Human Resources Management T.11. Downsizing and Redundancy

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Human Resources ManagementT.11. Downsizing and
Redundancy

• D. Borisova

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Contents

1. Reasons for Redundancy and Downsizing
2. Essence of Downsizing and Redundancy
3. Different methods, by which downsizing is done
4. Potential problems if downsizing is mismanaged
5. The redundancy process
6. Consultations
7. Redundancy selection
8. Support for both fired and survivors
9. Financial and human implications of downsizing on
   organisations

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Termination of Employment Why?

• Voluntary Resignation
• Retirement
• Expiry of contract
• Dismissal (disciplinary)
• Downsizing
• Redundancy

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Redundancy and Downsizing

• Redundancy
• any dismissal for a reason not related to the
  individual concerned, or for a number of reasons
  which are not so related
• 1993 Trade Union Reform and Employment Rights Act

• Downsizing
• planned elimination of positions or jobs
• - Delayering managerial downsizing
• Cascio, 1993 cited in Redman Wilkinson, p 279

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Downsizing Enigma

• Insufficient attention in HRM books as if
  downsizing was something dirty or malicious
• Use of overly euphemistic jargon when describing
  it
• Most pervasive, yet understudied phenomenon in
  the business world Cameron, 1994
• An isolated and unpleasant element of HRM
  practice that is hurriedly carried out and
  quickly forgotten

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Reasons for Downsizing

• Structural decline
• Privatization
• Outsourcing
• Decreased activity
• New technology
• Reorganization and reengineering
• Bankruptcy
• Poor financial performance

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Implications of Downsizing

• Reduction of security
• Threat to poor performers
• Greater pressure for hard work, higher
  productivity and beating out fellow workers
• Decline in opportunities for advancement
• Promotion and salary rise are not sure or
  predictable

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Methods of Downsizing

1. Natural wastage
2. Compulsory redundancy
3. Voluntary redundancy
4. Early retirement
5. Redeployment

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Proportion of change in total number of employees
in Bulgarian organizations during the last 3
years (Cranet, 2003)
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Methods, used for downsizing in Bulgarian
organizations (, CRANET, 2003)
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Natural Wastage (Attrition)

• Giving the individuals a free choice weather to
  leave or stay
• Relatively easy to implement via a recruitment
  freeze
• Uses the increase of labor turnover in
  retrenchment situations
• Problems
• Unplanned
• Unpredictable and uncontrollable by management
• May have avalanche effect
• Depresses workforce morale

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Voluntary Redundancy

• Expensive and offering limited control over the
  process, but still preferred by most employers
• Targets marginal performers, who fear to be
  dismissed without any financial cushion at a
  later stage
• Usually refers to those likely to re-enter the
  labour market
• Could be forced by managers by threatening
  tactics encouraging redundancies

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Compulsory Redundancy

• A last resort strategy for employers
• Gives employers the opportunity to design and
  implement criteria based on business needs
• Used where downsizing is large-scale or where
  companys resources are depleted
• Much more common for private sector

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Early Retirement

• Used in combination with other methods
• retired is much more socially acceptable r
  than redundant
• Usually applied to those unlikely to seek further
  full-time jobs
• Facilitated by expansion of occupational pension
  schemes and private pension funds
• Provoked by the nature of some payment systems
  where is more cost-efficient to hire young
  employees
• Workers must be given such opportunity by the
  legislation

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Redeployment

• Easier for lower-level grades of employees and
  difficult for managers
• Requires considerable coordination between
  departments
• Need for retraining and acquisition of new skills
• Need for degree of pay protection for employees
• Problems with adaptation and socialization in the
  new working environment

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Three Approaches to Downsizing (Cameron, 1998)

1. Workforce reduction strategies focused primarily
   on reducing headcount and usually implemented
   from the top downwards short-term risky outcome
2. Work redesign strategies aiming to redesign
   tasks, units, structures, work, not jobs
   mid-term
3. Systematic strategies focused on changing
   culture, attitude and values, not just reduce
   jobs on-going process based on continuous
   improvement theory long-term

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Redundancy Management Issues

• Avoidance of redundancy
• Measures short of compulsory job losses
• Need for formal written redundancy procedure
• Consultation requirements
• Selection for redundancy
• Redundancy/severance processes
• Compensation and redundancy pay
• The survivor syndrome

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Avoidance of Redundancy

• Work re-organisation and other business
  solutions
• Freezing recruitment
• Reduced use of temporary workers, contractors and
  flexible staff
• Elimination of overtime
• Shortened working hours, introduction of
  part-time, job sharing and other forms of FWAs
• Wage reduction
• Retraining, relocation
• Temporary lay-offs
• Redeployment

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Statutory Consultation

• Collective Redundancy and Transfer of
  Undertakings (Protection of Employment)
  regulations, 1999
• Requires consultation if gt 20 workers affected
• Trade Union must be consulted if recognized
• If no TU, employee representatives must be
  elected for consultation
• 20-99 redundancies 30 days prior to dismissals
• 100 redundancies 90 days prior to dismissals
• Consultation, not negotiation about ways of
  avoiding dismissal

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Benefits from Involving Staff

1. Achieving a smooth run-down
2. Reduced stress levels
3. Avoidance of industrial actions (strikes)
4. Transfer and retention of key managerial,
   professional and skilled staff
5. Maintenance of good will towards the company from
   leavers, survivors and the community

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Selection for Redundancy

• Move from seniority (LIFO) to selection based on
  assessment of skills and performance
• Enables managerial control
• Fair methods and selection criteria
• No discrimination in terms of
• TU membership
• Age
• Sex or maternity related
• Racial or Disability grounds

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Selection Criteria

• Request for voluntary redundancy
• Skill levels
• Personal specifications
• Performance assessments competency-based,
  assessment centers, selection committees, etc.
• Job ability or attendance records
• Sole basis of managerial judgment too
  subjective and manipulative

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The redundancy processadapted from Corbridge and
Pilbeam, p.482
Potential redundancy
Measures short of compulsory redundancy
Informing workforce
Consultation
Redundancies announced
Training and enabling managers
Selection Payments Support
Re-balancing
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Post-Redundancy Assistance

• Redeployment centers
• Business start-up advice
• Training and counseling
• Financial advice and loans
• Outplacement support
• Pre-retirement education
• Job search help and references
• Stress management, etc.

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Benefits in Use of External Outplacement
Consultants

• Provide special skills
• Seen as credible, professional, objective and
  independent of the employer
• Expensive about 15 of the total cost of
  redundancy

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Severance pay (UK)

• Compensatory financial support paid as a lump sum
  to dismissed employees
• Statutory minimum redundancy payment entitlements
  in UK
• Under 18 no entitlements
• 18-21 0.5 weeks pay per complete year of
  service
• 21-40 1 weeks pay per c.y.s.
• 41-63 1.5 weeks pay per c.y.s.
• 64 overall entitlements are reduced slightly
• Statutory maximum for a weeks pay 290
• Statutory maximum years service 20
• Statutory maximum redundancy pay 8,700 (but
  employer may offer more than statutory limit)

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Importance of Proper Management of the Process

• If mismanaged, downsizing could cause major
  damage to both organisations potential and
  image
• It affects organisations selection
  attractiveness and may produce hire and fire
  image
• Customers may worry that it may go out of
  business or about the quality of supplies or
  services

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Benefits from Downsizing

• Savings in labor costs
• Speedier decision-making
• Better communication
• Reduced product development time
• Enhanced involvement of employees
• Greater responsiveness to customers demands

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Threat of Post-Downsized Anorexic Organization

• Damaging effect on corporate performance and
  culture
• Greater employee turnover
• Poor performance and lack of loyalty
• Adverse effect on innovation
• No financial improvement resulting from the
  lay-offs

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Survivor Syndrome (Brockner, 1992)

• Limited support for the lucky ones
• Shock, guilt and low morale
• High levels of skepticism
• Fear for their future
• Increased stress and pressure
• Intensified work and jobs they may be
  ill-qualified to do
• Increased quit levels
• Decreased productivity
• Need for training, communication and counseling

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Downsizing or Dumbsizing?

• Downsizing may cut labor costs in the short run,
  but it can erode both employee and eventually
  customer loyalty in the long term Pfeffer, 1990
• Little evidence that downsizing improves
  long-term profitability and financial performance
• For new work arrangements to pay off, employment
  needs to be reasonably stable
• As far as economic effectiveness is concerned,
  downsizing is far from rightsizing

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• If you compete by building you have a future
  if you compete by cutting you dont
• Stephen Roach,
• Chief Economist at Morgan Stanley