed to the other department where there are vacancies. It will bring the feeling of concern among the employees.

3. Outplacement:

Once the organization decides for the rightsizing, it should put all efforts to provide outplacement opportunities to the affected employees. It should reach out to the organizations with similar operations and should invite them to come to their premises for placements. This entire activity is purely driven by the networks and linkages of HR team and leadership.

4. Exit Operational Activities:

The rightsizing manager should ensure that its employees face no problems in terms of settlement and their queries are duly resolved. He should also ensure that end to end exit formalities and associated activities of separation of employees should complete within stipulated time.

5. Before the Day of Exit:

Prior to the day of exit, company should plan the entire exit day. Not only it should satisfy its employees by redeployment or outplacements, it should make their exit as painless as possible.

6. Exit Day:

On the exit day of affected employees, the company should conduct one on one with each and every employee to make them understand the situation, help them with their settlement and address their queries as smoothly as possible. The company should try to achieve zero forced attrition.

While corporate organizations have been facing rightsizing from a time immemorial, there has been little innovation in handling it. Most of the organizations perceive rightsizing as a threat and do it in the most forceful way it could be done. While doing it that way not only brings a major hit to the brand image of the organization, it also acts as a major blow to the organization’s people vision and mission. Thus creating a distrust among the survivors and society at large.

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Downsizing – Objectives, Process, Areas and Impacts

Objectives of Downsizing:

The usual objectives of downsizing are:

i. Reducing overheads.

ii. Altering the organisational structure. In other words, to reduce the number of levels, so that decision-making takes less time and bureaucracy is reduced.

iii. Reducing organisational politics. Troublemakers can be removed during downsizing.

iv. Outsourcing a certain activity.

v. When a firm wants to concentrate on its core activity, it may cut the number of employees.

Process of Downsizing:

Once the organisation decides to downsize, it is important to make the process structured and sequential. If downsizing is linked to a broad organisational change and re-engineering strategy, the possibility of its acceptance by employees is high and the adverse effects can also be minimised. There are certain rules which, if followed, will make downsizing a smooth exercise.

Rule 1 – There is a greater need for communication and co-ordination during downsizing. Various tools of communication such as letters, memos, notices, etc. can be used so that the message reaches everyone. Care should be taken to see that communication is personalised. According to a survey conducted by Watson Wyatt, impersonal communication in the form of letters and memos was ineffective in 79 per cent of the downsizing companies.

Rule 2 – Think laterally and search for various alternatives to downsizing. Every effort should be made to try other options. The employees must be convinced that the organisation is downsizing as a last resort, after having tried out all other possibilities.

Rule 3 – Organisations have to be generous and justified in their action. They have to involve employees in the downsizing process and explain to them the rationale behind the exercise. The criteria for removing people should be fair and justified. Employees should also have the right to appeal against the decision.

Rule 4 – Organisations have to take care of people who are leaving the organisation. They should be provided outplacement services along with severance benefits. The employees should be notified well in advance and if possible, personally by the HR manager.

Rule 5 – After the downsizing exercise, make the required changes in the positions and redirect the employees’ efforts. Organisations have to help survivors to adapt and move on. After a small pause following downsizing, employees have to be briefed on what is expected from them. Their roles can be modified, if needed.

The resulting changes in the firm’s business environment should be explained to the survivors. Quality improvements are only possible when downsizing is followed by training. Hence, it is important to invest in employee training and development.

Areas Affected by Downsizing:

Following are some of the areas that are affected mostly by downsizing:

i. Employee’s attitude and morale

ii. Quality

iii. Profitability

iv. Society

v. Customer service

i. Effect on Employee’s Attitude and Morale:

Downsizing has considerable impact on the morale of the employees. It leads to distrust and dissatisfaction and employees feel stressed and demotivated. In a study conducted by the American Management Association, it was found out 69% of firms reported that their employee’s morale was down, 42% firms had registered increased resignations and voluntary retirement, 36% said they had a marked increase in turnover and 13% reported increase in disability claims. In all the cases, the negative impact was seen to last for more than one year.

When firms decide to cut down their manpower, employees who are not axed perceive an increase in workload and long working hours. Improper or lack of training prior to downsising makes the workers feel demoralised and stressed out.

ii. Effect on Quality:

When firms downsize, some of the best employees in the organisation also axed. The reason can be linked to the downsizing process. During a downsizing exercise, one of the first steps is voluntary attrition. During this period, some of the best minds may leave the organisation because they are confident of getting better jobs elsewhere.

In some cases, downsizing has become more of a ritual, which preys on the minds of even the best employees. Employees in order to play safe may grab the first available opportunity for voluntary attrition. Finally, the severance terms offered by some companies are extremely attractive that even the best of employees are tempted to leave the organisation.

iii. Effect on Profitability:

According to some researchers, the effect of downsizing on the firm’s profitability, have been mixed. In most of the companies, the objective of increase in profit was not met, though there was a decrease in expenses.

Watson Wyatt reported that out of 1000 firms which had downsized, only one-third reported an increase in profits, whereas only a small number of firms reported increase in the return to shareholders. A study by AMA, concluded that there was no direct relationship between downsizing and profitability in the long run. In fact, it has been found that downsizing reduces the creativity of the employees by disrupting the working relationships between the members.

iv. Downsizing and Society:

Experts in the field of human resources and other social sciences hold different views on the effects of downsizing on the society. One view is that downsizing has adverse effects not only on employees’ morale and attitude but also on their families and society as a whole. An empirical relationship has been established between downsizing and social evils like drug abuse, criminality and alcoholism.

It is also believed that downsizing results in health disorders, depression and suicides. On the other hand, some people think there is a positive side to downsizing. They argue that the society benefits in the long run due to downsizing, the rationale being that it helps in better matching of jobs and job-seekers. It fuels economic growth by making people take more risks. Proponents of downsizing are against the protectionist approach of the Government because they feel it will prove to be a disaster in the long run not just for one company but for the industry as a whole.

v. Effect on Customer Service:

Downsizing affects customer service because it decreases worker participation. Customer service executives may adopt an indifferent attitude towards work in the post-downsizing period. In a study conducted in an Australian bank, by Professor, Stephen Deery, it was found that quality of customer service was better at banks which gave more autonomy to its employees, and where decision-making was decentralised and work stress was low.

In the post-downsizing scenario, it was noticed that these attributes at workplace were considerably lower and there was greater frustration and absenteeism among the retained employees. Eventually, the cost saving due to downsizing was offset by the decrease in employee motivation, job satisfaction and the subsequent decrease in productivity.

Impacts of Downsizing on Employers:

Positive Impacts of Downsizing on Employers:

(a) Organizations improve their profitability by downsizing the workforce as the fixed expenses related to the workforce get reduced.

(b) Lean operations give more efficiency to the organization. The organization can concentrate on few existing projects and improve their market share rather than dividing their attention among many projects.

(c) In times of economic crisis and intense competition, downsizing helps organization in cutting costs at every level.

On Employees:

(a) Though downsizing is bad for all employees yet it allows them to think of learning new skills and getting better placements than the existing one.

(b) Some employees may think of starting their own small enterprise with the help of financial support from government or financial institutions.

On Society:

(a) Under employed labour which yields very low output is laid off and put to other good uses. This resource can produce better output in other ventures.

(b) Only the fittest employees survive, therefore, the economic resources used by not-so-fit are saved. The fittest organizations keep the fittest employees for economic gains and the non-per­formers are made to exit and learn more skills for other jobs.

(c) Lean organizations are better because they can offer better professional services to their customers. It has been noticed that no customer is dissatisfied with middle and small sized organiza­tions.

Negative Impacts of Downsizing on Employers:

(a) It is very hard for employers to lay-off employees who have been trained by them. If these employees are required after a couple of years, they may never join their old employer in spite of an attractive package.

(b) Employer cannot boost up the morale of the existing workforce when he downsizes. The workforce which is retained by him also starts to mistrust him and stops being loyal to him.

On Employees:

(a) Workers lose their jobs and feel frustrated about it. The inter­personal relations with the company take a big hit. Workers always feel that they are paying price for incompetent manage­ment. They and their families both suffer.

(b) Employees also stop trusting the management and keep looking for jobs outside.

(c) There is lack of self confidence in new as well as old employees and they go risk averse. They do not take any initiative in the organization and project a defensive attitude always.

On Society:

(a) Society faces unemployment of skilled as well as unskilled workforce. This can be very injurious to the civic life.

(b) Government is overburdened by corporate downsizing because it has to take care of unemployed people. It may have to absorb them in some ventures or train them for others or allow them loans at marginal rate to start some enterprise on their own. Social welfare expenses of government get greatly increased.

(c) Jobless employees may resort to unrest in the industry. They may go so destructive that at times very harsh measures may have to be taken to control situation of strikes, lockouts etc.

(d) There is a general fall in the standard of living of people in the society because of workforce downsizing. Jobless workforce does not have enough resource left for even necessities of life. They, therefore, cannot think about comforts and luxuries in life.

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