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Downsizing: Reasons, Costs and Implementation

Kurnianing Isololipu
Fakultas Ilmu Administrasi Unika Atmajaya Jakarta
Abstrak
Dalam organisasi, praktik downsizing masih dianggap sebagai sesuatu yang kurang
baik atau negatif. Hal ini dikarenakan, praktek downsizing akan merugikan
anggota organisasi. Meskipun demikian, praktik seperti ini merupakan salah satu
strategi yang dapat membantu organisasi keluar dari permasalahannya, terutama
yang berhubungan dengan masalah keuangan. Tulisan ini menjelaskan tentang
dampak dari praktik downsizing yang harus dihadapi jika praktik seperti ini
dijalankan dan pelaksanaanya seharusnya dilakukan oleh organisasi yang
bersangkutan. Jika praktik downsizing dilaksanakan dengan baik, maka hal ini
dapat mengurangi kerugian dari berbagai pihak, terutama bagi anggota organisasi.
Kata kunci : downsizing, organisasi, pekerja
Introduction
Globalization, tough competition
in the market, abundant human
resources and the invention of high
technology devices (Simone and Kleiner,
2004, p. 16) has changed the
environment for business. Thus, those
conditions also affect the way
organizations operate their business
activities. Most of the organizations,
whether they are big or small, will
experience some difficulties in the
changing environment. The one that will
survive is the one that can adapt with
the environment. The adaptation can be
in the form of strategies, vision and
mission statement, objectives and
infrastructure. One of the strategies
that are likely to be considered by the
organization is downsizing.
Although many publications and
research have shown that downsizing
creates negative effects for the
organizations (Williams, 2004, p. 377;
Cravotta and Kleiner, 2001, pp. 90-93),
downsizing is still a chosen tool for the
organizations in order to maintain
business
persistence.
Enhancing
financial performance and increasing
organizational performance are reasons

that downsizing still implemented in


many organizations. Although the
reasons for downsizing are acceptable,
downsizing can create some costs for
organizations such as changes in
psychological conditions and behaviors
both for survivors and victims. Given the
reasons behind downsizing and the costs
of downsizing, considering organizations
and employees interests, following
downsizing processes and choose the
right victims are significant elements to
be
implemented
in
downsizing
execution. This paper is based on the
argument that although downsizing
creates negative effects to the
organization, however, downsizing will
be beneficial for organization if
downsizing is implemented in the
correct way (Gandolfi, 2006, pp. 1-7;
Zatzick and Ivcrson, 2006, p. 1012;
Cascio and Wynn, 2004, pp. 425-436;
Greenspan, 2002, pp. 39-48).
Downsizing: a brief history
Downsizing has become a
common practice since 1980's. In this
period, downsizing was implemented as
a human resource management strategy
in order to achieve efficiency,
689

Kurnianing Isololipu, Downsizing: Reasons, Costs and Implementation 690

productivity and competitiveness of the


organizations (Cross and Travaglione,
2004, p. 275). The practice of
downsizing was still growing in the early
1990?s, evident in world famous
organizations such as IBM, AT&T,
General Motors and British Telecom
which
had
downsized
large
organizations (Kinnie et.al., 1998, p.
296). Today, many organizations still
execute the strategy of downsizing
because of the changing environment.
The recent economic recession that
happened all over the world resulted in
the more downsizing implemented in
organizations
(Cross and Travaglione, 2004, p, 275;
De Meuse et.al., 2004, p. 155).
Downsizing has been executed
recently in the world's best
organizations such as General Motors,
Fujitsu, Lucent Technologies, General
Electric, American Airlines, British
Airways and Boeing (De Meuse et.al.,
2004, p. 155). Based on the
explanation above, it is clear that
downsizing is considered as a better
choice for many organizations when
they are facing difficulties to maintain
their organizations' business life.
Downsizing
or
"rightsizing"
(Kinnie et.al., 1998, p. 296) can be
defined as "the reduction of the size
and costs of an organization and the
redesign of the work processes, with
intended purpose of regeneration"
(Cross and Travaglione, 2004, p. 275).
Cameron et.al. (1991, p. 62) explained
that there are three kinds of downsizing
strategies:
workforce
reduction,
organization redesign and systemic.
However, the frequent implementation
of downsizing strategies in many
organizations is layoffs or reduction of
employees (Kcts de Vries and Balazs,
1997, as cited in Cross and Travaglione,
2004, p. 275) which is part of workforce
reduction.
Reasons for the practice of downsizing
The most significant reasons to
apply downsizing for organizations are

ADMINISTRATIO

enhancing financial performance and


increasing organizational performance,
although many reasons lay behind the
implementation
of
downsizing.
Enhancing financial performance usually
comes in the form of cutting costs.
Meanwhile, increasing organizational
performance is created through work
redesign. As explained by Mellahi and
Wilkinson (2004, as cited in Wilkinson,
2004, p. 1080), the struggling
organizations are likely to choose
downsizing in order to decrease costs
and
enhance
organizational
performance.
Enhancing organizations' financial
performance is one reason for applying
downsizing in organizations because
downsizing enables organizations to
reduce costs. This reason occurs when
organizations are in difficult situations
such as financial problems because of
"lagging sales or rising costs" (Dc Meuse
el.al., 2004, p. 172). Among three types
of downsizing strategies, workforce
reduction in the form of reductions in
personnel become the common practice
for organizations which aim is to
increase
financial
performance.
Organizations will
choose layoff
because this is the fastest way to
decrease
one
of
the
biggest
organizations' expenses; labour costs. As
stated by De Meuse et.al. (1997, as
cited in Wilkinson, 2005, p. 1082), high
labour cost saving is a benefit tha,t
organizations look for from downsizing.
Some studies (Yu and Park, 2006; De
Meuse et.al., 2004) have indicated that
through layoffs, organizations' financial
performance w i l l improve.
However, downsizing can be seen
as a negative practice if the aim of
organizations only wants to find a quick
way
to
raise
their
financial
performance.
This
is
because
organizations will only care about their
business persistence with less attention
to maintain their employees who already
put a lot of effort in operating
organizations' business activities. In that
situation, employees will be seen as

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691 Jurnal Ilmiah Administrasi Publik dan Pembangunan, Vol.3, No.7, Juli-Desember 2009

"costs to be cut" (Cascio and Wynn,


2004, p. 432; Cascio, 2002, as cited in
Wilkinson, 2005, p. 1084). As a result, it
is not surprising that negative effects
such
as
decrease
productivity,
frustrations, demotivation and conflict
in the workplace (Gilson et.al., 2004, p.
1059; Branco, 1996 as cited in Godkin
et.al., 2002, p. 58) occur in many
downsizing practices. Moreover, layoffs
will not give direct result to the
improvement of financial performance.
As explained by DC Meuse et.al. (2004,
p. 172), it needs at least three years to
see financial performance enhancement
after downsizing. Thus, there should be
other forms of downsizing to enhance
financial performance.
Wilkinson (2005, p. 1083) give
several alternatives to implement
downsizing such as "redeployement,
freezing
recruitment,
disengaging
contractors and other flexible workers,
reducing overtime, secondments, career
breaks, job sharing and part-time work".
These
alternatives
can
allow
organizations to reduce eosts in order to
enhance their financial performance
rather than just cut costs through
layoffs. For instance, organizations do
not need to reduce employees if
organizations implement job sharing or
part time work, in fact, employees are
asked to share job or work not as a full
time, but still have ajob. In this case,
repetition of downsizing is possible
because employees are still maintained
while at the same time organizations
can reduce costs in order to enhance
their financial performance.
Improved
organizational
performance is another reason for
organizations to implement downsizing.
Organizations with a quite long business
life will likely become fatter, then, find
out that they are not flexible anymore.
These conditions make it hard to
compete in the changing environment.
Thus, they see downsizing as a tool that
can improve their performance. As
stated by Millman (1996, as cited in
Kinnie et.al,, 1998, p. 296), "downsizing

ADMINISTRATIO

is invariably promoted under the guise


of improving productivity and reducing
organizational complexity".
Organization redesign is a
possible strategy of downsizing when
organizations are in the situation
mentioned above. It is a better practice
for organizations in order to enhance
their performance because in redesign,
layoff will not be the ultimate tool.
Organizations will analyse the need in
the organization, then, match it to the
design
of
the
organization.
Organizations will change the design
and "eliminate functions, merge units,
eliminate layers, eliminate products and
redesign tasks" (Cameron et. al., 1991,
p. 62) if organizations find that the
resources in organizations exceed what
is needed. It is obvious that
organization redesign will follow some
processes that can enable employees to
participate. Thus, if organization
redesign affects employees, employees
will accept it as a considered action. As
affirmed by Huselid (1995, as cited in
Gilson cl.a!., 2004, pp. 1059- 1060);
increased productivity , less wastage
and less conflict and resistance are the
result of employee involvement in the
organizations' change process.
Given those mentioned above,
downsizing is perceived as a positive
practice because it allows a balanced
position for every resource in
organizations, including employees.
Employees will not be the main object
of downsizing, hence, the design of
organizations, although employees may
still be affected at the end of the
design process. As a positive practice,
thus, downsizing practice can enhance
organizations' performance because
every resource in the organization will
work in order to maintain the
organizations' business. A study done by
Farrell and Mavondo (2005) has
indicated
that
organizations'
performance is affected positively when
downsizing is a result of redesign in
organizations. The redesign practices
implemented in the organizations being

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Kurnianing Isololipu, Downsizing: Reasons, Costs and Implementation 692

researched
are
"reanalyze
and
redesigned jobs and tasks, elimination
of management levels and elimination
functions or departments". Therefore,
employees will know that downsizing is
applied not as a quick tool for the sake
of organizations but rather as "a last
resort" (Mirabal et.al., 2005, p. 41;
Cascio and Wynn, 2004, p. 430) to save
organizations" business life.
Although
the
reasons
for
downsizing seem acceptable in order to
maintain the life of organizations, the
implementation of downsizing will also
create costs in organizations. The ability
of organizations to overcome those costs
will
determine the success of
downsizing
execution.
Thus,
organizations have to know the costs
which may appear when the downsizing
is executed
Costs of downsizing
The
implementation
of
downsizing brings unwanted effects to
organizations.
The
changes
in
psychological conditions and behavior of
either employees who stay in or go out
from organizations are the effects of
downsizing. Stress, anxiety, depression
and frustration (Wilkinson, 2005, p.
1082; De Meuse et.al., 2004, p. 158;
Devine et.al., 2003, p. 110;Branco,
1996, as cited in Godkin et.al., 2002, p.
58) will occur as forms of psychological
conditions.
Meanwhile,
less
job
satisfaction, less commitment, decrease
in productivity, decrease in morale (Yu
and Park, 2006, p. 232; Wilkinson,
2005, p. 1082; De Meuse el.al., 2004, p.
158; Gilson et.al., 2004, p. 1059) result
from
the
employees'
changed
behaviours. However, the higher level
of changes affects more employees
who.stay in organization. As described
by Brockner (1988, as cited in Devine
et.al., 2003, p. 110); more stress, lesser
organizational
commitment
and
motivation were found in employees
who remained in organization after
downsizing, called the "survivor".
Those effects occur because

ADMINISTRATIO

employees feel that organization does


not appreciate their efforts, their
sacrifices to maintain organizations'
business life. Employees see downsizing
as a denial of a psychological contract
(De Mcuse et.al., 2004, p.l 57) between
organizations and employees. Based on
several definitions (Hopkins, 2001, as
cited in Mirabal and De Young, 2005, p.
44; De Meuse et.al., 2004, p. 157;
Godkin et.al., 2002, p. 59), a
psychological contract can be defined as
intangible
agreements
between
organizations and employees about the
responsibilities both have in the
organization.
The perception of organizations'
negation of the psychological contract
with employees can be overcome
through
the
implementation
of
downsizing process in the correct way as
will be examined in the next section.
Treatment for survivors is one
element that organizations have to
consider in order to prevent costs of
downsizing becoming excessive. This
treatment does not want to show that
victims are less important than
survivors. In fact, survivors have more
difficulties in coping with new
organizations'
environment
after
experiencing downsizing. Survivors still
have to put some effort in for the sake
of the organization, while at the same
time, as stated by Travaglione and
Marshall (2000, as cited in Cross and
Travaglione, 2004, p. 276), survivors
have to face the fact that loyalty is not
considered as important anymore in the
organization. Besides that, guilty feeling
over victims, dealing with new and
more
tasks,
striving
for
high
performance {Brockncr, 1988, as cited
in Devinc cl.al., 2003, p. 110; Cameron,
1994, as cited in Godkin et.al., 2002, p.
63; Godkin, et.al., 2002, p. 63) are
difficulties that have to overcome by
survivors, otherwise these difficulties
may lead to stress, frustration and
depression, thus, organizations will
face excessive costs. The key treatment
for survivors by organizations is

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693 Jurnal Ilmiah Administrasi Publik dan Pembangunan, Vol.3, No.7, Juli-Desember 2009

providingjob security (Wilkinson. 2005.


p. 1085; Delaney and Huselid, 1996, as
cited in Gilson et.al., 2004, p. 1059)
because after experiencing downsizing,
survivors will feel insecure for their
future positions in organizations.
Survivors might think that they will be
the next victims if organizations
implement another downsizing. In
addition, based on the study done by
Ebadan and Winstanley (1997, p. 85),
employees chose job security rather
than 'lateral moves" for substitution of
motivators when organization being
researched executed redesign. If
organizations
give
appropriate
treatment to survivors, downsizing is
perceived as a way for the
organizations'
survival.
Thus,
organization can execute downsizing
while at the same time pay attention to
the employees' effects.
In order to make the costs of
downsizing are not excessive and the
implementation of downsizing works
well, organizations have to find good
processes to implement downsizing.
One is that participation both from
organizations
as
executors
and
employees
is
important.
Thus,
downsizing will be a tool that brings
advantages for both organizations and
employees.
The implementation of downsizing
Many organizations tend to suffer
more or not obtain any improvements
both in financial and organization
performances
because
the
implementation of downsizing goes in
the wrong direction. There are three
key points to implement good
downsizing. Firstly, downsizing has to be
seen not only from organizations"
perspectives but also from employees'
perspectives
because
employees
become the centre of the persistence of
organizations. Employees are the ones
who
ensure
that
activities
in
organizations are operated. Therefore,
employees should be treated equal as
any other stakeholders in organizations.

ADMINISTRATIO

As explained by Greenspan (2002, p.


44), an organization can look forward to
"loyalty, respect and commitment" from
employees if the organization treats
employees
as
individuals,
as
"enlightened and empowered" through
"education, reinforcement of company
goals and values, honesty/dignity at all
times, planning and communication".
The downsizing from employees'
perspective is not always negative if
organizations can communicate and
explain the need of downsizing for
organizations. Meanwhile, at the same
time employees can give their opinions
about the downsizing which might be
beneficial for organization decisions in
solving the organization problems.
Greenspan (2004, p. 45) explained that
employees will appreciate future
organizations' decisions which may
affect them, if organizations admit
their weaknesses openly to employees.
Thus, employees will likely give a lot of
efforts in order to keep organizations
alive. Cascio and Wynn (2004) gave
examples of two companies, Agilent
Technologies,
Inc.
and
Xilinx
Corporation, which had been succeed in
implementing
downsizing
through
employees' involvement.
Secondly, the downsizing process
must follow a number of stages because
downsizing needs a depth of analysis
and understanding about organizations
and their environments until downsizing
implementation meets its expectation.
Gandolfi (2006, p. 2) explained that pre
(before
a
downsizing
activity
announcement), during (commencement
and implementation) and post (after a
downsizing is completed) downsizing
processes
should
be
followed.
Meanwhile, he found that when it
comes to the practice of downsizing,
many organizations only do before and
after phases of downsizing. There are
no planning and preparations of
downsizing and also less human
resource plans, policies and programs.
Given this situation, it is not surprising
that downsizing implementation seldom

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Kurnianing Isololipu, Downsizing: Reasons, Costs and Implementation 694

achieves its objectives.


Thirdly, downsizing will be
effective if it can choose people who did
not contribute much to be laid off
because knowledge and skills that
principal for organizations' persistence
are in the hand of the best people in
organization.
Many
downsizing
implementations do not work because
of mistakes in selecting people to be
laid off. The best people tend to leave
organizations first when downsizing
happens in organizations (Mone, 1994,
as cited in Godkin et.al., 2002, p, 63).
To have the right selection of
downsizing for employees, Cross and
Travaglione (2004) gave measurement
to
assess
employees
such
as
"commitment,
job
satisfaction,
intention to turnover and absenteeism".
These measurements, as they show the
contributions of the employees in
organization, can assist organizations to
lay off employees.
The success of downsizing
execution depends on how the process
of downsizing is done by considering
both organization and employees
interests. Although when downsizing is
introduced the first time will bring
various
responses,
well-managing
downsizing will lead to effective results.
Thus, organizations can still implement
downsizing as a tool to maintain
organizations' life.
Conclusion
Downsizing is still a dilemma in
organizations practice because of the
effects on the organization and its
employees. Organizations implement
downsizing in order to enhance their
financial performance and organization.
To enhance financial performance,
workforce
reduction
becomes
a
common practice which results in as a
negative practice of downsizing.
Meanwhile, organization performance
can be achieved through organization
redesign which will be seen as a good
practice of downsizing. At the same
time,
downsizing
threatens
the

ADMINISTRATIO

situations of employees' existence in


the organization which may lead to
costs to organizations such as decreased
productivity,
demotivation
and
decreased commitment of employees.
Thus, paying attention to organizations'
and employees' perspectives, following
the process of downsizing and selecting
the right employees to be laid off can
assist organizations to gain better result
from downsizing execution. In fact,
implementation of downsizing in
organizations will not be seen as a
negative practice, but a practice that
can
solve
problems
faced
by
organizations in order to prevent
organizations existence in the changing
business environment while at the same
time organizations also concern for
their employees.
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