How to Implement Effective Corporate Downsizing Strategies

Corporate downsizing can occur for a number of reasons, like a slump in profits, plant closure, or business acquisition. And unlike some common beliefs, it typically has nothing to do with employees’ performance. Instead, it’s a strategic business move to cut operational costs, maximize production, and increase profit.

In other words, corporate downsizing is just another part of doing business—even if it’s a difficult part. When a downsizing event does happen, though, it’s up to HR to pick up the slack, meaning that it’s vital for HR teams to be prepared and properly plan, manage, and execute workforce reductions when the time comes.

This brings us to an important question: How should HR handle corporate downsizing while maintaining a strong corporate image and making the process as stress-free as possible for displaced employees?

Good question! First, though, we need to thoroughly understand corporate downsizing so that we can then put a plan in place.

In this blog, we’ll cover:

• What corporate downsizing is.
• How to manage downsizing events.
• Ways to select employees if a RIF is required.
• Legal concerns when downsizing
• Common downsizing questions

Corporate downsizing refers to a deliberate and strategic process through which a company reduces its size, primarily by eliminating positions, roles, or entire departments within the organizational structure.

It also involves streamlining operations, optimizing resources, and realigning business objectives to enhance efficiency, cut costs, and maintain competitiveness.

While downsizing is rather common, it must always be handled delicately to make sure that staff members are set up for success after the event. Not only will a proper downsizing strategy help the event go smoothly, but it will also protect your corporate brand and help retain key talent.

There are many reasons for a company to have a downsizing event, and each company will likely have a very unique situation. Here are the most common:

• Organizational restructuring, mergers, or acquisitions may prompt downsizing to align resources with the new structure.
• Changing market conditions, such as decreased demand for products or services, can necessitate downsizing to maintain competitiveness.
• Technological advancements can lead to downsizing as automation replaces certain job functions.
• Companies may downsize to reduce costs for a myriad of reasons, especially during financial downturns or to address inefficiencies.
• Industry changes may cause a need to shift focus or streamline operations to improve overall efficiency and profitability.

One of the biggest questions people have is whether or not downsizing is the same as layoffs. While they are intimately linked, they are not truly the same. A layoff is when an employee or group of employees is let go from an organization for a myriad of business reasons—including downsizing. So, layoffs can be a part of downsizing, but the two terms shouldn’t be used interchangeably because downsizing can have other outcomes for employees besides their position being eliminated.

For example, layoffs may occur from a corporate downsizing event as a way to reduce headcount. However, downsizing could also see employees shift to other teams or take on completely new jobs inside the company if a department was eliminated because of a business pivot.

To put it simply, layoffs can be a tool used to achieve the desired outcome of a downsizing event, but they are not 100 percent the same thing as “downsizing” themselves.

Downsizing can come in many forms. However, here are some of the most common tactics you should know about:

• Reductions in force (RIF) and layoffs. The number one tactic is to reduce headcount and employee costs. Since downsizing typically occurs when a business pivot happens or during economic downturns, reducing staff is almost always a go-to. Remember, while this tactic saves costs immediately, the repercussions of this route must be carefully considered.
• Cost reduction. Just like headcount reduction, this tactic looks to save costs. However, it does so by looking to eliminate other costs, such as freelancers, tech platforms, bonuses, etc. Cutting costs here may help the company avoid RIFs if the reason for the downsizing event is purely based on cost savings.
• Structural redesign. This tactic may require a mix of the previous two tactics, but it doesn’t always. Essentially, redesigning an organization helps focus talent on more profitable pursuits, allowing the company to grow.

As we mentioned earlier, anytime a company needs to downsize, it must take care to plan and execute the event to ensure everything goes smoothly.

The strategic planning process of a corporate downsizing event is quite complex. For our purposes, we will consider all downsizing events to contain RIFs and layoffs, which are two of the biggest and most stressful aspects.

To ensure reductions go as well as they can, HR needs to identify the problems that workforce reductions are expected to solve, develop reliable selection criteria, and consider how the layoffs will impact the company as a whole in the long run.

For instance, how will the workload be distributed among remaining employees without productivity levels dropping and critical business functions ceasing?

In order to keep productivity levels high, HR must analyze departments and internal functions to determine which are critical and which employees are crucial to their execution. For this reason, we recommend that HR works closely with management teams to gain insight into day-to-day functions. Cross-departmental communication in the layoff process is central to conducting layoffs without damaging key business functions.

Communicating is key when it comes to these types of events. HR needs to work extremely closely with all stakeholders to ensure downsizing happens appropriately. If done correctly, clear communication and planning help companies avoid many of the pitfalls that downsizing can bring. For example, if HR doesn’t work closely with mid-level managers, you may remove key talent that will impact productivity after the reduction.

Also, HR should explore alternative workforce reduction methods before settling on corporate downsizing:

• Voluntary layoffs. Motivate employees to volunteer to leave your organization with incentives like outplacement and severance pay.
• Early retirement. Offer early retirement to eligible employees with financial incentives.
• Furloughs. Place employees to go on temporary, unpaid leave until financial woes pass.
• Hiring freeze. Stop hiring for a position that is not critical for business to continue.
• Pay reduction. Reduce pay rates, fringe benefits, or work hours of willing employees.

If none of these alternatives satisfy your objectives, then proceed with your corporate downsizing strategy.

This is probably the single most important – and difficult – process of corporate downsizing. Who gets to stay, and who must go? HR needs to develop selection criteria to ensure the layoff process is fair, objective, and in the company’s best interest.

Here are some selection criteria methods to consider:

• Seniority. The rule here is that the last to join are the first to go. This is a great way to protect yourself against discrimination suits, and it simplifies the layoff process. Nevertheless, by using this method for conducting layoffs, you risk laying off employees that are a huge company asset.
• Employee status. This method prefers full-time employees to remain in employment over part-time and contract employees. Using this method will keep your employer brand intact because part-time and contractual roles are usually considered more expendable.
• Performance. Selecting employees based on their performance is a favorite among management teams since it aims to weed out weaker talent. But it is risky to carry out successfully because of the subjectivity involved. Therefore, you need to be extra careful in using performance as the sole criterion for your layoff process. Doing so can result in a lawsuit.
• Skills. Choose between employees based on their skill set. Namely, distinguish between skills that are pivotal to your company’s success and skills that are not. By doing so, you get to retain top talent without sacrificing quality.
• Multiple selection criteria. This is the most effective layoff selection method. Create a list of criteria with different weights that best meet your company’s downsizing goals. Then rank employees according to these criteria. The ones with the lowest ‘score’ will be laid off. It’s a combination of the previous selection methods but customized to fit your organization’s needs.

Each method has its own shortcomings, and what might work for one organization might not necessarily work for another. So choose and develop your selection criteria carefully.

A sore spot for many HR professionals undergoing corporate downsizing is productivity and morale. In fact, productivity and morale are usually the first to suffer during and after workforce reductions.

To minimize the damaging effect on morale and productivity, you need to come up with an auspicious downsizing strategy. Your strategy should include various points, such as reasons, positions affected, selection criteria, employee benefits, notification, outplacement, and communication.

Failing to come up with a strategy to deal with productivity and morale can become a huge issue for businesses. Employees may find the workforce reductions unfair, they may feel betrayed and insecure, and they might grow to resent ever working for your organization. These kinds of emotions can cause harm to your employer brand down the line.

Imagine what would happen if one or more of your employees started telling people about their experience working with you. If they’ve had a good experience, you’ve got nothing to worry about. But if they’ve had a bad experience, then it’s a completely different story.

Bad news travels fast. So you want to make the layoff process as easy on the employee as possible. HR should communicate with management teams to mitigate risks, carry out fair workforce reductions, and keep morale high. Otherwise, you might face problems like recruiting new talent, retaining valuable employees, and reaching out to consumers and investors.

Where employee satisfaction is concerned – make it one of your top priorities.

Use our workforce reductions checklist to make sure you stay on track:

Legal considerations play a huge role in company downsizing and the layoff process in general. There are certain laws in place that protect employee rights and vulnerable employee groups. These laws protect employees from unfair dismissal based on age, gender, race, religion, and other personal characteristics.

At the very least, you should be familiar with the following employee protection laws:

• WARN Act
• ADEA
• OWBPA
• FLSA
• NLRA

The last thing you need on your plate during corporate downsizing is a lawsuit. So make sure you play by the legal rule book and consult an attorney.

To help clarify the details of corporate downsizing events even further, we’ve put together a brief frequently asked question list along with high-level answers below.

The ethics of corporate downsizing are a subject of somewhat debate, especially because of the delicate nature of the event.

The ethics of downsizing can be viewed in two ways. The first is that downsizing is a standard business move that many companies have had to employ during economic downturns, pivots, and a bunch of other reasons. This would mean that downsizing is ethical and—when implemented—often unavoidable.

The second viewpoint would be that the potential negative impact a downsizing event can have makes them unethical from a worker’s standpoint. For example, downsizing often requires a reduction in force or a layoff, which if done without care can seriously impact the lives of employees.

In the end, downsizing is often the last resort a company has to fix an issue or to remain competitive and, therefore, not have to cut costs even more. So while there is a potential for downsizing to go poorly, a plan of action is required to avoid any adverse impacts and to help those impacted by a downsizing event move into a new, exciting career outside of the organization.

With a clear plan of action, clear communication, and willingness to support exiting workers, downsizing events do not need to be traumatic or unethical, especially if it’s the only option.

Corporate downsizing has several disadvantages. Firstly, it often leads to layoffs, which is always a challenge for HR and those let go. If done incorrectly, downsizing can also result in a loss of institutional knowledge and expertise, which can negatively impact the company’s ability to innovate and compete in the short term.

Poorly executed events can also create a negative work environment with increased job insecurity, reduced morale, and cause turnover of key talent. Downsizing may also damage the company’s reputation and corporate brand which can have far-reaching effects if public opinion turns negative.

Lastly, the process itself can be costly and time-consuming, requiring resources for severance packages, rehiring, and rebuilding the workforce. Most of these disadvantages can be overcome with a strong strategy and a clear communication plan, which we’ve listed above.

The impact of downsizing on a company depends on various factors. While downsizing can lead to short-term cost reductions and increased efficiency, it also carries potential drawbacks, many of which we’ve already discussed in great detail above.

For example, corporate downsizing may result in a loss of talent, expertise, and morale among remaining employees. Downsizing can potentially damage employee loyalty, productivity, and the overall company culture. Additionally, it may harm the company’s reputation, which could impact profitability and the ability to hire key talent that a business may need in the future.

In the end, whether downsizing is beneficial or not depends on the specific circumstances, the company’s long-term goals, and how it is implemented and managed.

When it comes to downsizing, companies need to take care when planning and executing the event. The first step is to understand that while downsizing may not be avoided, there are many ways to reduce costs before turning to layoffs and RIFs.

If a reduction in headcount is the ultimate decision, companies need to put a well-designed plan in place to ensure that the employees impacted by the event are communicated to clearly and are supported as they make their exit.

It’s vital to understand that a poorly executed downsizing event has the potential to damage employer brand, create retention problems with key talent, and decrease morale. Many of these negatives can be overcome with the event being handled with care.

One of the best ways to ensure employees are taken care of is to provide them with outplacement services as they make their exit. Outplacement helps employees navigate their next career move and empowers them to land their next role outside of the company. Not only does outplacement make a difference in your employees’ lives as they go through a stressful transition, but it also helps protect your brand, keep morale high, and make employees feel more secure in their roles.

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Josh Hrala

Josh is an HR journalist and ghostwriter who's been covering outplacement and offboarding for over six years. Before pivoting to the HR world, he was a science journalist whose work can be found in Popular Science, ScienceAlert, The Huffington Post, Cracked, Modern Notion, and more.