Question: I've tried to avoid layoffs, but if the economy continues in this downward spiral I see having to downsize soon. Is there a right and wrong way to implement cutbacks when the time comes that you have to?

Mike R., President and CEO

Lyn's Answer:  Downsizing a small business or large corporation must focus on the same question:  How will it affect your current and future productivity?  Looking at history, we can assume business will spiral up again at some point, so how do you manage your company's current fiscal health while maintaining your growth potential? Fortunately there is some useful research to help you answer this question. A study by the American Management Association found that 40 percent of organizations reported that productivity sagged after downsizing, and 18 percent reported that quality suffered. Morale was hit even worse: 58 percent said morale worsened, and 37 percent said keeping employees was more difficult. 

That's the bad news. The good news is that there are effective ways to handle layoffs. The problem at most companies is that all the attention is focused on the downsizing process, and little is given to the remaining employees, who will be the company's greatest assets for the future. They should just be happy to still have a job, right?

David Noer, who has done one of the most in-depth studies of layoff survivors (Noer, 1993) found that after downsizing survivors at all levels of the organization showed fear and insecurity; frustration, anger, sadness and depression; a sense of unfairness; reduced risk-taking; and lowered productivity.  Although many layoff survivors feel glad that they escaped, they don't feel good about top management - the people they see as responsible.

Bob's Answer: Mike, as a CEO you might be wondering - in tough times like these, is shaking people up a bad thing? Doesn't it keep my employees on their toes and bring out their best? One researcher found that productivity does go up with mild job insecurity (Brockner, 1992) but declines when insecurity becomes extreme.

Even more discouraging is the follow-up study done by David Noer, the researcher Lyn mentions above. He found that many of the symptoms are still present after five years - employees are often passive players waiting for things to happen. So just when the company needs creative, innovative risk-taking to pull out of a downturn, key players may be hunkered down, waiting for someone else to stick their neck out. Disillusioned managers talk with their people less just when they need to communicate more. The cultural shift to high performance never comes - the organization gets bogged down in turf wars, anger, politics and isolation. People become more cautious and leaders at every level become more risk averse.

Lyn:  Fortunately, that scenario is avoidable. Brockner also found that if survivors see the layoff as fair and well handled, its negative effect on productivity and morale is less. His research found that employees respond better when the justification for downsizing is explained well, and well in advance by top management; when all levels share the burden; those who leave are given services to soften the blow; and employees are involved in the process.  Equal attention must be given to the important work of revitalizing the survivors who will build a new, high-performance culture. Put succinctly, what's required is: (1) information, (2) attention, (3) a clear vision of the future, and (4) group programs to help employees deal with grief and sadness and the transition to a new culture.

Bob:  To downsize without damaging productivity, Mike, leaders like you need to pay attention to employees at every level. A Hay Group study found that top leaders often have a poor ability to take the pulse of the organization - they see morale as good when objective assessment shows it sinking.  Open up two-way communications - something as simple as a suggestion box or on-line forum has worked for other small businesses - or walk around and ask questions. Communicate a clear vision of the direction you see the company headed. Hay Group also found some leaders expected negative morale and ignored it. But if you acknowledge and participate in activities that grieve the loss of co-workers and the old culture, you can move your organization forward to a new, productive business environment. This is such a critical issue for long-term survival, we are offering readers a white paper with new research and additional answers  http://www.turknett.com/sectionR/art4.asp for leaders on effective downsizing. 
 

Turknett Leadership Group has guided executives from Fortune 500 companies and entrepreneurial firms to successful answers for over two decades. If you have a question about the best way to lead your organization or develop your own skills as a leader, send a confidential e-mail to: Answers@turknett.com