Rethinking downsizing

by Isabel Wu

Fans of the hugely popular Dilbert comic strips will recognise Catbert, the Evil Director of Human Resources, whose sole aim is to torment the comic strip company’s employees.

Downsizing, or mass redundancies, is used by organisations to improve their financial position particularly when they are under pressure from shareholders, competition and/or shifting consumer trends.  Downsizing has become one of, if not the most, preferred option for reducing costs and increasing efficiency, yet evidence points to the fact that the results of downsizing are often illusory (this Ivey Business Journal article, Downsizing isn’t what it’s cracked up to be gives a great summary).  With more attention generally given to implementing the redundancies than to the disruptions to workflow, morale, loss of organisational knowledge and the need to recreate the social structure to reflect the reduced personnel, the cost of downsizing is often underestimated and its ability to positively impact on profit often overestimated.  Thus firms often find that one round of downsizing is not enough.

The real reason that downsizing does not work is that organisations do not work the way in which downsizing needs them to if it is to be effective.  One of the outcomes of the industrial revolution (late 1800s/early 1900s) was a system in which work could be mechanised.  Creating standardised jobs allowed labour to be treated as a commodity; workers could be easily replaced, trained, measured and directed, and scales of economy could be achieved.   The organisation charts, divisions and hierarchies became part of the cost overhead needed for the organisation to manage its labour.  Managing well meant not only finding ways to keep the labour needed as low as possible, but also keeping the management overhead as lean as possible.

In this labour-is-a-commodity context, downsizing is logical: as demand changes and processes can be made more efficient, organisations can (or must) make do with fewer bodies.  People are a consideration only so far as downsizing has unfortunate human cost.  Interestingly downsizing began to become more commonplace and accepted in the 1970s, a time when a firm’s value was mostly comprised of physical assets: buildings, equipment, machinery, stock, and so on and labour was needed primarily to power production.  Only 17% of a firm’s value was made up of intangible assets, such as brands and designs.

Markets have been changing steadily since the 70s.   What is produced now extends far beyond the physical goods only to a long list of non-physical attributes: style, reputation, service, environmental concerns, social responsibility, prestige, brand associations, lifestyle affinities, technological advancement,  to name but a few.  In 2010 a firm’s physical assets typically made up only 20% of its total value.   And what delivers these intangible assets to the firm is the non-labour component of work.  It comes from people’s different human inputs: experiences, their endeavours, sense of pride, desire to achieve, curiosity, creativity, camaraderie, and many more, some so fleeting they are barely noticed, but all adding up to significant value for their employer.

Unlike mechanical labour these intangible assets are not the result of the organisation structure managing output.  Managers do not elicit inspiration, innovation, inventions, ideas, a desire to pursue a vision, a dedication to a purpose, interactions that create sparks or spur enthusiasm, through the setting of a roster, or tick of a clock, nor through a list of competencies, or data that can be used for comparative measures.  The infrastructure that produces the far greater component of the organisation’s value is not a cost but an asset, and it is not scalable at all.

Work is and never was a mechanical process.  Treating it as one worked for a time, when demand for mass produced goods drove the economy.  Today’s knowledge economy however demands that work is a human process.  It requires people to interact, collaborate, solve problems, create and use networks, learn, share, and participate in the workplace physically, socially and emotionally in countless ways.

Downsizing is only relevant to the scalable, labour side of work – the side that addresses the organisation’s 20% value in physical assets.  It lays to waste the social and knowledge-based inputs that generate value.  The real failing of human resources is not so much in its failure to plan a workforce to meet the forces that lead to downsizing, but to continue to treat labour as a commodity and management as an overhead that, by downsizing these, are expected to improve an organisation’s performance.

Even if organisations are unconcerned about the human cost of downsizing, the senselessness of using an approach that is so mismatched to the purpose it is meant for, that it is as likely as not to fail, is only to be expected.  And human resource Catberts will continue to play with them before downsizing them.