Companies’ Downsizing Efforts May Not Boost Earnings but Just Lower Morale, Researchers Say

The strategy you employ to rescue your company from the brink might just shove it over the cliff.

So said researchers at Indiana University’s Kelley School of Business who studied the downsizing efforts of eight large U.S. corporations in the 1990s.

“Only half of the downsizings . . . we studied actually resulted in increased profits,” said Vincent Mabert, a professor at Indiana University.

The problems ranged from layoffs that cut too deeply, necessitating the hiring and training of new employees to “dribbling,” or unfocused layoffs that seemed to go on for months, creating a climate of fear among workers. Other companies damaged their image by holding back too much information from their employees, who were less loyal and more likely to seek other work as a result.

Suzanne Masterson, assistant professor of management at the University of Cincinnati’s College of Business Administration, added that some effort must be made to treat those losing their jobs with sensitivity for an important reason: the morale of the employees who remain.

“It’s very important to treat them fairly because that’s the impression that will be left with the survivors,” Masterson said. “Perceptions of justice depend on how these procedures are implemented.”

So-called grunt work, or tasks that are normally beneath the pay scale of an employee, takes on an entirely new slant when a company has shifted from a growth mode to retrenching. That’s another factor employers need to keep in mind.

“They won’t mind wrapping up cable if business is booming and the employees know that they must pitch in temporarily,” said Ellen Whitener, an expert in employee and management relations at the University of Virginia’s McIntire School of Commerce who studied health-care and financial services firms.

“But when you downsize too quickly, the remaining workers have to take on more tasks like that. These are the employees you need to keep, and they may start looking for new jobs when you really can’t let them go,” she said.

“The most important thing is to admit that . . . there isn’t a best way,” Whitener said. “That said, being honest is probably the most important thing, along with having a sensible, coherent strategy.”