Downsizing: What it is and how to manage it in your company

Published on 14/03/2024

Downsizing: What it is and how to manage it in your company

Published on 14/03/2024
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Downsizing: What it is and how to manage it in your company

Due to the situation brought about by the global health crisis, many companies have been forced to reduce the number of workers to keep their businesses afloat. That is why the term “downsizing” has been more present than ever in all business environments this past year.

Although there is a negative perception of corporate downsizing, it is much more than a reduction in staff and can even be beneficial for companies and workers if approached from a positive standpoint and through a well-executed plan.

What is corporate downsizing?

The term downsizing is an Anglo-Saxon word that comes from the terms “down” and “sizing,” meaning “to lower” and “size,” respectively. Thus, its meaning is to reduce the number of employees of a company considerably.

Although this is the most literal definition of the term, from a business perspective, it is much more than that. Downsizing seeks to work with optimal human resources to ensure a company’s productivity. Thanks to this reduction in personnel, the company can reorganize its structure and make improvements through the decrease in teams and all the consequences that this entails.

Types of downsizing

When corporate downsizing is applied, we can find two types:

Proactive: Refers to a plan that is prepared in advance and anticipates possible risks that may arise in a company. It does not wait until the last moment when the problem has already been encountered to act and provide a solution, but rather possible alternatives are studied before moments of crisis as a preventive model.

Reactive: In this type of plan, the company is not prepared to face the problems or business setbacks that may arise. Its action is simply reactive and it acts once the problem is presented. Reaction and thinking times are shorter, given the urgency of the situations, so solutions may be less effective.

Advantages of Downsizing

Without a doubt, downsizing offers a series of benefits to companies that apply this strategy within their corporate organization. The main advantages of this practice are:

Cost Reduction

The main advantage of downsizing is the reduction of costs for the company. Mainly, this savings tends to be human, as reducing the workforce reduces costs, as well as the expenditure of time and resources for the organization of said personnel, which also represents a cost for the company.

In relation to the latter, companies can streamline their human resources processes, which can be simplified.

Simplification of the Company’s Organizational Structure

By reducing the number of employees in an organization, its organizational structure is simplified, which has direct consequences on business activity. A company with fewer workers usually has a greater capacity for organization and receiving clear orders.

Improvement in Internal Communication

In relation to the previous point, a company with a smaller organizational chart and with essential job positions has more effective communication channels. Communication between departments and workers is more fluid and less formal, which can be beneficial for the company’s development.

Resource Optimization

When downsizing is chosen, the company starts working with the essential resources to carry out its activity, which means that all those resources that could be replaced or eliminated are optimized, resulting in savings and benefits for companies.

Increase in Productivity

From all the aforementioned consequences, we can extract that downsizing leads the company to be more productive, since it continues to perform its functions only with the strictly necessary personnel and resources. If the company, after applying downsizing, does not achieve the same results, it may not have correctly applied this staff reduction and should review its strategy.

Disadvantages of Downsizing

  • Loss of Talent: By implementing downsizing, companies may be wasting a valid and talented human team that they will no longer have due to poor management of this corporate restructuring.
  • Increased Work Stress: If downsizing is not applied correctly, work stress may increase among the remaining team members of the company, due to increased workload and fewer resources available to carry it out.
  • Work Demotivation: If employees anticipate that they may be laid off in the near future, it may negatively affect their productivity and motivation.
  • Unemployment: Although it is not a direct consequence in the company, corporate downsizing does indirectly affect society by increasing unemployment rates.

For all these reasons, we see that the downsizing process should not be carried out without proper planning, as its consequences, if not applied correctly, can be disastrous for the prosperity of your business.

Tips for Applying Proactive Downsizing

Poor application of downsizing can lead to negative consequences in your company, as we have already seen. Therefore, we give you some tips on how to proactively apply downsizing in your company.

Define Objectives and Need

It is important that before implementing downsizing in your company, you set the objectives you want to achieve with the staff reduction. These objectives must be aligned with the real needs of your company, so as not to decrease productivity and achieve the same results with fewer resources.

Take into Account Current Legislation

The Workers’ Statute regulates in the article on collective dismissal the procedures to be followed when there are numerous dismissals and in order to protect workers and their jobs, it requires certain considerations to carry out such dismissals:

  • Establish a consultation period with worker representatives prior to collective dismissal and its proper communication.
  • Be open to dialogue and the possibility of avoiding dismissal by betting on channels that maintain labor relations.
  • If the number of dismissals exceeds half of the company’s staff, the employer must claim that it has sold all non-essential capital for its activity.
  • The termination of the contract must be communicated individually to the employees.
  • The termination of the contract by workers can be legally challenged.
  • If the dismissal affects more than half of the workers and the company was not in a situation of insolvency, it has the obligation to offer them an external relocation plan.

Leverage Digitalization

In many companies, digitalization and the use of technology can be seen as factors that increase corporate downsizing, but it is true that good use of digital processes in companies can increase worker productivity.

Digitalization can help you understand the real performance of your employees to know which resources are dispensable in your company, which ones to improve, etc.

Employees as a Fundamental Asset

Make sure to put workers at the center of your organization and ensure their well-being and interests. By this, we not only mean caring for their well-being during working hours but in all practices, both at the onboarding and offboarding stages.

To carry out a good offboarding process, it is essential that there be good communication between the employee and the company. At the same time, the company should provide all the necessary resources for the positive completion of the worker’s time in the company.

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