I was just asked to write a paper on how to manage a downsizing.  I hope this isn’t a bad omen.

But as I started my research, I was struck by how few firms which engage in downsizing actually meet their intended goals. It seems pretty straightforward: layoff workers - cut payroll expenses - improve profitability. Right?

A number of research studies may prove otherwise. As one example, in a survey conducted by the Wyatt Company, fewer than half of the companies undergoing a downsizing actually met their cost reduction targets. For most, severance packages and legal fees added up quickly. And within a year or so, many of the companies ended up hiring replacements for laid off workers or others who left during the turmoil, which cost money in hiring and relocation fees.

Another study examined 210 layoff announcements, and collected information on each firm’s financial performance in the years immediately before and after  each downsizing.  On average, key financial metrics such as net income, return on assets, and return on equity increased in the first year following the layoff announcements, but not in the year after that.  In no case did post-layoff performance match the maximum levels achieved prior to the downsizing. So while the layoffs may have resulted in some improvements in near-term profitability, the improvements were only temporary.  

One factor influencing these findings is the negative effect of downsizing on morale and attrition among those employees who survive the layoff.   For example, one study showed that companies that laid off 10% of their workforce sustained, on average, a turnover rate that was 5 percentage points higher than the average turnover rate of non-downsizing firms.  In other words, an extra 5% of the workforce left of its own accord following the downsizing.  And these are the people that the company wants to keep – many of them the best and brightest, since these employees have the most opportunities to find jobs elsewhere.

Bottom line:  downsizing and restructuring is something that must be done carefully.  Look for more details to come in the next few weeks.