Human Resources Management T.11. Downsizing and Redundancy

1. Human Resources ManagementT.11. Downsizing and Redundancy D. Borisova

2. Contents • Reasons for Redundancy and Downsizing • Essence of Downsizing and Redundancy • Different methods, by which downsizing is done • Potential problems if downsizing is mismanaged • The redundancy process: • Consultations • Redundancy selection • Support for both fired and ‘survivors’ • Financial and human implications of downsizing on organisations

3. Termination of Employment – Why? • Voluntary Resignation • Retirement • Expiry of contract • Dismissal (disciplinary) • Downsizing • Redundancy

4. 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 Redundancy and Downsizing

5. 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

6. Reasons for Downsizing • Structural decline • Privatization • Outsourcing • Decreased activity • New technology • Reorganization and reengineering • Bankruptcy • Poor financial performance

7. 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

8. Methods of Downsizing • Natural wastage • Compulsory redundancy • Voluntary redundancy • Early retirement • Redeployment

9. Proportion of change in total number of employees in Bulgarian organizations during the last 3 years (Cranet, 2003)

10. Methods, used for downsizing in Bulgarian organizations (%, CRANET, 2003)

11. 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

12. 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

13. 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 company’s resources are depleted • Much more common for private sector

14. 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

15. 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

16. Three Approaches to Downsizing (Cameron, 1998) • Workforce reduction strategies: focused primarily on reducing headcount and usually implemented from the top downwards; short-term; risky outcome • Work redesign strategies: aiming to redesign tasks, units, structures, work, not jobs; mid-term • Systematic strategies: focused on changing culture, attitude and values, not just reduce jobs; on-going process based on continuous improvement theory; long-term

17. 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”

18. 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

19. Statutory Consultation • Collective Redundancy and Transfer of Undertakings (Protection of Employment) regulations, 1999: • Requires consultation if > 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

20. Benefits from Involving Staff • Achieving a smooth run-down • Reduced stress levels • Avoidance of industrial actions (strikes) • Transfer and retention of key managerial, professional and skilled staff • Maintenance of good will towards the company from leavers, survivors and the community

21. 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

22. 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

23. 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

24. 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.

25. 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

26. 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 week’s pay per complete year of service • 21-40 – 1 week’s pay per c.y.s. • 41-63 – 1.5 week’s pay per c.y.s. • 64+ – overall entitlements are reduced slightly • Statutory maximum for a week’s pay = £290 • Statutory maximum years service = 20 • Statutory maximum redundancy pay = £8,700 (but employer may offer more than statutory limit)

27. Importance of Proper Management of the Process If mismanaged, downsizing could cause major damage to both organisation’s potential and image: • It affects organisation’s 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

28. 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

29. 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

30. 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

31. 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”

32. “If you compete by building – you have a future … if you compete by cutting – you don’t” Stephen Roach, Chief Economist at Morgan Stanley