'Lean and lame' -- why downsizing doesn't work

Written by Joe McKendrick, Contributing Writer

Tough times call for tough choices. But is downsizing really the best option?

In the past, I've heard it referred to as "dumbsizing" -- that is, almost knee-jerk slashing of staff in response to turbulent economic conditions. But in many cases, downsizing may be penny-wise and pound-foolish. what happens when a company needs to kick back into growth mode, and the people it was counting on to shepherd the new growth phase have jumped ship after morale plummets?

One academic analyst has looked at some studies of companies that have downsized in the past and found it does hurt their long-term prospects. Freek Vermeulen, writing for Harvard Business Publishing, quotes from Fortune Magazine, which noted that many firms that downsize end up "rather than becoming lean and mean, often end up lean and lame."

The problem with downsizings is that the shock affects the remaining workforce, often resulting in a mass exodus of remaining valuable talent. Vermeulen, a professor at the London Business School, looked at various studies and concludes that downsizing is not the best strategy for managing through tough times.

For example, in a study of 122 downsizing firms, James Guthrie, from the University of Kansas, and Deepak Datta, from the University of Texas at Arlington, examined whether the program had improved their profitability. The researchers found no improvement in profitability.

First, there's the impact on the surviving employees -- motivation sinks like a stone in the wake of a downsizing.

Professors Charlie Trevor and Anthony Nyberg from the University of Wisconsin-Madison also found that voluntary turnover among surviving employees increased significantly. "It's a nasty and unexpected aftershock for many slimmed-down companies--they became quite a bit leaner than intended!"

Trevor and Nyberg also found that companies with advanced HR practices -- such as procedures for problem resolution, and progressive benefits such as ons-ite childcare, flextime, and other benefits -- were able to contain any mass exodus following a downsizing.

Sound and forward-thinking HR practices -- not slash-and-burn approaches -- are a smart idea because they send a message to vital talent that the organization is serious about  its commitment to them.

This post was originally published on Smartplanet.com

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