When is it right to downsize?

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Recently I had very similar conversations with the HR Heads of two very large corporations. One is a global giant and the other a very large Indian media house. Both were agitated because they were overseeing large downsizing plans. By downsizing we are refering to the job of letting people go and not of shutting down production facilities.

It is never easy to ask people to go, usually for no fault of theirs. And in these kind of exercises the knife usually falls on those who will find it most difficult to find alternative employment. However, corporations believe that they have to put the proverbial stone on their heart else its future, and hence many more jobs, will be in jeopardy.

When a company, which is till profitable (in one case it is down by half to only a few billion dollars now and in the other by a similar percentage and so to a few hundred crores) decides to downsize, is it justified? Does it make good business sense? What do you think?

Please join this poll and express your point of view. This is a very live and real dilema that many of us are facing, from one side of the fence or the other.

{democracy:6}

Comments

6 responses to “When is it right to downsize?”

May 5, 2009

Ravishankar

This was a comment I sent in response to a poll on downsizing in a blog I follow. Basically the writer was asking a few questions on reasons behind downsizing. I thought I should not lose what I wrote and therefore this post. If you are keen to read up the original post by the writer I have given the web address at the end of this post.

Being a bong, there is this socialistic streak in me. Given that, I feel its a larger question of whether its the right economic system where absolutely everything is decided upon by the market. Most companies, when the going is good, do not ever strategize for bad times in spite of the finance manager trying to be the internal devil’s advocate.

There is also this issue of most organizations not strategizing in a scientific manner regarding human resourcing. Most HR managers are not really allowed to apply their skills and thoughts in an organization, where most of then not everything is decided upon by line.

If you take the IT sector, these body shopping guys(Infosys is the largest!!!) kept having huge benchstrengths where the people had no work. And then there is some catastrophe and people have to be sacked.

More and more now, people should be careful about selecting organizations who they think are employee prone in thought and practice. HR cult has to flow from the operating managers. And of course the “D” of the HRD is a mostly a joke in most Indian companies.

And organizations need to build a culture of truth. Most metrics that are published are not true and window dressed. The Balance Sheet is ofcourse the biggest lie of them all. An instance I want to share with you. A bank in Dubai published their 2008 figures last week where they declared a Net Profit of 500 Million AED. Would you believe that 1000 million AED was received as a grant(due to liquidity crisis) from the Emir which was shown as an Income instead of increasing the capital or reserves. They had actually made a loss of 250 million AED.

In Indian companies we have over or under invoicing, there is no standard of ethics for human beings, the system is corrupt. As I mentioned earlier, the truth is only know to the top and the people below and the general public are thought to be stupid. so when senior managers talk about work ethics and the philosophy of developing their human resources, I take it with a pinch of salt. The proof after all is in the eating.

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May 5, 2009

Sanjeev Roy

A friend, who is part of the ownership of a mid size pharma enterprise in the country sent me this comment directly. I found it very thought provoking so am publishing it here. Since he did not comment on the site, I am leaving his name out of it:
‘Good to see that you’re active as hell trying to make people think.

It’s got me thinking and I feel that your question is flawed. There is a bias in the way the question is framed that is designed to illicit a sentimental response rather than logical one, so you will get tailored responses depending on who is answering – lower and middle management will give you an overwhelming “No” as the very thought of profitable companies laying off is preposterous and predatory. The responses you get from higher and top management will be more spread across and real. So the result of the poll is purely dependent on the traffic on your site, which is why it is flawed.

It could work better if the questions were more from a role playing angle – “If you were the head of a corporation responsible for…” as it could remove some bias.

Few people truly understand the responsibility that comes to the person who at the end of the month has to “pay the salaries” & “pay the rent” irrespective of the market dynamics. That same person has figure out whether he will still be able to “pay the salaries” & “pay the rent” after 6 months. Even global companies who lay off locally when they’re showing local profits are at the end of the day a part of a whole. If the large company does not survive, no matter how profitable the smaller subsidiary is, it will go down. So there are many issues to consider.’

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May 6, 2009

Ganesh

Let us look this in two parts.

The first part being the right sizing. At any given point in time, size of an organization and its productivity is a critical measure of the health. Given that this is true there can be structures developed for driving growth. Organizations typically have an organic or inorganic growth approach based on the industry & its maturity stage, the organization’s strengths etc…Successful organizations are those who while driving inorganic growth, have the ability to manage challenging times and keep employees motivated. Rightsizing is a clear signal that the organization and the management in particular has given up on its strengths and capabilities. Its like laying down arms. Organizations preferring to grow inorganically, have no reasons to use this opportunity to right size as the risk reward mechanism’s are very conservative.

However having said all this over a period in time organizations use such opportunity as a cleanup exercise which any how they should have done on a regular basis.

The second is the socio cultural weave of our society. Any individual being laid off is viewed suspiciously on capabilities by the society and creates a barrier in the individual seeking reemployment. If this issue gets viewed positively the entire process can become more pragmatic for everyone.

Further, during the hay days, the reward in many organizations is not commensurate with the business results and neither is a corpus created for sailing through rough weather. This I feel is a leadership issue. Another issue under such circumstances is that every leader is trying to prove his worth to the organization at the cost of his team members. The cycle eventually catches up with them too.

So i feel there is no right or wrong general answer to this question. It is a part of the fabric that is worn and we need to deal with every incident in an appropriate manner. Any organization that takes corrective measures from time to time (irrespective of its business results) stands to gain in the long run and is least impacted in the downturns.

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May 6, 2009

ranjan

Business is the business of creating wealth…
Human resources is one of the important factors of production of goods & services in the process of creating wealth. As a shareholder, the main objective remains to be maximising returns on invested capital.The consideraions of other stakeholders are significantly secondary in nature.
In that context, returns of an entity can only be measured by one yardstick – whether that meets the expectation of the shareholder or not.To achieve such goal, any factor of production( like human capital ) needs to be effectively utilised & will be always optimised to get the maximum return as envisaged by the investor.
In the context of your question, the argument of laying off labour inspite of significant profit ( relative data point) is irrelevant.Moreover, the investor adjusts factor of production to maximise return not only for current but future period of time considering risks & returns of the future market conditions.Hence, current profits do not indicate future risks on returns.
Hence, adjustment of factor of production is a natural phenomenon in the process . No investor or shareholder will be imprudent in judgement to adjust labour if that significantly runs the risk of future returns. This adjustment happens only after recourse to adjustment of all other factors of production.
In the current context, shareholders are even more sensitive to long term sustainibility of future returns & opportunities & hence are more sensitive to adjustment of labour which carries the highest burden on emotional engagement of business & society.
In any case, all these actions get already reflected in the market valuation of an enterprise & hence one can almost instantenously get to see the implications & consequences of such actions in the value of the enterprise.
Hence, many a times laying off labour does not shore up the stock price of an entity which clearly refelcts how market factors such action in the valuation.In the end, the market decides everything, albeit dispassionately & objectively.

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May 6, 2009

Samrat DasGupta

For the first 30 years of his working life, my father was employed. And in those 30 years, he changed his job thrice.

I have been working for thirteen years and I have been on the payrolls of seven companies.

Clearly I am not from the married-to-the-company generation. And if I can move to another job because of my financial/value gains, I think it is only fair that my company should move me out if I’m not being able to bring in the expected value to the table.

In the words of a very nice gentleman from Tata Chemicals who was on a flight with me, “The first thing your generation does is get a make-belief ownership of a fancy car, a house, a home-theatre. This is just the universe’s way of making you think before you jump in for the next EMI.”

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May 8, 2009

Sumit Roy

I agree with Samrat,

Divorce for reasons of better money should be implemented from both sides.

I voted “No” to shedding people if the company was still profitable.

That’s because I firmly believe that employees are the brand’s best ambassadors.

When times are tough I’d take out “advertising expenses” and invest it in making employees walking, talking advocates of the brand.

Of course if you think building brands is a short term business then you are welcome to shed some of your best advertisements. And while you are at it, why not shed a few shareholders and loyal business associates as well.

After all, like advertisements, they can always be bought at a cost anyway.

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