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The Downside of Downsizing

Find out why cutting workers may not increase

In an effort to increase productivity while cutting down costs, more and more U.S. companies are shrinking their staffs. There's only one problem with downsizing. It's not working, insists a team of researchers at the University of Michigan.

Of 30 automakers studied over four years of downsizing, only five or six experienced gains in productivity, report Kim Cameron, Ph.D., and colleagues. In the others, corporate performance actually declined following staff reductions.

Possibly, downsizing was so poorly managed that the intended cost reductions have not occurred. But it also may be that downsizing creates resentment and resistance among remaining employees--and that hinders competitiveness.

Organizational shrinkage often leads to what Cameron's team calls "the dirty dozen"--12 negative effects including decreased morale, trust, communication, and innovation, as well as increased conflict, scapegoating, and conservatism.

Cameron and Co. interviewed the heads of each organization five times over the four years and compared their reports with perceptions of corporate culture and the outcomes of downsizing gathered from more than 2,500 employee questionnaires. The end result? The way downsizing was carried out proved more important to effectiveness than the actual size of the work-force reduction.

"The most successful firms implemented both short-term and long-term strategies as they downsized, and they used both across-the-board and targeted techniques," reports Cameron. The short-term, across-the-board shrinkage helps relate the seriousness of the company's problem, while the long-term organizational restructuring rebuilds employee security that changes are in motion to stop the bleeding.

Cameron's team also recommends that the downsizing strategy be designed by employees, not top managers, and that suppliers, customers, and distributors be included in the reductions. And, perhaps most important: "Pay special attention to those who lost their jobs. And those who didn't."