The Grey Chronicles


Downsizing: Best Practices

Cost Reduction and Control Best Practices, The Best Ways for a Financial Manager to Save Money

Recently read Institute of Management and Administration [IOMA]’s Cost Reduction and Control Best Practices, The Best Ways for a Financial Manager to Save Money (2006), probably an appropriate read in this time of worldwide economic crisis.

In its preface, it states:

“The United States is currently experiencing one of the strongest economic environments and profit rebounds of the past 20 years. Nonetheless, most businesses are still targeting areas in which to further streamline costs and ultimately set the stage for a resilient bottom line during the next downturn. Because of the strength of the current rebound, though, most top executives have altered their cost-control focus. How can they—and you—be certain about what to focus on next?”

The book consisted of 16 Chapters on best practices to reduce and control cost in compensation, retirement and benefits; human resource and training; accounting and finance; purchasing, inventory and exports; outsourcing, downsizing and consultants, and business tax.

The following are excerpts from the book:

“Reducing the number of employees for whom you pay salaries, benefits, and government taxes is an immediate and seductively simple way to pump plasma into an anemic bottom line. Over the long term, however, job cuts can leave a company eviscerated, talent-hungry, and at risk for long-term financial failure.”

“Work groups disrupted by the downsizing process had lower levels of creativity than stable ones; anticipated downsizing proved more demoralizing to the creative process; and overall, lower creativity resulted from the degraded work environment that followed the downsizing.” (Amabile & Conti, 2000)

“Downsizing done correctly (as part of a well-thought-out, overall corporate restructuring plan) can tighten operations and procedures and boost overall corporate performance.”

So what is needed for doing a downside correctly?

“If your organization decides that workforce reductions are necessary to reduce costs as part of a restructuring or in response to market dynamics, then the first step is to assemble a team and develop a downsizing plan, which includes the downsizing objectives, involvement of employees, selection of downsizing methods, calculation of the cost of downsizing, develop an implementation plan and checklist an an evaluation of the aftermath.”

“Incentives work, but multiple strategies help to improve outcomes. . . multifaceted approach [such as]: Total or partial attrition, Early retirement and buyout incentives, Involuntary separation, or Leave without pay.”

But consider the following effects:

“In almost any context and over many years, research has shown that across-the-board job cuts undertaken just to reduce payroll expenses, increase profitability, and subsequently, shareholder value, probably will fail over time.”

“Cascio reported their findings in Responsible Restructuring,(2002) stating, "We found no significant, consistent evidence that employment downsizing led to improved financial performance, as measured by Return on Assets (ROA) and industry-adjusted ROA" (operating income before depreciation, interest, and taxes divided by total assets). In fact, "employment downsizers" (companies with a decline
in employment greater than 5% and a decline in plant and equipment less than 5%) were less profitable in the year of the downsizing than either "upsizers"”

Why they fail?

“Six common mistakes to avoid:
1. Being unclear about long- versus short-term goals.
2. Failure to change work processes.
3. Failure to involve workers in the process.
4. Failure to communicate openly and honestly.
5. Failure to evaluate results.
6. Failure to consider health consequences.”


Institute of Management and Administration [IOMA] (2006). Cost Reduction and Control Best Practices, The Best Ways for a Financial Manager to Save Money. New York: John Wiley & Sons, 1986. 310pp. back to text

Amabile, Teresa & Conti, Regina (2000). “Minding the Muse: The Impact of Downsizing on Corporate Creativity.HBS Working Knowledge, no. 1, May 2000. back to text

Cascio, Wayne F. (2002).
Responsible Restructuring. Berrett-Koehler Publishers, Inc./Society for Human Resource Management, 2002. back to text

1 Comment »

  1. Nice site. There’s some good information on here. I’ll be checking back regularly.

    Comment by Mike Harmon — 2008.December.20 @ 09:15 | Reply

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