Companies downsize by first determining if the savings exceed the financial and nonfinancial costs, according to Bain & Company. When management decides to downsize, it often forms a committee responsible for determining the size and process of the downsizing. The committee acts in the best interest of the company and shareholders.
In addition to determining the scope and process of the downsizing, the committee must also ensure managers are trained in conducting layoffs and outplacement services are available to displaced workers, explains Bain & Company. Companies and shareholders benefit from downsizing because of reduced costs; rightsizing of resources to market demand; signaling to investors and owners that management is taking proactive steps to match resources with business needs; profiting from post-merger cost synergies; and releasing less productive assets.
Prior to proceeding with downsizing, companies evaluate the overall impact, notes Bain & Company. Despite the cost savings, the side effects of downsizing can damage a company in the long-term. Damage to employee morale, loss of talent, disorder due to the departure of key personnel, public relations problems and an inability to take advantage of opportunities when conditions improve due to minimized staff all serve to dissuade companies from downsizing. Efforts to avoid downsizing in the face of deteriorating business conditions include hiring freezes, salary cuts, shortened work weeks, restricted overtime and temporary plant closures.