Downsizing or layoff is a widespread strategic decision and change practice since 1970’s and during the economic downturn in the year 2007 it became a more common phenomenon. In 2001 alone fortune 500 companies reportedly cut a total of 1040466 jobs and one predicts that by 2015 a further 3.3 million jobs will be outsourced. Changing patterns in reasons cited for job loss support this impression of the rising importance of restructurings. Differences in factors such as the state of the economy and the signal sent by job loss could make the process of downsizing and the effects of job loss differ between restructurings of healthy organizations and downsizing due to financial distress. Recent companies to pursue downsizing include American Express, Alcoa, Motorola, HP, Dell, Lucent to name a few.

DOWNSIZING APPROACHES

There are many kind of approaches in downsizing. The reasons for the firm to undertake such approaches also varies. As documented by Palmer et al,. they include restructuring, closing or selling of a business unit, cost reduction, cost savings, increased productivity through greater efficiency and effectiveness and coping with external pressure including recessions and economic downturn, economical change, increased competitive pressures through greater globalization of business and technological change.

Multiple strategies may be associated with downsizing beyond the simple cost cutting approach. For instance, after the terrorist attack on united states on September 11,2001, Praxair Inc. a supplier of speciality gases and coating the United States, experienced a downturn in productivity. They announced the need to reduce their worldwide workforce by 900 employees as well as the need to restructure their business to cater to products where demand was increasing. To this end they simultaneously downsized and invested in two new product plants.

Sometimes employees are the last resort for cost cutting and thus the company follows downsizing. For example, in the end of the second quarter of 2001 Charles Schwab & company was hit by a major economic downturn in commission based revenue. This company has hired a lot of workforce during the boom period of the business cycle. So they had an overabundance of staff and finally realised the need to restructure and downsizing was their last resort of cost cutting. As a result by the end of 2003, the company has reduced nearly 25% of its workforce and significantly decreased the staff bonuses in a move to save the company from its declining profit.

But downsizing will not necessarily lead to gains in productivity unless and until its complemented with other business strategies. For example , a research in 1990 showed that expected increase in profits did not increase in two out of three cases through cost cutting by downsizing. This research showed that share prices may initially rise with the announcement of cost cutting by downsizing but often fall, trading at or below the market over a two year period.

TYPES OF DOWNSIZING

There are mainly three types of downsizing. They are as follows:

Retrenchment

Downscaling