Although downsizing is a common business strategy for reducing labor expenses, it isn’t always the best way to either cut costs or maintain your competitive edge. Instead of saving money and streamlining daily operations, negative consequences of restructuring and forced layoffs may worsen an already bad situation. Look at and consider the negative effects before you commit to implementing downsizing in a change management plan.
Downsizing can have significant direct and indirect negative financial effects. While the objective of downsizing is to increase cash flow by reducing payroll expenses, negative financial effects can actually work to worsen your financial situation. For one thing, it takes time and money to implement a downsizing plan. For another, there is the direct expense of paying severance packages and accrued vacation to laid-off employees. Finally, you may face increased unemployment insurance taxes and lower productivity from surviving employees.
Decreased Rapport and Relationships
Downsizing decisions that focus on reducing numbers via massive job cuts often consider employees as a group, not as individuals. You not only face losing the experience and insight that skilled and seasoned employees offer, but also face losing the camaraderie and relationships that make daily operations and customer interactions more efficient. As a result, both productivity and profitability can suffer as fewer employees and thinner relationships make getting things done and generating business more time-consuming and difficult.
Increased Survivor Attrition and Replacement Costs
Downsizing often increases the number of survivors who start looking for other work. For example, if you lay off 10 percent of your workforce, you can expect a 15.5 percent rate of voluntary turnover among surviving employees, according to a column by Wayne F. Cascio of the University of Colorado Denver Business School. That compares to a10.4 percent voluntary turnover rate among companies with no layoffs. In addition, survivor attrition can eliminate workforce reduction cost-savings objectives because replacing each of these employees can cost up to 2.5 times the employee's annual salary.
Potential for Employee Retaliation
A downsizing plan that does not follow procedural justice principles can expose your business to retaliation. Procedural justice refers to employee perceptions about the procedures used to select, notify and support downsizing victims and survivors. Cascio states that laid-off employees who perceive downsizing procedures as unfair or discriminatory tend to file more wrongful termination lawsuits, while turnover rates among survivors often increases. In addition, employees who feel they are victims of unfair treatment may retaliate via theft, sabotage and even violence.
- Photo Credit XiXinXing/iStock/Getty Images
What Is the Meaning of Downsizing?
Downsizing has become a popular (or is it, unpopular?) topic in recent years. Like many other aspects of the business universe, downsizing...
The Impact of Dissatisfied Employees
Employee satisfaction is important to your company's overall success. The impact of dissatisfied employees can range from high turnover and low productivity...
Can You Fire an Employee While They Are on Vacation?
With few exceptions, employment in the US is considered "at-will." At-will employment means an employer can fire an employee at any time,...
Effects of Company Downsizing on Employee Morale
Downsizing, or laying off some of the workforce, will always have a negative impact on employee morale. Those left behind will lose...
The Effects of a Corporate Restructuring Strategy
Corporate restructuring is a legal maneuver employed by a company with too much debt and not enough income or a business model...
The Negative Effects of Globalization on Companies
Globalization refers to the economic growth of world trade and investment. Many companies offer their services globally to expand their market, or...
The Positive Effects of New Employee Orientation
When companies bring in a new employee, they allow for an adjustment period. The employee gets acquainted with the company, and productivity...
Negative Effects of Downloading Music
Music downloads from file-sharing sources have become increasingly popular since the advent of Napster in 1999. Downloads are easy to locate and...
The Effects of Employee Training on Morale
Most companies have new-hire training programs, and many have continuing education and training for all levels. An organization's training program can increase...