Why Do Companies Downsize?

Companies downsize in response to declining revenue, rising costs, poor economic conditions, bad profit forecasts, elimination of divisions and for strategic reasons. In general, the goal of downsizing is to reduce the labor force and cost in a way that doesn't adversely affect profitability. When revenue falls, cutting costs may allow a company to maintain near-term profit.

Since labor is one of the greatest expenses of a typical company, cutting staff is a fast way to reduce overhead costs. In some cases, downsizing is a response to desperate economic conditions at present. Other times, companies try to act proactively by downsizing based on poor projections for the industry or the company.

Companies also downsize for more strategic reasons. In some cases, a company performs well, but it has divisions or business units that don't. Eliminating unprofitable units may boost the bottom line of the business and preserve capital to invest in upgrading remaining operations. Companies may also downsize as part of a restructuring plan or major change in strategy.

A reduction in workforce based on poor employee performance, unethical activities or criminal behavior is not considered downsizing. Downsizing is based on a broader strategic move of the company to control costs or to positively affect long-term profitability.