Arguments For and Against Downsizing

Arguments For and Against Downsizing

August 4, 2016

By Mohammad Zarif Gilman

Competition of the firms is immense in today’s corporate world. Every new startup, no matter how uniquely they are portrayed has contemporaries in the market and get entrapped in the competition directly or indirectly. Also, the idea of a monopoly market today is a far cry. To survive through this strife, the businesses have to continually fine-tune operations to keep the efficiency up to mark and the costs down. One of the alternatives of cost-cutting is downsizing. But is it an optimal solution? Does it adversely affect the company in question in the long run? Let us have a quick analysis of the arguments for and against downsizing.

FOR

  • Cost Cutting: Downsizing may be a reaction to poor economic conditions. Companies respond as such to reduce sales due to recession or by competitors gaining market share; by eliminating jobs wherein they reduce their payroll outflow and maintain or achieve specific levels of profitability. However, downsizing need not depend on poor economic conditions alone. Mergers and acquisitions lead to duplication of support staff, changes in technology lead to obsolescence of product or service lines- all these things create excess workforce with no work, and downsizing is the correct response of the organizations to such changes for protecting profitability.
  • Boosting Efficiency: The jobs that are subjected to elimination are usually the ones that are creating redundancies. Redundancies make a system inefficient. An example can clarify this: H R Textile Mills of Pride Group eliminated the jobs of ‘helpers’. The meager addition of tasks to the labors therefore increased the time required for production. But, overall efficiency was increased as the cost cutting over-compensated for the lag. Simply put: it increases efficiency.
  • Mechanized Output: Replacement of jobs with technology can be a profitable move. The Japanese owned tire manufacturer goliath Bridgestone acquired a Firestone facility and got rid of most of the jobs. They equipped the facility with Japanese technology which resulted in the increase in production of tires from 16,400 to a staggering 82,175 tires per month. Also machine technologies can offer pin point accuracy which its flesh-and-blood compatriots cannot.
  • Reorganizing Work Force: Sometimes downsizing can be done without firing. Jobs in one branch can just be shifted to another branch. Most of the times it is beneficial as the employees are acclimatized with their jobs and therefore can make the newer branch operational quickly. This is very common amongst the banks in our country.
  • Job Outsourcing: Another phenomenon that is very commonly observed is job outsourcing prior to retrenchment which is found to be profitable as companies bind with them only through contracts.
  • Creating Space To Breathe: Often companies reverse their initial decision of employing more people as it may give more space to breathe in the workplace.

Against

  • Losing Skilled Workers: Downsizing leads to loss of skilled and reliable workers. The difficulty in finding new suitable workers makes the company ill-equipped and ill-prepared to take advantages of new opportunities like expansion of operations and sudden turnarounds.
  • Complications of Downsizing: One important consideration is the severance pay of the terminated employees. Given that, the company has policies for severance pay; the fired employee has right to it which can sometimes be arduous on the company’s part. Grameenphone for instance have policies for severance pay ranging up to one year’s salary depending on the employees.
  • ‘Bad’ Will: Job retrenchment can adversely affect the good will of a company. The job security of the company may be questioned and integrity be doubted.
  • Job Security Issues: When downsizing workers primarily due to them being no longer necessary to the organization, the workers may feel like victims of injustice. The workers who remain feeling insecure and disoriented when facing the new realities which may have a long term effect in their work.
  • Threats on Firing: Rehiring of terminated employees by the competitors may lead to corporate espionage or exploitation of weaknesses of a company, for which companies prior to job retrenchment has to go through reconditioning of their operations.
  • Wastage of Resources: The cost, resources and time that was involved in training of the employees wasted through their laying off. Some firms spend an awful lot in the training and grooming of their employees.


THE RUDIMENTS

There are conglomerations of laws regarding job retrenchment around the world. According to the labor laws of our country, in case of termination of employment with notice by the employer, monthly rate workers have to be given a written notice for 120 days and other workers a notice for 60 days. Additionally, the terminated employee has to be cleared of all dues of the next 30 working days and the provident fund.


CRITICISM

A major criticism levied against downsizing is, layoff of permanent employees and outsourcing of jobs or hiring of low wage employees may be of little benefit to the company. But some economists suggest otherwise that such practices increase operating efficiency as companies have the space to hire fresh blood with higher level of skills and consequently lead to more profit and growth. Advocates of downsizing hold that, downsizing has helped the United States maintain its position as one of the world’s leading economies.


THE VERDICT

Although job retrenchment has its pros and cons, studies suggest that although it causes temporary disruption for the workforce, it does not cause an overall attrition in standard of living or productivity. So we reach the inference that, job retrenchment may be the answer to solving long term as well as short term impotencies, but reach a point where we can question this practice on ethical grounds. A company resorting to downsizing in case of possible bankruptcy is clear on this ground, but what about the company resorting to downsizing for more profit? Stepping out of the picture and looking at the easel, we find that it needs maximization of productivity. Regards to that, getting rid of the stains, even if it means job retrenchment, is a necessity. But instead of treating the fired employees as dead weight, finding appropriate positions for them would be ethical and a more optimal solution.

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