Downsizing: A Poor Option for Small BusinessesByRaymond D. Matkowsky
Even in an economy that was going strong, company downsizing was and still is commonplace. Since 1990, Xerox, Eastman Kodak, Sears and IBM have eliminated more than 154,000 jobs. In July of 2000, the brokerage firm of Merrill Lynch announced plans to slash 1,800 jobs from its payroll. This is in spite of the fact that the company announced a 34% increase in second quarter earnings. In 2001, Raytheon eliminated 1,000 jobs in Atlanta Georgia alone. During the first six months of 2008, the United States Labor Department reported a loss of 324,000 jobs. This is not only a U.S. problem, but a worldwide problem. On June 8, 2008, Siemens, one of Germany’s largest exporters, said that it world eliminate 16,750 jobs world wide. This represents 4% of their workforce.
According to the Journal of Management Inquiry (June 1997), American corporations eliminated approximately 3,000 jobs every business day between 1992 and 1997. December 2000 alone brought announcements of 133,713 layoffs. As of October 2014, there is currently 9.3 million long term unemployed. They were "downsized" out of their jobs and have little prospects of regaining them. Corporate executives have decided that downsizing is the way to cut costs, save money and increase competitiveness. However, the bottom line is that downsizing many times accomplishes none of those goals. Downsizing is a poor operational answer to problems that may require strategic solutions instead.
Conventional Wisdom
Conventional wisdom holds that downsizing increases a business’s profitability. However, a 1992 report by The American Management Association revealed that only 228 companies out of 547 that conducted a reduction in force (RIF) within previous years had improved profits during a post downsizing period. A similar study of the financial performance of a group of Fortune 100 firms revealed that their performance actually worsen in the two years following layoffs. In the majority of cases a RIF did not deliver an increase in profitability.
60% of U.S. workers are employed by small businesses (companies that have payrolls of less than 100 employees). If Fortune 100 corporations find it difficult to improve financial performance through a reduction in force, then small businesses that do not have excess employee resources can only expect to add a drop to the financial bucket at best. Downsizing is a poor option for small entrepreneurs.
Downsizing Is A Lose-Lose Proposition
Business is like a wheelbarrow; someone has to push it. Just as a RIF is not an option for a small business, the same is true for doing nothing. Cost reductions need to be implemented. Remember that just as twenty nickels equals a dollar, small changes can total up to huge savings. Small changes tend to be easier to implement than large ones.
Downsizing is a lose-lose proposition. The employee who gets separated from his or her job loses. It may even be a bigger loss for you. You’ve lost the services of a trained employee who knows your business, knows your customers, and knows what they want and how they want to be treated. Plus, that employee knows how you want things done. The loss of an employee is also a big security risk.
Employees Represent A Big Investment
Employees represent a big investment on your part and downsizing just throws that investment away! You need to implement win-win situations that capitalize on those investments, not throw them away. So, what are the options?
There Are Many Possibilities
First, the small business manager must be creative and have a predetermined plan. No one solution will work well for all enterprises. It may take some experimentation to determine what does for you. It probably will take a combination of actions that finally do the trick.
Assume that your order book just does not support the services of all of your employees. Say you have a staff of twenty. A staff of fifteen is a more reasonable number in the economic climate. But, should you lay-off five people? More than likely, it is too small of a group to make much of a difference. However, it could be argued that cash conservation is the rule during a recession and a lay-off, no matter how small, will conserve some precious cash! Except, how much will it cost to replace those people once the recession is over? How much productivity will be lost until these new hires can be brought up to their maximum efficiency? Your final cost may be more than saved by the lay-off. What is needed is a way to preserve the cash that would be spent on payroll without sacrificing employees in the process.
Employees have lives away from the job. At times they may face pressing issues that require a great deal of attention. They may have a sick child, spouse or disabled parent. They may want to take college classes that normally interfere with their work schedule. For 100 employees there maybe 110 reasons. A slowdown in your business may be an opportune time to ask if anyone needs such accommodations.
Be aware though that a worker may not be able to avail himself of your offer without some further incentive. Even though there is a federal family leave law few people have utilized it, because many cannot afford to do so. A parent with a sick child may not be able to afford a loss of medical benefits for example. A continuation or sharing the costs of benefits and a job upon return may be enough to sway the employee to take the leave. You need to be creative and develop a win-win situation that both the company and the employee can benefit from.
Out of your twenty employees, lets assume that only one person is willing to take a voluntary leave of absence. You still need to reduce your payroll by the equivalent of four people per week or an additional 640 hours per month. If all of the remaining 19 employees work two hours per day less for twenty days, that is a savings of 760 hours of payroll time per month, that would allow you to keep most of your staff on the job without resorting to an employee lay-off. The advantage is that as the recession eases you just inform your workers when they will resume their regular schedules.
Maintain Your Quality At All Costs
The above is just an example. The numbers quoted can be adjusted to your company’s needs. No two companies are alike. There are many actions that you could take that will save you money while sparing your employees the hardship of layoffs. You need to determine the correct balance to aim for. Make sure that your production is operating at top efficiencies too, so that your reduced staff can still maintain a high level of output, quality and that once you return to normal operation quality will not suffer.
By implementing the above suggestions, you can conserve cash without the loss of valued employees and remember that your employee relations efforts now will have a significant impact on your bottom line in the future.
Do you have any other suggestions, please share them with your fellow readers. Email me at rdm@datastats.com.
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