While the pain of downsizing-related layoffs can’t be avoided entirely, it can be mitigated. Anticipating the duration and depth of an industry downturn, for example, can definitely help a manager prepare and deploy HR practices that will, in turn, help both employees and firms adjust to difficult times. This author discusses some responses that have been known to be effective.
Downsizing has been a pervasive managerial practice for the past three decades. Over the years, a firm’s standard response to finding itself in financial difficulty was to reduce its workforce. While there is ample evidence suggesting that downsizing activities rarely return the widely anticipated benefits, there is also a sobering understanding that downsized firms are forced to deal with the human, social, and societal aftereffects of downsizing, also known as secondary consequences. Research shows clearly that the human consequences of layoffs are costly and particularly devastating for individuals, their families, and entire communities. While workforce reductions cannot always be avoided, there are compelling reasons why downsizing-related layoffs must nonetheless be seen as a managerial tool of absolute last resort.
During an economic downturn a firm must carefully consider its options and assess the feasibility and applicability of cost-reduction alternatives before deciding on layoffs. While a considerable number of research articles that discuss alternatives to downsizing have been published, there is no conceptual understanding of downsizing-related layoffs as they relate to the actual cost-reduction stages of a firm. Indeed, it is critical for an organization to factor in the concept of cost-reduction and to recognize the specific cost-reduction stage that characterizes the firm’s current business position and environment. Thus, a firm needs to determine the expected duration of the business downturn. In order to do so successfully, the executive manager must know exactly where the firm is in its cost-cutting stage. A firm’s cost-reduction stage, by definition, refers to the timeframe the company requires to be able to reduce operational expenditures successfully.
The purpose of this article is to present a methodology that enables firms to minimize, defer, or even avoid the adoption of downsizing-related layoffs. In order to do this, the research presents and discusses the framework of cost-reduction stages of a firm coupled with creative modern-day human resource (HR) practices that firms typically adopt. This paper builds upon Vernon’s (2003) and George’s (2004) work of the three cost-reduction stages: short-range, mid-range, and long-range phases. The underlying framework of the cost-reduction stages is depicted in Figure 1.
Figure 1: Framework of cost-reduction stages
Source: adapted from Vernon (2003) and George (2004)
The framework depicted in Figure 1 comprises three timeframe-related phases. Each commands several internal cost adjustments that have produced a variety of stage-related HR practices:
Stage one: Short-range cost adjustments
According to Vernon (2003), the first stage of the cost-reduction framework represents short-range cost adjustments in response to a short, temporary decline in business activities. Most likely, the firm resorts to minor, moderate cost-reduction measures in this early stage. These preliminary adjustments should enable the firm to shun downsizing-related layoffs and involuntary cutbacks, and return to normal business activity within a timeframe of four to six months. A firm experiences this stage because of an unexpected drop in sales and a decline in sales forecast. It is characterized by short-term expenditure adjustments in order to prevent a medium-range downturn or a more lasting, long-range decline. The immediate recognition of a temporary business slip and the resolute engagement in preliminary cost-reduction methods should allow the firm to focus its operations in a cost-sensitive mode for a quick recovery.
The likelihood of success for short-range cost adjustments hinges on a number of factors. First, senior management must be able to effectively articulate why the cost-adjustment measures are necessary and the short time frame of the strategy. Executives’ ability to convey the message that the implementation of preliminary cost-reduction measures at the present time will prevent future layoffs is critical. Second, the HR Director’s role is to communicate the decision(s) made by the executive board to the entire workforce promptly and to implement the cost-reduction methods effectively. Third, employees’ flexibility in allowing the firm to modify cost structures increases the chance of success for the planned cost alterations. In sum, a firm’s capacity to overcome a business downturn in the first stage will depend on the organization’s ability to respond to the new environment by immediately modifying expenditures.
HR practices for short-range cost adjustments
There are several HR practices that firms can adopt in an effort to engage in preliminary cost reductions. Some of the more popular approaches that have emerged are:
- Hiring freeze
A hiring freeze constitutes a mild form of downsizing and reduces labor costs in the short term. Some firms continue to hire new employees while cutting jobs at the same time. While this practice may make sense in terms of supplying the firm with key personnel, it also tends to send a confusing message to the rest of the workforce. In its latest attempt to fight rising jet fuel costs and a weakening U.S. economy, American Airlines imposed an immediate hiring freeze on management and support staff (Maxon, 2008).
- Mandatory vacation
Implementing mandatory vacation involves requiring employees to use their accrued vacation days or mandating that individuals take a number of unpaid vacation days during a certain time period. While employees might not want to be told when and how to use their entitlements, they will nonetheless appreciate the reaffirmed job security. Chrysler LLC currently plans a corporate-wide shutdown of its U.S. operations during the weeks of July 7 and July 14, 2008, with the intention of improving the automaker’s efficiency and boosting productivity (Govreau, 2008).
- Reduced workweek
Firms sometimes resort to a reduced workweek. This may translate into the reduction from 40 to 35 or fewer hours and thereby reduce the short-term payroll expenditures. While most employees appreciate the idea of being able to spend more time with their families, they may not always welcome a reduced paycheck. Also, employees may find that the same amount of work still needs to be performed while they spend less time on the job. Nucor Steel Corporation in South Carolina has avoided layoffs for 35 years by reducing to two- and three-workday weeks for its employees during downturns (George, 2004). Recently, workers at a St. Thomas automotive parts plant in the UK have voted to reduce their work week rather than see 200 employees leave permanently (De Bono, 2008).
- Cut in overtime pay
Reducing or abolishing overtime pay for employees can be a potent technique for reducing operational costs in the short term. Firms may decide on an across-the-board (i.e., all employees) abolition or it may confine the cut to selected categories only (e.g., non-management, blue-collar employees, or salaried employees, etc.). In 2004, automotive firms, such as Visteon Corporation, General Motors, and Ford, slashed overtime pay for most employees indefinitely (Dybis & Garsten, 2004).
- Salary reduction
Salary reduction has been a standard practice for firms experiencing unexpected financial pressure. Whereas salary reduction may mitigate financial concerns in the short-run, extended salary reductions can affect employee morale and loyalty. Also, while companywide salary reductions may prevent layoffs, there is a clear risk that top performers will be encouraged to leave for competitors that offer superior compensation. In 2006, White Electronics Designs implemented salary reductions of 5 percent for salaried employees and 10 percent for management. Hourly workers remained untouched. In 2006, a collation of Intel managers agreed to take a temporary 100 percent pay-cut to avoid layoffs. Prior to that, Intel announced that it had planned to cut 10,000 employees, including 1,000 managers (Paul, 2006).
- Temporary facility shutdown
Temporary facility shutdowns occur when a work site closes for a designated period of time, while some administrative functions are still performed. A shutdown allows employees to have time off without using their vacation days. While the overall company production decreases, the firm can achieve considerable cost savings while avoiding layoffs. In 2008, Aleris International shut down its rolling mill production in Virginia in order to align production with demand. The production for customers was phased out and transferred to other facilities within the United States. (Aleris, 2008).
- Soliciting cost-reduction ideas from employees
Employees appreciate the opportunity to make a positive impact on their workplace and environment. Firms frequently solicit cost-reduction ideas from employees who are often creative in producing cost-reduction solutions. This HR practice has shown to be most effective when employees are able to make suggestions in the early stages of cost cutting (Vernon, 2003). At Martin Heyman Associates in the U.S., all professional construction consultants are encouraged to contribute cost-reduction ideas. Unfortunately, many executives still do not realize that employees are the best source of cost-reduction ideas, in that workers on the job are in a prime position to identify and recognize waste (Yorke, 2005).
Clearly, there are many HR practices and options that firms can adopt to reduce short-term expenditures. While some firms have come up with fairly creative ideas, others have resorted to corporate layoffs as a first resort.
Stage two: Medium-range cost adjustments
According to Vernon (2003), the second stage of the cost-reduction framework constitutes medium-term cost adjustments in response to a business downturn exceeding six months. These secondary cost-reduction adjustments are frequently signaled through extended company-wide or industry-wide forecasts of diminished sales activity. If properly recognized and executed, the firm may be able to transition to mid-range cost adjustments and thus prevent long-term layoffs and forced downsizing activities. Constituencies need to recognize that deeper cost-reduction strategies may be required in order to avert downsizing-related layoffs. Executive management and the HR Director must be able to articulate the underlying purpose and objectives of the expenditure adjustments to the entire workforce. This should ensure buy-in and commitment on the part of employees. The application of HR practices in this stage could potentially alter employees’ work environment. Thus, the HR department will play a critical role in the conduct and transition of these practices.
HR practices for medium-range cost adjustments
Firms typically adopt several HR practices in an effort to engage in secondary cost reductions:
- Extended salary reductions
Extending salary reductions can be a method of choice if an economic downturn exceeds 6 months. While extended salary reductions can negatively affect employee commitment and morale, advocates stress that employees would prefer a smaller income temporarily rather than seeing their jobs disappear permanently. As with short-term salary reductions, there is a risk that high-performing individuals will be encouraged to pursue external employment opportunities. Firms have generally been creative about altering variable pay options. For instance, while some firms balance the reduced salaries by distributing once-a-year payments over 12 months, others substitute stock awards for variable cash payments. The U.S. firm 415 Production offered an overall 5 percent pay cut or a four-day work week reflecting the appropriate decrease in pay to its employees (Morss, 2008).
- Voluntary sabbaticals
Voluntary sabbaticals, also called furloughs, allow salaried employees to take voluntary leaves for a designated period of time. Companies may offer sabbaticals with considerably reduced pay or no pay at all. Most firms continue to provide benefits during sabbaticals. Sabbaticals enable firms to reduce their medium-term expenditure and act as a potent method for avoiding downsizing-related layoffs. While employees may feel motivated and re-energized upon their return, HR experts point out that medium-range and long-term sabbaticals may cause employees to lose their leading-edge and return with outdated skills. Interestingly, there is evidence suggesting that firms offer generous sabbaticals during times of economic growth while companies refrain from this HR practice during tough financial periods (Vernon, 2003). In 2001, the consulting firm Accenture announced that 800 employees qualified for a special voluntary sabbatical program, while 600 employees were going to be laid off permanently (Taub, 2001). In 2001, one of Siemens’ divisions, Information and Communication Mobile, offered its German employees a one-year ‘time-out’ at reduced pay without permanently eliminating the jobs (Perera, 2001). Siemens was thus able to reduce costs without losing high-performing employees during difficult economic times.
- Employee lending
Employee lending is a modern-day HR practice whereby the current employer, the lending firm, lends an employee to another employer firm for a set period of time while continuing to pay salary and providing benefits. The borrowing firm, which can be a competitor, in return, reimburses the lending company for part or all of the salary. While employee lending can dramatically decrease medium-range expenditure of the lending firm, some employees may not wish to work for a third-party. There is also the risk that the borrowing firm may decide to hire the employee permanently once the contracted period is lapsed. As a consequence, the lending firm would thus loose a critical knowledge base. Texas Instruments engaged in lending HR staffers to vendors for up to 8 months with the intention of bringing them back to their original jobs at the end of that period. The supplier reimbursed Texas Instruments for their staffers’ salaries during the loan period and agreed not to offer them permanent jobs (Morss, 2008).
- Exit incentives
This option entails offering employees incentives to leave the firm in the form of optional severance or early retirement. This strategy enables firms to better target jobs and units in that it recognizes employees for their service and helps retain the remaining employees. At the same time, exit incentives can be costly and can create an entitlement mentality for the remaining workforce in the future (George, 2004). In 2007, technology-outsourcing firm E.D.S. (Electronic Data Systems) offered extra retirement benefits to 12,000 employees in the U.S. if they were to embrace early retirement (EDS, 2007).
In sum, corporate executives and HR directors need to find innovative ways to reduce medium-term expenditures. Unfortunately, similar to the first stage, too many firms resort to layoffs by default.
Stage three: Long-range cost adjustments
According to Vernon (2003), the third stage of the cost-reduction framework represents long-term adjustments which are necessary if a firm experiences a prolonged business downturn exceeding 12 months and beyond. This stage may be recognized through an extended decline of current and projected customer demand and/or extremely volatile economic conditions. This third stage generally requires extended long-range expenditure adjustments on the part of the firm. It is in this phase that downsizing-related layoffs are frequently inevitable. While permanent layoffs should always be seen as a final resort, firms must try to avoid across-the-board, mass layoffs at all costs (Gandolfi, 2006). Companies who find themselves forced to engage in extensive layoffs must adopt practices that instill loyalty and commitment in the remaining and exiting workforces (Vernon, 2003).
HR practices for long-range cost adjustments
Firms that are forced to embrace downsizing have shown to adopt various layoff-related strategies and with various degree of success. It is beyond the purpose of this paper to review and present the literature on the actual outcomes of downsizing. Essentially, the primary goal in this third stage is to set the scene for the firm to be able to re-attract and re-gain layoff victims in a post-downsizing phase. This, of course, is based on the presumption that the economy will bounce back sufficiently and that the firm will be willing and able to hire again.
- Rehiring bonuses
It is not uncommon for firms to rehire laid-off employees. While some firms provide a monetary rehiring bonus for veterans to return to the company within a specified period of time, other companies hire previously laid off employees as external consultants. In some cases, firms realize that they cut too many and/or the wrong employees, while in other cases management decides to hire back after the economic downturn. Research shows that employees and consultants frequently return to the downsized firm with improved monetary rewards (Gandolfi, 2006). Back in 2001 and after two rounds of layoffs, Charles Schwab Corp. offered a $7,500 bonus for any previously downsized employee who was rehired by the firm within 18 months following the layoffs (Morss, 2008).
- Maintaining communication with laid-off employees
Firms should make an effort to maintain friendly relations with laid-off victims. Modern-day technology, including internet forums, 24-7 hotlines, e-mails, and mailings, provide and facilitate highly-effective ways to foster and sustain positive employer-employee relationships (Lublin, 2007). This is particularly important if firms intend to rehire the former employees when the economic climate has improved.
- Internal job fairs
Firms should make every possible effort to retain high-performing employees. A powerful method is an internal job fair, where firms host events in order to help place and redeploy downsized employees within the company. The Ford Motor Company is currently running internal job fairs in its plants to entice employees to find new careers beyond the assembly-line (Vlasic, 2008).
Selecting a downsizing strategy
Determining an appropriate workforce management strategy remains a vital task for firms. In order to select a downsizing strategy effectively, aligning a firm’s cost-cutting methods with the cost-reduction stage as outlined in Figure 1 may prove to be a powerful method. While there are many HR tools at an executive’s disposal, each practice works most effectively when implemented during its established time frame, or cost-reduction stage. At the same time, the assumptions underlying the framework (Figure 1) are somewhat simplistic and probably do not capture the complexity of corporate decision-making. According to Vernon (2003), at least six factors affecting the selection of a downsizing strategy need to be considered:
- time, or the expected duration of an economic downturn)
- resources, such as cash resources at hand
- budget, namely the financial condition of the firm)
- corporate culture, for example, the institutional values and anticipated effects of cost cutting
- demographics, the location of the firm/demographics of employees the firm would like to retain or rehire
- labour market, specifically the state and condition of the labour market
These factors should be considered when selecting a particular downsizing approach. For instance, if the expected duration of an economic downturn is prolonged (i.e., factor time) and, thus, the firm opts to engage in across-the-board layoffs, then there will be the inevitable impact upon the firm’s corporate culture, as mass layoffs have shown to produce negative consequences. Similarly, an established ‘no layoffs’ policy (i.e., corporate culture) may prompt the firm to retain all its salaried employees if it has the capacity to remain liquid during an economic downturn (i.e., factors budget and resources).
This paper has demonstrated that the ability to correctly forecast the cost-reduction phase assists a firm in determining appropriate employment strategies. This paper presented a methodology of cost-reduction stages enabling firms to minimize, defer, and avoid downsizing-related layoffs. It appears as if the key lies in the alignment of a firm’s downsizing methods with the cost-reduction stage in which the firm finds itself. While the introduced framework remains simplistic, it is nonetheless alleged that implementing HR practices that are aligned with the six factors above should allow for a more successful downsizing. There is ample evidence that downsizing-related layoffs are devastating for all parties and that permanent layoffs should be not be considered at all costs.
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