Restructuring, Delayering and Downsizing: Some Lessons from the Past

This article provides a brief historical overview of restructuring, delayering and downsizing in Australia.  It also looks at lessons from the past that may assist HRM practitioners in developing and implementing appropriate intervention strategies to help minimise the potential negative financial, organisational and human consequences for the downsizing organisation.

Downsizing was first introduced as a strategy to streamline, tighten and shrink an organization’s structure with respect to the number of people employed. As downsizing became more prevalent during the late 1980s, the term was applied to a broader range of managerial efforts aimed at improving a firm’s performance (Gandolfi, 2009).  Hence, restructuring and delayering became commonplace during the 1990s (Dolan, Belout, & Balkin, 2000).  It is worth noting, however, that these were strategic initiatives rather than reactions to a particular economic shock or crisis (Marchant, 2009).

In the period from the recession in 1990-91 to the Global Financial Crisis (GFC) of 2008, Australia enjoyed a long period of relative wealth and low unemployment, where the biggest issue faced by many organisations was the lack of skilled labour. Consequently, Generation Y had not experienced a recession and associated job losses by the time of the GFC (Marchant, 2009).  The economy was buoyant and most people felt that their jobs were secure (Weller, 2007).  During this time, there was an increase in satisfaction and security as employers were driven by the skills shortage to improve work conditions (Brown, Forde, Spencer & Charlwood, 2008).  The labour market was dynamic with individuals changing easily from one job to another.

When a large shock happens however, such as the Global Financial Crisis, job change is more likely to become involuntary (Carroll & Poehl, 2007).  Still in the shadow of the GFC, we are once again in an era of downsizing, only this time around it is a reactive response rather than a proactive or strategic initiative.  In this environment the rhetoric about people being the organisation’s most important asset (Holland, Sheehan & De Cieri, 2007) has been replaced by statements about the high cost of human resources. Our notion of an employee has been reframed from a strategic and scarce asset to something ‘to be got rid of’. Another contextual difference on this occasion is that cuts to employee numbers are across the board and are therefore affecting more levels of the organisation than in previous decades. Lessons from earlier restructuring, delayering and downsizing activities are being ignored.  The key lesson is that workforce reductions often lead to negative financial, organisational and human consequences for the downsizing organisation (Gandolfi, 2009).

Financial consequences

The downsizing literature portrays an overwhelmingly negative picture of the financial benefits of downsizing and there is strong evidence to suggest that a pure downsizing strategy is unlikely to be effective (Macky, 2004). In the past, such downsizing efforts have been shown to produce dismal financial and economic outcomes (Burke & Greenglass, 2000).

Organisational consequences

Given that people represent a large component of operating costs, the cutting of employee numbers seems a rational and natural response.  Espoused organisational benefits include lower overheads, less bureaucracy, faster decision making, smoother communications, greater entrepreneurship and increased productivity (Burke & Greenglass, 2000).  Though some studies have shown positive organisational outcomes following downsizing (Cameron, 1994; Littler, 2000; Macky, 2004), most empirical findings suggest that the majority of restructurings and downsizings fall short of objectives (Cascio, 1998; Gandolfi & Neck, 2003).

It is also worth noting that organisational knowledge, the core of effective organisational performance which is inevitably intertwined with the individuals who make up the organisation, is also at risk during downsizing activities. Organisational knowledge encompasses the shared, accumulated knowledge of individuals within the organisation that creates the organisational memory which is drawn upon in decision-making. While it includes the knowledge and experience of individuals, organisational knowledge is also a function of the organisation’s culture, systems and procedures that are inherent in organisational transactions, norms of behaviours in roles and interactions, and the physical structure of the organisation (Walsh and Ungson 1991; Sitlington, 2011).

Human consequences

The human costs of downsizing are considerable (Gandolfi, 2009; Burke & Greenglass, 2000). The literature distinguishes between three categories of people directly impacted by downsizing, namely, decision makers and implementers, victims, and survivors. The symptoms associated with the emotions, behaviours and attitudes of survivors in particular, have come to be known as ‘sicknesses’. The most prominent sickness is the survivor syndrome, which has been described as a set of emotions, behaviours, and attitudes exhibited by surviving employees (Littler, 1998). Brockner (1988) asserts that downsizing engenders a variety of psychological states in survivors, namely, guilt, positive inequity, anger, relief, and job insecurity. These mental states have the potential to influence the survivors’ work behaviours and attitudes, such as motivation, commitment, satisfaction, and job performance. The survivor syndrome is characterized by decreased levels of morale, employee involvement, work productivity and trust towards management (Cascio, 1993).

In summary, restructuring, delayering and downsizing are topics of considerable interest for HRM practitioners. After the downsizing has played out, they will be asking questions about who lost their jobs (in terms of age, gender, level, salary, occupation and so on), why, and what changes in attitudes and work behaviours have emerged (or re-emerged).  HR practitioners are crucial to the implementation of intervention strategies that will facilitate the ongoing restructuring and to help minimise the negative impacts on financial performance; ensure that attention is paid to organisational structure, climate and culture so as to strengthen knowledge sharing; and provide support to employees who have been negatively impacted by downsizing activities.