Full Project – Impact of employee downsizing on organization

Full Project – Impact of employee downsizing on organization

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One the primary reasons for employee downsizing is to reduce costs. Employee payroll counts as a liability on the company balance sheet and, therefore, reduces the owners’ equity. The retained earnings of a company are affected by the amount it pays out in payroll, and removing this obligation is one way to cut costs. Aside from payroll, employee benefits are also costly to companies, as are the operating costs associated with overproduction.

Companies sometimes downsize their employee base to increase productivity. This may seem counterintuitive on the surface, but some instances exist where this would be advantageous. For instance, if a company knows that it can increase the output of individual workers while remaining constant with its productivity, this can be advantageous for cost reduction. However, a company may also decide to downsize to increase productivity by replacing workers with sophisticated equipment that can do the same job.

Downsizing the number of employees a company has generally signals that some restructuring and changes are underway. These changes generally take place for increasing profitability of the company. If shareholders and other investors perceive that the company will be making changes that increase its profitability, it will increase the value of company stock. This can result in more investors coming on board or current investors increasing their shareholdings in the organization. In either case, downsizing can increase the company’s perceived value



1.0     Background

Organizations of virtually every type face an environment of continuous and accelerating change. A pervasive response to this experience is some form of downsizing. It has affected hundreds of organizations and millions of workers since the 1980s. Downsizing refers to activities undertaken by management to improve the efficiency, productivity, and competitiveness of the organization by reducing the workforce size.

Over the past couple of decades, employee downsizing has become an integral part of organizational life. Global competitive pressures coupled with ever-changing demand conditions have caused firms to critically examine their cost structures, including those associated with human resources.

Due to the globalization of business, organizations are able to develop a number of approaches by which to employ human resources, technology, and capital to implement innovative projects in different parts of the world. They are able to derive maximum advantage due to these possibilities. While the larger goals appear justifiable and in the interest of most stakeholders, they often lead to frequent changes at the organizational, functional, and individual levels.

At the organizational level, such changes can lead to closure of businesses, offshoring, merging with another organization, outsourcing, restructuring, etc. At the functional level, it can imply changes in the availability of resources, changes in the scope of activities, etc. As a sequel to these developments, employees can be redeployed, transferred, rendered redundant, or let go within a very short span, without adequate preparation for these changes. Such changes take their toll in terms of organizational productivity, nature of employer-employee relationships and the associated social costs (Noer 2004). People who contribute to the organizational goals are the organization’s assets. The challenge is to manage employee exit without disrupting the organization’s functioning. Those individuals who lose jobs are the hardest hit. For the affected employee, the emotional trauma of losing a job is very difficult to cope with. Aside from the financial implications of a job loss, they have to reconcile with the loss of self-esteem, self-confidence, and a breach of trust between the employer and the employee. Along with the individual, his/her family also gets deeply affected with the involuntary job loss of a family member. The pain is not limited to the individual alone but affects a number of others. The effect is also felt by other employees who remain in the organization as they suffer from the guilt and are also faced with the fear of job insecurity.

The fundamental reason to resize the organization is to improve organizational performance and to reduce costs of operation. While these changes are expected to fetch significant gains for the companies in the long run, an analysis of corporate experiences of downsizing shows that such measures are not always implemented with careful consideration of all the implications. Downsizing also brings, in its wake, a number of associated hidden costs, which companies tend to overlook in pursuit of short-term gains. The flip side of downsizing is that the organizations lose expertise, skills, knowledge, experience and valuable relationships, which walk out of the door every time somebody leaves. A number of alternative approaches can be implemented to achieve the over-riding goal of enhancing business performance. At the same time, it is true that downsizing in many cases is an inevitable option. However, downsizing should be considered not as the first but the last option. If the axe has to fall, it should be preceded by a careful consideration of the consequences of such a drastic action. This study investigates the circumstances which compel organizations to downsize and its impact on organizational performance.

While some researchers likeWorrel et al., (2001), Fernando Munoz-Bullon and Maria Jose Sanchez-Bueno, (2008) have provided evidence of the stock market reaction to downsizing, others likeDeMeuse et al.(2004) have focused on the effect of downsizing on profitability. In theory, downsizing is presumed to have positive outcome for the organization. In many situations, downsizing did accomplish what management had intended, and in others, unintended and negative consequences resulted. Although organizations are continuing to use the downsizing tactic as a cost cutting strategy, they are beginning to weigh the relative costs and a benefit against the negative impact downsizing has on employees.


1.1     Statement of the Problem

Researchhas showneconomic and technical factors as causes of organizations abandoning deeply institutionalized practices. The change in consumer demand causes organizations to adopt practices opposed to long-held principles. Poor performance leads firms to abandon long-maintained practices. Environmental stimuli, including product demand, technology, and the competitive environment, transform organizational strategy and structure.

As a result of these changes, many companies have resorted into the downsizing their human resources in order to cope with economic pressures. But what most of these companies do not realize is that downsizing does not always lead to savings in reality or increase in the market worth of the company. On the contrary, the downsizing companies may be branded anti-people. It usually leads to repetitive downsizing and results in the loss of employee morale and loyalty and thereby affects overall productivity levels.

1.2     Purpose of the Study

The aim of this study is to see the impact of employee downsizing (including layoffs, retrenchments, severance and rightsizing) and subsequent organizational performance. Other objectives include:

  1. To investigate downsizing approaches/strategies and their employment implications.
  2. To study the association between organizational downsizing and subsequent problems in employees.
  3. To examine the relationship between organizational downsizing and organizational performance.
  4. To examine the reasons why organizations downsize.
  5. To study if downsizing reduces organizations spending.

1.3     Research Questions

In achieving above objectives the following research questions are raised:

  1. Is there a relationship between organizational downsizing and organizational performance?
  2. What are the downsizing approaches and their employment implications?
  3. Is there significant difference between organizational downsizing and subsequent problems in the organization?
  4. To what extent has downsizing reduced organizations spending?
  5. Does downsizing make organization achieve optimum results?

1.4     Research Hypotheses

To provide answers to the research questions the following hypotheses will be tested:

H0:    That downsizing does not lead to cost cutting for organizations.

Hi:     That downsizing leads to cost cutting for organizations.

H0:    There is no significant relationship between organizational downsizing and organizations profitability.

Hi:     There is significant relationship between organizational downsizing and organizations profitability.

H0:    There is no significant difference between organizational downsizing and productivity.

Hi:     There is significant difference between organizational downsizing and productivity.

1.5     Scope and Limitation of the Study

Most hiring managers have every intention of complying with employment laws but find that the time needed to keep abreast of the nuances of employee retention in areas such as gender, religion, national origin, age, marital status, physical disability or criminal record is hard to find. This problem coupled with economic recession and fall in demand or price. The research is limited by the availability of comparable research data across studies. The scope   of this study therefore, is to see the effect of this on general organizational performance.

1.6     Definition of Terms

Organization:       ­It’s a social unit explicitly established for the achievement ofspecific goals.

Employee Downsizing:   Employee downsizing is a planned set of organizational   policies and practices aimed at workforce reduction with the goal of improving firms’ performance. Thus, we view downsizing as an intentional event involving a range of organizational policies and actions undertaken to improve firm performance through a reduction in employees (Datta et al, 2010).

Rightsizing:          This is the process of a corporation re-organising/restructuring their business by cost cutting, reduction of workforce or re-organising upper-level management. The goal is to get the company molded properly to achieve the maximum profit without ruthlessly downsizings.(thefreedictionary.com)

Layoff:                (in British and American English), also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or (more commonly) a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs. Originally the term layoff referred exclusively to a temporary interruption in work, as when factory work cyclically falls off. The term however nowadays usually means the permanent elimination of a position, requiring the addition of “temporary” to specify the original meaning.

Outsourcing:        This is the contracting out of a business process, which an organization may have previously performed internally or has a new need for, to an independent organization from which the process is purchased back as a service. Though the practice of purchasing a business function—instead of providing it internally—is a common feature of any modern economy, the term outsourcing became popular in America near the turn of the 21st century. An outsourcing deal may also involve transfer of the employees and assets involved to the outsourcing business partner.

Severance:           It means to break up relationship between employee and employer.

Redundancy:        Dismissal of an employee for lack of available work.


Performance:       Comprises the actual output or results of an organization as measured against its intended outputs (or goals and objectives).According to Richard et al. (2009) organizational performance encompasses three specific areas of firm outcomes:

  1. Financial performance (profits, return on assets, return on investment, etc.)
  2. Product market performance (sales, market share, etc.); and



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Full Project – Impact of employee downsizing on organization