(Note: This is a guest post by Han Jian, an associate professor of management and co-director of the Center on China Innovation at China Europe International Business School, or CEIBS)
It may seem counterintuitive, but downsizing is an inevitable result of a rebounding global economy. From late 2017 to early this year, multinationals such as GE, Siemens, Microsoft, Oracle, Bank of America, Cisco, and Walmart have been slashing jobs, even as some of these firms show improved performance or roll out expansion plans.
Changes in the macro environment force companies to seek out new ways of reinventing themselves, such as change strategy, restructuring, or entirely doing away with some aspects of their operations, which often lead to structural downsizing.
Among all management decisions, structural downsizing has the biggest impact on employees, because it breaks the psychological contract – defined by organizational researcher Denise Rousseau as an unwritten set of mutual beliefs, perceptions, and informal obligations between employer and employee.
Downsizing, or the sudden severing of this psychological contract, negatively affects employees’ views of mid- and long-term career development; in extreme cases, it even smashes their sense of self-worth and alters their outlook on life. Research shows that when large-scale downsizing occurs, there is a corresponding rise in the rate of domestic violence and crime in related communities. Suicide is not rare during downsizing, especially among middle-aged employees. Last December’s suicide, by a 42-year-old man who was in charge of R&D at one of China’s well-known telecommunications providers, for example, led to a lot of discussion about downsizing management, career development and midlife crisis.
Many company leaders are not adept at effectively managing downsizing, regarding it as no more than an administrative process. Front-line managers and even HR professionals tend to underestimate the profound impact of a shattered psychological contract. Though it was written years ago by staff laid off by Lenovo, an article headlined “The company is not my home,” is still mentioned and reposted on social media when fresh job cuts hit the news. The piece took Lenovo to task for what its writers perceived as the company’s failure to do enough to cushion the blow, except for carrying out termination procedures according to employment contracts.
If downsizing is inevitable, how can we minimize the negative impact? The key is to maintain the foundation of the psychological contract: trust. Trust is most fragile during organizational change, in general, and downsizing in particular. Moreover, uncertainty breeds stress, conjecture and rumor. Late last year the world’s largest copper mine, in Chile, was shut down after unionized workers went on strike to protest layoffs. Management said the downsizing was part of a wider effort to adjust the plant’s work flow; but employees saw it as a way to get back at them for a 43-day strike organised earlier in the year. The lack of trust on both sides clearly had a major impact in this case. Open communication is essential to rebuilding trust, and timing is crucial.
Once there is a consensus that downsizing is inevitable, the company should announce the scope and schedule of job cuts as soon as possible so employees can access clear and consistent signals through a variety of communication channels, preventing possible misunderstandings and the spread of rumors. An organization must also have a clearly defined plan as well as gradual and unwavering progress with implementation. Ambiguity, chopping and changing, executives’ silence, sloppiness and even beguilement can only bring about more stress and more harm to employees. If downsizing is inevitable, the company should at least let workers feel that they are being dealt with fairly, and that management is trustworthy.
It’s also worth remembering that downsizing has an equally deep impact on employees who remain, because their psychological contract with employers changes when they see their peers leave. Employees’ negative expectations and worry about downsizing are more lethal than downsizing itself. This kind of toxicity will lead to lethargy among staff, slash team morale, increase voluntary turnover, and even spur an overall decline in company performance.
‘Survivors’ of a round of downsizing usually worry over questions such as, “Does the company have a promising future? Do we need to take over the sacked employees’ responsibilities? Will our job responsibilities and positions be adjusted? Will our salary, bonus and welfare be affected?”
Company leaders are not likely to come up with perfect answers to these questions all at once. Therefore, the key to dealing with these queries is to actively build mutual trust through all channels available, such as sharing information, answering employees’ questions via group discussion or one-on-one conversations. Department managers should move quickly and decisively to outline organisational goals and reorganize work teams; also HR departments should help employees quickly adapt to new teams. Again, the goal is to rebuild employees’ trust and shape their new psychological contract with the company. Research shows that companies that actively plan and execute these strategies have a lower voluntary turnover rate after structural downsizing. After all, managing downsizing is one of the key components in rebuilding an employer’s brand reputation with survivors, potential employees and also among those laid off – they may be recruited again when the company faces a labour shortage.
During the process, companies should also pay special attention to high performers and high potential employees, because they have more opportunities in the market. After a round of job cuts, the organisational structure tends to be flatter, and thus reduces promotion opportunities in general. Capable mid-level managers are more likely to leave if they foresee fewer opportunities for career advancement. A strong effort to encourage and empower these people after the downsizing will reduce undesirable turnover. Articulating goals and career paths whenever possible also helps to alleviate employees’ fear and uncertainty about the company’s future – and theirs.
--Follow CEIBS @CEIBS
--Follow Russell Flannery @rflannerychina
