The Downside of Downsizing 3


The Financial Mail reported that banking giant ABSA may be planning to cut 3000 jobs as a result of its business reorganization initiative. The bank has not made an official announcement, but rumours already abound, and employees are concerned about job losses. ABSA has expressed concern that staff costs have increased by 9%, while other costs grew by just 6%. Staff costs account for around 54% of the total expenses.

Cutting expenses seems to make sense in tough times, but while cutting staff costs appears to be the quick and easy solution; it is not always the best option in the long run. There are undoubtedly very sound reasons to retrench staff. The industry may be shrinking; market size may be changing; changes in technology may require fewer employees etc. However, many layoffs are the result of attempts to cut overall expenses, increase profitability, boost the share price and become the “lean, mean business machine”.

According to an article in Newsweek (February 2010), layoffs often fail to achieve those objectives. Research by the University of Colorado lists the direct costs of retrenchments as being:

• Severance pay
• Paying out accrued leave
• Outplacement costs (if any)
• The cost of rehiring employees when business improves
• We can add the potential costs of arbitrations and Labour Court cases

The hidden and indirect costs are often more damaging:

• Low morale (of the survivors)
• Risk averse behaviour of survivors
• The fall out of litigation (also read reputational damage)
• Sabotage
• Violence
• Loss of institutional memory and knowledge
• Diminished trust in management
• Reduced productivity

Contrary to popular belief, companies that retrench staff do not enjoy higher share prices than their peers. In fact retrenchment announcements often had a negative effect on share price. Layoffs also do not increase individual company productivity. A Wharton University study showed that while labour costs per employee decreased under downsizing, sales per employee also decreases.

Another popular myth is that layoffs increase profits (otherwise why do it?). A study of 122 companies found that downsizing reduced profitability – especially in research intensive industries.

When retrenchments are announced, good people (who can find alternative employment) often head for the door first. So the company loses people it really did not want to lose. Retrenchments also increase fear and lower morale in the workplace. That carries hidden costs for a very long time to come. When the economy improves, these are often the staff who look to leave the company because they are disillusioned (as a result of the retrenchments).

Retrenchments often weaken a company and have huge implications at a personal level. That is why the Labour Relations Act places so much emphasis on consultation and negotiation. It is, after all, a “no fault” dismissal. Having sat through many retrenchments, I still find the process difficult and emotional. Nobody likes retrenching (I hope). Some employers, however, use the opportunity to “get rid of dead wood” – a particularly dangerous practice that will come back to bite you.

I think the message is – always look for alternatives to retrenchment. Engage employees in looking for solutions in an open, honest and transparent dialogue. Expect anger and negativity – peoples lives are at stake. And if it has to be done, make sure you have professional advice every step of the way. Lastly, don’t think it’s over when it’s over. The ripples take a long time to settle. Management, and HR particularly, have a huge job ahead to ensure that employee engagement and morale improves.

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3 thoughts on “The Downside of Downsizing

  • Clement Makan

    Having lived through several downsizings (some called it rightsizing to give it some ligitimacy) in my lifetime I couldn’t agree more with these views. The ripples created sometimes turn to a tsunami. While the company may want to remove “dead-wood” (I call them “oxygen thieves”), most often these ones have developed exceptional skills to drop below the radar. After all they have been practising for years. So what happens is that all the emotional intelligence vested in “achievers” is thrown out with the bath water. As the writer suggests, there are other ways. All one has to do is research the literature to find these ways. However, I guess retrenchment is an easy way out. 

  • Rebecca Mackett

    I’ve seen how easy it is for companies to lose their good people, as the best employees all ways ensure that they stay marketable and up to dated with changes.Most  can predict from the sighs or symptoms  before retrenchedment is even announced and then they start losing focus on their job with planning how to move on.Trust do get diminshed in management where leader are often not even supported with dealing with the information first. before it has to carrying it over to the staff.It definitly seen a a quick fix solutions by most companies with ripple effects on those who stay behind.As it take a long time to build trust again

  • sylvia hammond

    Thank you for this excellent Blog post.  As someone who spent the 90’s in corporate life, retrenchment, outsourcing and downsizing were my daily diet, I agree absolutely with your analysis.  I would add that what is measured received attention, and total staff costs always receive attention.  However, the insidious creeping counter costs are very rarely measured: staff absenteeism, staff turnover, staff productivity, staff accidents and injuries; rising outsourced contractors and sub-contractor costs; the use of labour brokers and temporary staff costs – ofen less trained staff without company history and knowledge of company culture; and finally the survivors adopt a “heads down” attitude where they are less likely to question senior management or risk creating any ripples.  It occurs to me that this attitude could well have contributed to the scandals that we have seen internationally, amongst others: where results are hidden (Japan), documents are shredded (USA), and corporate culture like that recently reported at Goldman Sachs thrive.