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Jeffrey Pfeffer
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Jeffrey Pfeffer

Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University, and author of the Sept. 2010 book, POWER: Why Some People Have it and Others Don’t.

Downsizing Doesn't Work

There are two things to say about downsizing: It seldom works and is often done incorrectly.

There is an enormous body of research that has examined the consequences of organizational downsizing. The research is quite consistent in finding that downsizing does not increase stock price (either immediately or over a two-year period), does not increase productivity, disrupts innovation by breaking up networks of relationships that cut across subunit boundaries and are helpful for the intra-firm coordination necessary to get new products or services to the market, creates fear, distrust, and stress in the workplace, and in many instances, does not even reduce costs. This last effect is because in a downsizing, sometimes the wrong people leave and the company has to later bring back laid-off employees as contractors.

Downsizing is often done poorly. When a company announces layoffs but doesn't say who is going to be laid off, everyone is fearful, rumors circulate, and people get distracted.

I have a few thoughts on ensuring a more successful downsizing. First, let people know who is going to leave when the announcement is made. Companies often have people leave immediately, with no opportunities to say good-bye to colleagues. That sort of impersonal action sends a message of harshness lacking compassion.

Second, provide generous severance. Otherwise, why would anyone want to continue to work for your company? Layoffs typically hit the lower-ranked employees -- the ones who actually do the work -- hardest. Sometimes leaders are getting bonuses even as first-line workers are being shown the door. This is a bad idea, as that builds more distrust within employees. Share the sacrifices, and try to maintain the jobs of the people who actually do the company's work.

Finally, do something for those who remain: They typically have to do more work than before. Acknowledge their extra efforts.

In the words of one executive at a large chemical company, it took us two months to decide to do layoffs, two weeks to do it, and two years to recover. Most companies do restructuring badly. Which is why the evidence is clear: Few layoffs provide the anticipated benefits.

By Jeffrey Pfeffer

 |  February 9, 2009; 9:32 AM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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Let me take my last statement a bit further. There is an organized campaign going on right now, which Mr. Pfeffer seems to have signed onto, to try to reverse our national taboo against taking pay cuts. As the theory goes, if salaries increase in good times but don't decrease in bad times, it takes longer for companies to dig their way out of a recession. However, this theory is just a fig leaf to cover up yet another round of looting from our paychecks.

Salary stability is the last remaining bastion of employee rights, and once this barrier is breached, it will be all downhill for the American employee. They've already gutted our retirement and health care, and now they want to lower salaries to the levels seen in third-world nations. And they're selling this as some kind of moral benefit -- of course we should all take a pay cut so that our neighbor doesn't get the axe.

There are also practical issues with reducing salaries as opposed to layoffs. A properly targeted layoff focuses on the worst performers in your organization. Reducing salaries or hours causes your best employees to leave, because they are ALWAYS going to have the leverage to get a better position. And even if your competitors have also cut pay, they are always going to make exceptions to get top performers in the door. So you're left with all of the people who are either too unqualified or too cowardly to leave, with your organization drained of its best talent.

Additionally, the most common reaction to having your pay cut by 10% is to work 10% less hard. Someone who is working 50 hours a week is going to say, "why am I killing myself? I'm leaving every day at 5 PM from now on." So your hardest workers turn into unmotivated underperformers.

People should see this issue for what it is -- yet another attempt to offload our nation's self-inflicted economic problems onto the backs of our workers. Let's see a few CEOs put their bloated compensation packages on the block first, as a sign of good faith. But that will never happen -- only sheep get sheared...

Posted by: jerkhoff | February 10, 2009 1:35 PM
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Another side effect of downsizing: at least a few of your former employees will discover that they didn't really need you after all. If they take another corporate job, they are less likely to be good little cubicle-sheep, but rather people committed to their own careers. Many of them don't come back at all, but rather start businesses of their own, and your former employee is now either your highly-paid consultant or your competitor.

Posted by: n_mcguire

-Pretty much this for skilled workers. I've watched countless people get laid off through the Bush years while management continues to yank on their own chain until they're satisfied. The loyalty to a company is non-existent for me without dedication for the company FIRST for me. I have set timelines for what I want out of a position and if it doesn't come along I move to the next. It's been working very well for me and not well for previous employers.

Be warned that the times where employees can be pushed all day long without reward are approaching their dying days. Recession or not the best employees can always find work elsewhere.

Posted by: theobserver4 | February 10, 2009 1:31 PM
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You couldn't be more wrong. I've lived through multiple downsizing cycles in several companies. My experience is that corporate morale suffers far more in hard times when the deadwood is allowed to remain standing. Employees wonder why they should work hard when the guy in the next cubicle is goofing off all day. When properly applied, layoffs provide the opportunity to cull out the people who are actively damaging your organization, reward the true high performers with a slice of the savings, and light a fire under everyone in the middle. A company without layoffs is like a forest which never has a fire and gets cluttered with undergrowth. From one who's been there...

Posted by: jerkhoff | February 10, 2009 1:10 PM
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Good article. Yeah, other than for easily replacible employees (which most skilled workers aren't) layoffs don't make much sense. I mean you spend a ton of money recruiting people, sometimes relocating them, training them, and familiarizing them with your business and then you throw all that out the door for some short term savings. If the business has made all other cuts, in a nasty recession like this, they'd be better off giving everybody a two week furlough in the middle of summer or some popular vacation time.

Posted by: bill3 | February 10, 2009 11:22 AM
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Another side effect of downsizing: at least a few of your former employees will discover that they didn't really need you after all. If they take another corporate job, they are less likely to be good little cubicle-sheep, but rather people committed to their own careers. Many of them don't come back at all, but rather start businesses of their own, and your former employee is now either your highly-paid consultant or your competitor.

Posted by: n_mcguire | February 10, 2009 10:41 AM
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Thank you for this article. If at least one well-positioned decision maker internalizes this message hundreds of good jobs could be saved.

Posted by: jp1954 | February 9, 2009 3:45 PM
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