Employee downsizing or layoffs are the deliberately planned reduction of significant numbers of individuals or workforce to improve organizational effectiveness. Downsizing provides short-term or immediate benefits, including increased profitability, bankruptcy avoidance, new relationship formation, reorganization, and eliminating "deadwood" or disengaged staff. During the COVID-19 outbreak, many staff were laid off as a result.
According to surveys conducted by the U.S. Bureau of Statistics in 2020, over one-third of U.S. workers were concerned about their companies collapsing, and 22% feared they would eventually lose their employment. The Federal Reserve forecasted a Q2 unemployment rate of 32.1% for 2020 (U.S. Bureau of Statistics 2020). According to Indeed data, overall job postings for January 2021 were down 24% from the same time the previous year. Hiring in the hotel business decreased by nearly 60% compared to that time the previous year. The trend was nearly identical in most nations, as no country escaped the effects of COVID-19 (ILO, 2020). That resulted in layoffs and downsizing all over the globe.
Today, layoffs and downsizing have become the default response of businesses to the problems posed by technological advancements and worldwide competitiveness. Too often, if done wrong, layoffs and downsizing can have negative publicity, knowledge loss, decreased engagement, more voluntary turnover, and poorer innovation, all of which harm long-term earnings.
This article will discuss the difference between layoffs and downsizing while providing information on how each will impact the organization and its staff.
What are layoffs?
A layoff is an employer's short-term or long-term termination of employment for circumstances unrelated to the employee's performance. Employees may be laid off when corporations want to reduce expenses due to a drop in demand for their products or services, a seasonal closure, or during a period of economic hardship. Employees who are laid off lose all salary and company benefits but are eligible for unemployment coverage or compensation.
Employees who are laid off frequently do not lose their investment in employer retirement plans and may be eligible for a severance payout.
Layoffs are a tried-and-true method of decreasing organizational costs; reducing employees can have an immediate and significant impact. Because "people" expenditures—compensation and benefits—typically account for half of a company's overall operating expenses, it is logical that firms seeking to cut costs focus on laying off staff. Even the announcement of an impending layoff is widely seen as a quick way to enhance the share price of a public company's stock, yet research contradicts this belief.
Several additional factors may also necessitate a layoff:
- A nationwide economic downturn.
- A natural disaster or emergency.
- A drop in a specific industry.
- Technological advancements.
- A company's failure.
- Acquisitions and mergers.
- Market competitive factors.
- Warfare or terrorism.
Layoffs might be among the most difficult responsibilities a manager faces. Effective strategy and interaction will significantly impact the layoffs, the surviving workforce, and the customers who collaborate with your team.Recognizing how the process works will help you plan for any layoffs the organization may have to implement (Neto, 2018).
Related: Employee layoffs and its impact on employees
Example of Mass Layoffs
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Employers in the United States resorted to widespread layoffs during the early stages of the COVID-19 epidemic, when restrictions and infection fears halted travel, closed restaurants, and idled many other service businesses. According to the U.S. Bureau of Labor Statistics (BLS), employers in the United States shed more than 20 million jobs in April 2020 alone.
To keep jobs, the U.S. government established the Paycheck Protection Program, which provided loans to businesses to cover payroll expenditures that would be repaid under certain conditions. During the epidemic, the initiative lobbied employers not to lay off staff.
Related: How To Combat The Pandemic: Furloughs Or Layoffs
What is downsizing?
Downsizing is a frequent organizational technique that is often associated with economic slumps and failed firms. Downsizing permanently decreases an organization's workforce by removing ineffective personnel or divisions. The easiest approach to cut expenses is to lay off staff, and liquidating an entire shop, office, or unit opens up resources during organizational restructuring.
A production and management concept known as lean enterprise involves eliminating any aspect of an organizational structure that does not directly contribute value to the end product. Downsizing is not always forced (involuntary). It is also utilized to produce leaner, more efficient enterprises at different points of the business cycle.
According to the principles of lean enterprise production, any component of a company enterprise that does not directly help a final product is redundant. Customers determine what is valuable (and what is not) based on the price they are willing to pay for a good or service.
Downsizing can also better align the firm's competence and talent with the market. For example, a firm may consider downsizing to eliminate people with obsolete skills who may no longer be valuable in the company's future direction.
Example of Downsizing
Following the 2020 economic crisis and lockdown, many businesses cut their workforces due to the economic burden of government-ordered company shutdowns designed to prevent the virus's spread. Individuals were confined to their houses, and discretionary travel was virtually prohibited for several months, imposing a strain on airlines and hotels.
After stating in April 2020 that it would reduce 10% of its 160,000-person global workforce through consensual layoffs, organic turnover, and involuntary layoffs, Boeing cut more than 12,000 positions in May 2020. There were a total of 6,770 involuntary layoffs in the United States. Boeing also intended to lay off thousands more people but did not specify when.
Boeing is one of America's top plane manufacturers, but it was forced to restructure in response to the 2020 economic crisis. In addition to the issue, one of Boeing's planes, the 737 MAX, was grounded in 2019 following a second fatal crash. For the second time in 2020, the company registered zero orders in April 2020, and customers cancelled additional 108 orders for the 737 MAX. These two factors combined to produce the most adverse beginning to a year since 1962.
Difference between layoffs and downsizing
A layoff is when an employer suspends or dismisses an employee, temporarily or permanently, for circumstances unrelated to the employee's performance.
Downsizing lowers a company's employment numbers by removing unproductive people or departments. Downsizing can be adopted to make businesses leaner and more productive, but it is usually done when times are rough, and income is dropping.
Layoffs and downsizing are both phrases that relate to decreases in the number of people on a company's payroll, albeit "layoff" is more commonly used to allude to temporary displacement, whilst "downsizing" typically carries more permanent connotations. Reductions in force (RIF), reorganization, right-sizing, and restructuring are other phrases used in this context. In such circumstances, employee terminations are typically the result of surplus labor caused by economic considerations, changing markets, inadequate leadership, or some other factor unrelated to worker conduct.
Because labor force reductions expose a corporation to many of the same legal concerns as behaviour-related terminations, companies normally remove employees through a well-planned and documented procedure. The process is normally carried out in two stages: 1) identifying the employees to be laid off and terminating them following the preceding procedure, and 2) giving perks to aid the transition, such as severance packages, unemployment benefits, and relocation services.
Impact of layoffs
The dismissal of one employee may seem insignificant, but it frequently hurts a company where workers collaborate to achieve a common objective. A layoff creates a gap in the team, which has multiple effects on the organization. Mass layoffs provide a bigger problem for the corporation. Here are some of the impacts on employees and the organization:
- Higher Turnover
- Lower Customer Loyalty
- Emotional Anxiety
However, as mentioned earlier, layoffs do have their benefits which are outlined in the table below:
The Benefits of Layoffs (Reasons) | The Drawbacks of Layoffs (Externalities) |
Increases profitability and the overall competitiveness of the company. | When skilled personnel is laid off, existing employees may find themselves in a difficult situation. As a result, customer service may degrade. |
Reduce employee perks and liabilities to save money. | Existing and laid-off employees may face occupational, psychological, and other health difficulties. |
Laying off high-paid workers and substituting them with lower-paid workers. | Limited staff numbers within an organization/department may result in more dissatisfied employees, reducing corporate income. |
Getting rid of disgruntled employees who can't "pull their weight" ("dead wood") and add to the workload of other employees. | Laying off skilled people may cause output to halt and quality to suffer inside the organization. |
Stockholders may see a higher return on their capital. | Employee attitudes grow negative due to the possibility of being easily replaced and reduced to a number by the firm. |
When tasks are effectively revised and redistributed, strategically planned layoffs result in wiser companies. |
''Survivors'' are workers who escape a layoff. They display a variety of unfavorable post-layoff behaviors and sentiments, such as worry and low morale. However, the magnitude and nature of these actions and sentiments are influenced by several factors that determine survivors' responses. Although the efficacy or otherwise of downsizing is strongly related to the extent to which survivors embrace and adapt to it, leadership may ignore the effects of downsizing on surviving employees, which may decrease business performance in the long run.
Everyone's motivation and outlook may be seriously affected by the shock of witnessing so many talented co-workers and friends lose employment (Mujtaba, 2014). If managers and human resources cannot effectively manage this type of shock, employee morale and dedication to their jobs may suffer.
Layoffs harm survivors' attitudes and actions because they increase stress and workload, decreasing motivation, dedication, and trust in management. A breach of the psychological contract may lead to despair. Leadership can avoid these adverse effects by outlining and informing people about their reasons for downsizing. Employees are less inclined to exhibit these negative behaviors if they perceive clear, honest communication between them and leadership. They are more likely to get involved in more rapid and successful attempts to rebuild their company.
In addition to the short-term effects and harms, a layoff can also harm a person's long-term aspirations due to its unfavourable stereotypes, especially for older workers who are frequently subjected to discrimination when seeking new employment. Research has shown that even when layoff victims can overcome the immediate difficulties, a prolonged period of unemployment (lasting longer than six months) might negatively stigmatize the person and further limit prospects.
Conclusion
Human resources (H.R.) leaders must successfully handle the human consequences of layoffs and downsizing. A layoff's immediate financial difficulties can damage a worker's physical and psychological well-being and cause bankruptcy, despair, and more serious ailments. Because unemployment might last as much as six months or longer, layoffs may have long-term consequences. When laid off, workers cannot obtain new jobs, and they may experience feelings of hopelessness.
This article gave an overview of layoffs and downsizing, as well as their effects on employees. As project managers, H.R. professionals who lead the layoff process should concentrate on the ethical, legal, and socially responsible process when conducting layoffs or downsizing.
On a wider spectrum, layoffs reduce job security and boost competition for available and unfilled positions. The impact of layoffs on the economy varies depending on the industry and the magnitude of the layoff. If an industry that employs most of a region struggles and is forced to lay off workers, widespread unemployment will occur. This has the potential to have far-reaching consequences nationwide. Unemployment is the most serious economic impact that layoffs may have.
Richard Mapfuise is an Organizational Development Consultant at Industrial Psychology Consultants (Pvt) Ltd, a business management and human resources consulting firm.
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