HR downsizing

The Essence of Downsizing: A Review of Literature

Prantika Ray & Sunil Maheshwari

Prantika Ray (E- mail: prantikar@iima.ac.in) is Doctoral Scholar & Sunil Maheshwari (E-mail: sunilm@iima.ac.in) is Professor, Human Resources Management Area, Indian Institute of Management Ahmedabad 380015.

The process of downsizing has often been considered as a one- time activity that is disconnected from the processes and the out- comes associated with the activ- ity. Since the strategies, organi- zational, industrial and environ- mental characteristics play a cru- cial role in determining the suc- cess and/or failure of the downsizing process, a piece-meal approach to the research on downsizing is not enough. This paper thus presents a holistic view of the downsizing process where the dynamics that ensue during the downsizing are eluci- dated in a framework. This pa- per further discusses certain im- plications for practitioners and provides scope for future research for the researchers.

Introduction

The aftermath of the process of downsizing by organizations is a very cru- cial point of concern. Several research- ers have spoken about the possible out- comes in relation to firm’s operational performance such as organizational learning capacity, change in the organi- zational culture (Cascio, 1993), techno- logical advancement (Maheshwari & Kulkarni, 2003), improvement of the organization’s competitive position (Amabile & Conti, 1999), financial and market outcomes such as market valua- tion (Love & Kraatz, 2009; ), short-term market reaction (Love & Kraatz, 2009), signal for potential synergies (Bowman & Singh, 1993; Cascio et al., 1997; Demuse et al., 1994), and willingness for future acquisitions (Krishnan, Hitt & Park, 2007). However, after the organi- zation has been downsized, additional challenges are made in handling the re- maining human capital in the organiza- tion. In this paper, we have concentrated on the outcomes of downsizing based on current and potential employees. It is vi- tal for an organization as an employer to consider various factors to ensure high commitment and low turnover intentions of the present employees and the attrac- tiveness of the organization for the po-

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tential job-seekers. These factors are firm characteristics, industry character- istics, individual characteristics (em- ployee and their supervisors); possible outcomes of various downsizing pro- cesses, and various steps implemented by the organization to combat negative ef- fects of downsizing.

What Is Downsizing?

Downsizing has been defined as “the planned elimination of positions and jobs, which does not include the normal retire- ments or resignations, but the voluntary severance and early retirement pack- ages” (Cascio, 1993). It refers to a de- liberate intention of laying off a certain number of workforce from the organiza- tion. Organizational decision makers pro- vide various reasons behind downsizing, which are the following:

Downsizing is basically considered a mode to remove the redundan- cies in the organization, and it is mostly considered in the terms of headcount reduction.

(a) To reduce costs (Gandolfi & Hansson, 2011; Sahdev, 2003), (b) to improve the speed of decision-making (Cameron, 1994), (c)to improve one’s competitive strategy (Levitt, Wilson, & Gilligan, 2008; Macky, 2004), (d) to enhance communica- t ions within the organization (Cameron, 1994), (e) to maximize shareholder returns (Escalante, 2001), and (f) to improve organiza- tional efficiency (Zyglidopoulos,

2003) and productivity (Cameron, 1994). Downsizing is basically con- sidered a mode to remove the redun- dancies in the organization, and it is mostly considered in the terms of headcount reduction; but it can also be a form of revamping the job de- sign and revisiting and redesigning certain jobs (Cascio, 1993).

Forms of Downsizing

Downsizing can thus be broadly cat- egorized into three types:

Workforce Reduction: Organiza- tions have taken up workforce reductions not only to reduce the salary, training, promotion, and rewards related to the costs in the organizations but also as an attempt to create a ‘lean’ organization. The workforce reduction could be in terms of hiring freezes, layoffs, volun- tary retirement, and golden handshakes (Howard, 1988; Maheshwari & Kulkarni, 2003; Tourish, Paulsen, Hobman & Bordia, 2004). The first form of workforce reduction unlike the other three is the stoppage of the recruitment into the organization, and thus barring the entry of the potential employees and keeping the current employees unaf- fected (Feldman, 1996). The downside of hiring freezes is the signal to the job market about the difficulties in the func- tioning of the company, which will affect the future jobseeker’s attraction to the organization (Feldman, 1996). The effec- tiveness of voluntary retirement and golden handshakes is decided by the tim- ing, the composition of the people asked to leave, and the rationale behind the re-

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duction in workforce. If the employees in the organization are nearing their re- tirement age, their commitment and pro- ductivity probably decrease, the early departure of such employees enhances the proportion of highly motivated and productive employees in the organization (Howard, 1988).

Work Redesign: Organizations take up work redesign to eliminate redundant jobs and units, and the target of the re- design is to define better job roles and refine the work done by the employees. The redesigning of work could be in the form of abolition of functions, merger of units, job redesign, and reduction of work hours (Gandolfi, 2005). Work redesign is based on two parameters of work in the organization—autonomy and workload; the primary aspect is to bring change in the two parameters (Mishra & Spreitzer, 1998). Gandolfi (2005) discussed the depth and breadth of the downsizing strategies; the four levels of downsizing with the objective of work redesign are layer elimination, unit combination, prod- uct removal, and process arrangement. With the merger of organizations, there are instances where similar units or prod- ucts in both the organizations are merged, and thus, these redundancies could either be completely eliminated or redesigned with newer process roles or objectives. Griffin (1991) showed that the work re- design has no immediate short-term ef- fects, but in the long term, it affects em- ployees’ behavioral outcomes as well as the organizational outcomes.

Systemic Strategy: This strategy, un- like the other two, aims at eliminating

workforce or at changing the organiza- tional culture and brings about attitudinal differences in the employees. The strat- egy aims at a bottom-up approach and in- creases the accountability of the entire organization (Cameron, 1994). Cascio (1993) discussed the systemic strategy, which being a long-term strategy leads to the development of a continuous improve- ment in the organization. These strategies can vouch for a better employer brand, as it sends a signal to the potential em- ployees about the organization’s objectives to develop an environment for the employee’s career advancement.

Process Elements & Outcomes

Organizational Commitment and Turnover Intentions: Downsizing is implemented through workforce reduc- tion, and hence, it is often followed by role overload and lack of role clarity. In addition, the survivors or the employees retained in the organization exhibit low levels of organizational commitment and high turnover intentions (Allen, Free- man& Russell , 2001; Waraich & Bharadwaj, 2012). Thus, organizations implementing the downsizing processes through work redesign strategy further intend to develop clearer roles for the employees, reduce the role overload, and enhance role clarity that would lead to higher commitment levels and lower turn- over intentions (Ugboro, 2006). Hence:

Downsizing is implemented through workforce reduction, and hence, it is often followed by role overload and lack of role clarity.

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Proposition 1: Organizations imple- menting the downsizing strategy through utilization of the workforce redesign strat- egy would report higher levels of com- mitment and lower turnover intentions compared to the workforce reduction strategy.

Organizational identification is a step ahead of organizational commitment, where the employees incorporate the organization’s values, norms, etc., into their self-identities, and the self-defini- tion is tied to the collective (Knippenberg & Sleebos, 2006). Organizational com- mitment is found to be strongly related to the perceived organizational support than the organizational identification be- cause the former considers the individual and the organization as two distinct enti- ties. Organizational commitment has been found to be more closely related to turn- over intentions than organizational iden- tification owing to the greater associa- tion of organizational membership in the former (Knippenberg & Sleebos, 2006; Gautam, Dick & Wagner, 2004). Hence:

Proposition 2: Downsizing would be more closely related to organizational com- mitment than organizational identifi- cation.

Trustworthiness of the Leader: Cameron (1994) discussed the impor- tance of visibility, accessibility of the leader, and the frequent interactions to confront the pain and discomfort in the organizational environment. The individu- als who remain in the organization after the downsizing process exhibits work- place behaviors based on the leadership

characteristics in the organization. If in- dividuals perceive the competency of their leader, they consider the manage- ment can improve the competitive stance of the organization (Spreitzer & Mishra, 2002). One major dimension of trustwor- thiness of the leader is the employee’s awareness about the goal of the organi- zation, i.e., the goals that the organiza- tion seeks to achieve and the means by which they would be achieved (Cho & Park, 2011). The second component of trustworthiness is dependent on the amount of autonomy given to the employ- ees (Cho & Park, 2011). However, im- mediately after the organizational downsizing, it may not be feasible to pro- vide autonomy owing to the sparseness of resources and dipped financial perfor- mance. At that point, communication about the various measures taken in the organization, supervisor’s attention to- wards job redesign, and reduction of work overload would increase the trustworthi- ness in the leader.

Proposition 3a: The leader’s accessibil- ity is strongly related to the trustwor- thiness of the leader.

Proposition 3b: The leader’s competency is strongly related to the trustworthi- ness of the leader.

Proposition 3c: The greater the commu- nication about the organization’s goals to the employees, greater is the trust- worthiness of the leader.

Presence of Unions: Appelbaum, Simpson, and Shapiro (1987) discussed in their paper that wrong communication about any downsizing decision in the

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unions might lead to possible disruptive behavior and employee unrest. The time and content of the news as well as the situational factors play a crucial role in determining the delivery of the notifica- tion of the downsizing plan. Hellgren and Sverke (2001) discussed in detail the ef- fect of union part icipation in the downsizing process. The proper commu- nication about the reasons for downsizing, educating the employees about the inter- ventions, and organizational strategies following the downsizing process would increase both the union satisfaction as well as the well-being of the employees.

Wrong communication about any downsizing decision in the unions might lead to possible disruptive behavior and employee unrest.

Managerial Discretion: Elvira and Zatzick (2002) discussed the role of managerial discretion in the case of in- voluntary layoffs. But if we consider the voluntary exits in the form of severance pay and early retirement incentives, the managerial discretion is lost to a greater extent. The reason behind it is that individual’s decision about staying or leaving the organization depends on the individual’s interests and the benefits re- ceived from the organization.

Perceived Justness of the Process: Employees eligible for the voluntary workforce reduction program expect fairness in the process in terms of ad- equacy of the provisions and communi- cation about the downsizing process. Al- though they are not the ones who leave

the organization, the probability of being targeted in the further downsizing pro- cesses makes the employees receptive about the fairness of the measures taken by the organization. The fairness is based on the amount of input an individual has put in the organization and the provisions received in return, in other words, the distributive justice. Those who perceive the process to be fair would show higher levels of commitment and lower turnover intentions. Hence:

Proposition 4a: Survivors who find the provisions taken up in the downsizing process adequate would show higher levels of organizational commitment and lower turnover intentions.

The survivors often feel the loss of control over the situation, and so an en- vironment of uncertainty develops in their workplace (De Vries & Balazs, 1997). In the process of the workforce reduc- tion, if only the workforce is eliminated without any redefinition or elimination in the job, there can be incidences of high stress in the organization. The primary reasons behind it are work overload, role ambiguity, etc. (Brockner, 1992). This could even lead to lower perceived or- ganizational support, lower organizational commitment, higher burnout, and greater intentions to quit (Tombaugh & White, 1990; Ugboro, 2006). Hence:

Proposition 4b: Greater the perceived uncertainty in the workplace, lesser is the perceived organizational sup- port.

Proposition 4c: Survivors perceiving un- certainty in the workplace would ex-

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hibit lower organizational commit- ment.

Proposition 4d: Survivors perceiving un- certainty in the workplace would ex- hibit greater intentions to quit.

Proposition 4e: Survivors perceiving un- certainty in the workplace would ex- hibit higher burnout.

Perceived Degree of Threat: Lazarus and Folkman’s framework elu- cidates the stress in the post-downsizing environment, especially when there is a limitation on the autonomy of the individu- als, increase in workload and an uncer- tainty of further layoffs in the organiza- tion. These factors lead to an increased perception of threat in the minds of the individuals (Brockner, Spreitzer, Mishra, Hochwarter, Pepper & Weinberg, 2004). Hence:

Proposition 5a: Individual’s perceived degree of threat is related to work overload.

Proposition 5b: Individual’s perceived degree of threat is related to the in- creased uncertainty in the environ- ment.

Perceived degree of empowerment: Brockner et al. (2004) explicated in their paper that the perceived control of the post-layoff situation could help the sur- vivors to cope with the perceived threat of well-being that might arise due to the uncertainties in the workplace and job roles. Mishra, Mishra and Spreitzer (2009) developed a matrix on two dimen- sions, namely, the degree of trust in man- agement and the degree of empower-

ment, and concluded that employees high on both the dimensions provided the most constructive responses and also acted as “active advocates” by giving useful in- sights for the development of the organi- zation. An important point highlighted in this paper is that high degree of empow- erment should be coupled with high trust in the management; otherwise, the re- sponses could be detrimental.

High degree of empowerment should be coupled with high trust in the management; otherwise, the responses could be detrimental.

Career Life Cycle Stages- Early- career, Mid-career, and Late-career: The effects of downsizing have been found to be varying on the individuals at different stages of their career life cycle (Feldman, 1996). The mid-career em- ployees, who are in the pursuit of reach- ing the top management roles, are greatly affected by the downsizing process (Feldman, 1996). The relationship be- tween job involvement and organizational commitment is maximum in the early- career stage (apprenticeship) and mini- mum in the late career stage (establish- ment stage) (Jans, 1989). Thus, the em- ployees at different stages of their ca- reer have different preferences. Hence, the assistance provided after the downsizing at various stages of career would be different. A person in the ear- lier stage of the career would seek a job with high job involvement, whereas a person in the latter stage would look at pension benefits (Jans, 1989). However, some extremely competent employees

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are lost in the “open window” or golden handshake program, and so there are organizations that even practice mana- gerial discretion through acceptance of VRS applications, but the firm perfor- mance in India shows not much improve- ment (Maheshwari & Kulkarni, 2003). In this situation, it is vital for an organiza- tion to carefully develop a plan for cat- egorizing the employees whom they defi- nitely want to retain and the ones who can be offered VRS. The most critical factor that needs to be considered be- fore applying managerial discretion is the individual’s willingness to stay in the or- ganization. Despite the competencies that the individual possesses, if an individual prefers voluntary retirement instead of staying in the organization, the idea of retaining the individual may not be fruit- ful.

Proposition 6: The managerial discretion would be significantly related to the exit of an employee from the organi- zation. The relationship is moderated by the voluntariness of the process in such a manner that the managerial discretion is predominant in the case of an involuntary turnover, whereas in the case of voluntary turnover, other factors such as severance package or the presence of unions predominate are also considered.

Organizational Characteristics

Industry Dynamism and Attractive- ness: Downsizing has a negative effect on learning and innovation as well as there is a loss of the social capital that the organization had built over the years

(Amabile & Conti, 1999; Fisher & White, 2000). Harrigan and Dalmia (1991) placed human capital in high-tech organization above any other organiza- tional assets, thus, attributing importance to the knowledge that gives an edge to the innovation-driven industry. This type of industry requires job autonomy and creativity (Amabile & Conti, 1999; Tzafrir & Eitam-Meilik, 2005). Organi- zations having high R&D intensity are extremely dynamic and base their com- petitive advantage on skilled human capi- tal, hence, it is observed that these or- ganizations have greater negative impact on their performance compared to the ones that are low on R&D intensity (Guthrie & Dutta, 2008). These organi- zations have high creativity and thus downsizing would act as an impediment on the creativity owing to increased workload pressures (Amabile & Conti, 1999). Organizations with high capital intensity and growth have been found to exhibit greater negative relationships between the downsizing process and the firm outcomes (Guthrie & Dutta, 2008). Hence:

Organizations with high capital in- tensity and growth have been found to exhibit greater negative rela- tionships between the downsizing process and the firm outcomes

Proposition 10: Workforce reduction downsizing strategy will have a greater negative impact on the cre- ativity of a high-tech organization as compared to a work redesign strat- egy.

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Organization’s Brand Image as an Employer: Perceived organizational sup- port is the individual’s perception of the organization’s support and care-taking characteristics that are aimed towards the individual’s well-being (Eisenberger, Huntington, Hutchinson & Sowa, 1986). It is observed that organizations adopt- ing workforce reduction strategies exhibit less attraction for job-seekers, and this relationship is mediated by the perceived organizational support (Kammeyer- Mueller & Liao, 2006). Rhoades and Eisenberger (2002) enumerated the three antecedents of the perceived organiza- tional support—fairness, supervisor sup- port, and organizational rewards and job conditions. Kammeyer-Mueller and Liao (2006) further discussed that the assis- tance, participation, and communication are the three strategies that organizations undertake to ensure that the impact on the employees is as minimal as possible. Prior communication about workforce reduction to the employees makes them consider the procedures to be transpar- ent and fair and thus induce procedural fairness. Moreover, work redesign is aimed at developing well-defined job roles in the organization. The well-estab- lished roles lead to a reduction in work overload and enhancement of job au- tonomy, thereby increasing the perceived organizational support (Rhoades & Eisenberger, 2002). Thus, with the en- hancement in perceived organizational support, one can expect an increase in job-seeker attraction.

Proposition 7a: Workforce reduction strategies incorporating prior com- munication to the employees would

report high job-seeker attraction, which is mediated by perceived or- ganizational support.

Proposition 7b: Work redesign strategies incorporating reduction of work over- load and enhancement of job au- tonomy would report high job-seeker attraction, which is mediated by per- ceived organizational support.

The impact of the downsizing pro- cess is significantly lower for a highly reputed firm.

Downsizing process is found to have a significant negative effect on a firm’s reputation as has been perceived by the market analysts and the peer firm ex- ecutives (Love & Kraatz, 2009). How- ever, the impact of the downsizing pro- cess is significantly lower for a highly reputed firm. Gatewood et al. (1993) stated that the individual’s perception of a firm’s reputation is strongly related to job seekers’ familiarity with the organi- zation. The familiarity can develop de- pending on an individual’s acquaintance working in the organization, through ad- vertisements or even through news ar- ticles. With the increased perception of organizational support in the downsizing process, the negative relationship be- tween downsizing and firm reputation is reduced. The increase in the assistance provided to retrenched employees and prior communicat ion about the downsizing process possibly induce organization’s trustworthiness in the minds of the potential employees, which is also a mode to enhance reputation (Love & Kraatz, 2009). Therefore,

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Proposition 8a: The downsizing process is negatively related to the job-seeker attraction and this relationship is mediated by firm reputation.

Proposition 8b: The negative relationship between downsizing and firm repu- tation is moderated by the perceived organizational support, such that with an increase in the perceived organi- zational support, the negative rela- tionship between them reduces.

The organizations undertaking the downsizing, especially workforce reduc- tion, send a signal to the potential em- ployees that they can rely less on getting a secured job in the organization (De Vries & Balazs, 1997; Kammeyer- Mueller & Liao, 2006). The individuals who would like to be employed in an or- ganization with high job security would avoid an organization that has downsized. This is because they consider such orga- nizations to be low on stable employment (Kammeyer-Muller & Liao, 2006). How- ever, the systemic downsizing that aims at revamping the organizational culture is seen as a constructive process that leads to the incremental and long-term development of human resources. Hence:

Proposition 9: Organization employing workforce reduction downsizing technique would report lower job- seeker attraction than organizations taking up systemic downsizing tech- niques.

Conclusion

Despite discussions on the effects of the downsizing process on the current

and future employees of the organization, there have been very few research pa- pers encompassing the process elements, the organizational characteristics, indi- vidual characteristics, leadership charac- teristics, and the future and current em- ployee outcomes. This study tries to col- late all the studies that have discussed the various aspects of downsizing and to tie them in one comprehensive theoreti- cal framework. Some of the relationships in the framework have been well-estab- lished but there is future scope of devel- oping empirical studies on the other pro- posed relationships. This study has sev- eral implications for both researchers and practitioners. There are several relation- ships that need to be empirically estab- lished, especially the mediation and mod- eration relationships. So, this study can act as a starting point for future research. Another contribution that the research- ers can further make in this regard is to include the established theories for ob- taining the causalities in the relationships that have been discussed in the study. Furthermore, the studies conducted in the field of downsizing process should be lon- gitudinal. Organizations that adopt downsizing need to take into account various firm characteristics, industry characteristics, and individual character- istics before choosing a downsizing strat- egy. It is evident that the combination of these characteristics would bring about a completely different scenario for each organization; therefore, imitating a downsizing strategy without considering these characteristics could lead to detri- mental outcomes. Thus, the organizations need to look at the downsizing process in a holistic approach and not a piece-

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Fig. 1 Conceptual Framework of the Downsizing Process

meal approach. Incorporation of all the factors, as well as processing of elements and outcomes, would help the organiza- tions to develop a better and fool-proof organizational strategy post-downsizing.

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