Downsizing - What is Meaning of Downsizing and Its Importance | HRMantra Hr Software

Downsizing - What is Meaning of Downsizing and Its Importance | HRMantra Hr Software

 6-7 minutes

Downsizing means reducing the number of employees in the organization all at once because of reasons such as cost per employee being too high, reorganization in the company, positions abolished, unforeseen challenges, etc.

In this blog, let us understand in detail:

• What is Downsizing in an organization?
• Benefits of downsizing in organizations
• Example of Downsizing
• What are the three downsizing strategies?
• What is Organization Downsizing?

What is Downsizing in an Organization?

Organization downsizing was the buzzword around global recession time, the COVID age, mergers, acquisitions, and others. The simpler definition of downsizing is reducing the headcount to reduce total operational costs. It can take the form of either voluntary separation, early retirement programs, or involuntary termination through excess layoffs.

Difference Between Downsizing and Layoff

Although related, downsizing and layoff are two similar yet different concepts. Layoff can, in a way, be considered one of the ways of downsizing the workforce. Downsizing is a drastic and complete organizational strategy to permanently do away with a portion of the workforce and their associated overheads. It reduces the headcounts for a stated purpose, whereas layoff refers to the permanent or even temporary dismissal of employees, largely due to the constraint of an economic downturn.

While dealing with layoffs, the firing of existing employees is required, but in the case of downsizing, a company may not fire its existing employees.

Benefits of Downsizing in Organizations

Downsizing is an emotionally wrenching roller-coaster ride for HR professionals. Pre, during, and post—one might feel emotionally worn out, but at the same time, you have to be there for your remaining workforce and help them understand the fold of the downsizing.

But if somehow, you can get through the process without having as many or having no layoffs, it could benefit in the following ways:

• Cost optimization: Majorly organizations downsize to reduce costs and increase their profitability by doing away with excess workforce, cutting off unnecessary expenses, and eliminating additional perks.
• Improve Efficiency: When organizations decrease the number of employees, most of them reconsider workflows, operations, and processes. They further focus on core functions and decline the others that are not so important.
• Well-Demarcated Roles and Responsibilities: Due to the presence of only limited employees in the organization, the HR leaders can define roles and responsibilities in a serious manner, which can lead to focused resources and tasked goals.
• Responsive to Market Trends: When companies downsize their headcount, they are more responsive and flexible in adapting to market trends or economic conditions.
• Improved Financial Health: Financial health could be enhanced due to downsizing as it would reduce expenses. This could lead to better credit ratings and borrowing power, thus further strengthening one''s position within the industry.
• Increase Innovation: When the workforce is reduced, there might be better collaboration and communication between the teams, allowing them to focus on better ways of working as well as 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: General Motors downsized their organization in the late 2000s to manage themselves with the growing global financial crisis and bankruptcy. They closed a number of manufacturing units, laid off a number of workers, restructured their processes, and more as a way of managing their financial health and remaining balanced at the time of the crisis.
• IBM: In the mid-1990s, IBM initiated a big downsizing process to maintain their position amidst soaring competition and a constantly changing technological landscape. Their downsizing exercise included major layoffs and selling of business units.
• Hewlett Packard (HP): HP has undergone multiple downsizing exercises between 2000 and the 2010s and especially in 2012, which became notable as it included the layoffs of around 27,000 jobs.
• British Airways: At the call of COVID, the unprecedented event, which had affected workplaces worldwide, led many companies, including British Airways, to undertake downsizing. They were required to downsize as the travel industry faced immense challenges, resulting in the elimination of almost 1,200 jobs.
• Due to several reasons in 2023 and the cleverly slowed worldwide market trends, many tech giants like Google, Amazon, Microsoft, and more applied downsizing exercises.

What are Three Types of Downsizing Strategies?

• Voluntary Downsizing: When organizations incentivize employees to leave their jobs. Incentivization may include early retirement packages, payouts for unused leaves, and more. This is done if organizations would like to downsize with little or no disruption at all.
• Involuntary Downsizing: This is when an organization does not offer any incentive before laying off the employees. Generally, this is done when the organization is in a crisis and a quick action is needed to reduce headcount. Involuntary downsizing might be very disruptive and comes with many repercussions if not done carefully.
• Right Sizing: This involves the company reducing costs by removing unnecessary positions. It may be a yearly event or a periodic exercise in budgeting, focusing on a targeted approach or a restructuring of organizations. This approach is typically balanced and least disruptive.

Downsizing and Human Resource Management

Future-forward HR professionals like you find themselves playing a critical role during downsizing exercises as they act as a bridge between the C-suite, leaving employees, and the remaining employees. You must break the news, ensuring it is not too harsh on the leaving employees, motivate the present workforce, and strategize to optimize the results of a downsizing exercise.

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