Downsizing and Rightsizing

AuthorKarl Heil, Scott Droege

Page 197

Downsizing refers to the permanent reduction of a company's workforce and is generally associated with corporate reorganization, or creating a "leaner, meaner" company. For example, the database developer Oracle Corporation reduced its number of employees by 5,000 after acquiring rival PeopleSoft. Downsizing is certainly not limited to the U.S.; Jamaica Air cut 15 percent of its workforce in an effort to trim expenses and anticipated revenue shortfalls.

Downsizings such as these are also commonly called reorganizing, reengineering, restructuring, or rightsizing. Regardless of the label applied, however, downsizing essentially refers to layoffs that may or may not be accompanied by systematic restructuring programs, such as staff reductions, departmental consolidations, plant or office closings, or other forms of reducing payroll expenses. Corporate downsizing results from both poor economic conditions and company decisions to eliminate jobs in order to cut costs and maintain or achieve specific levels of profitability. Companies may lay off a percentage of their employees in response to these changes: a slowed economy, merging with or acquiring other companies, the cutting of product or service lines, competitors grabbing a higher proportion of market share, distributors forcing price concessions from suppliers, or a multitude of other events that have a negative impact on specific organizations or entire industries. In addition, downsizing may stem from restructuring efforts to maximize efficiency, to cut corporate bureaucracy and hierarchy and thereby reduce costs, to focus on core business functions and outsource non-core functions, and to use part-time and temporary workers to complete tasks previously performed by full-time workers in order to trim payroll costs.

The following sections discuss trends in downsizing, the growth of downsizing, downsizing and restructuring, criticisms of downsizing, support for downsizing, and downsizing and management.


As a major trend among U.S. businesses, downsizing began in the 1980s and continued through the 1990s largely unabated and even growing. During this time, many of the country's largest corporations participated in the trend, including General Motors, AT&T, Delta Airlines, Eastman Kodak, IBM, and Sears, Roebuck and Company. In the twenty-first century, downsizing continued after a sharp decline in the stock market early in the century and followed by continued pressure on corporate earnings in the aftermath of the September 11, 2002, terrorist attacks. Downsizing affects most sectors of the labor market, including retail, industrial, managerial, and office jobs, impacting workers in a wide range of income levels. Table 1 compares the number of temporarily downsized workers with the number of permanently downsized workers.

While layoffs are a customary measure for companies to help compensate for the effects of recessions, downsizing also occurs during periods of economic prosperity, even when companies themselves are doing well. Consequently, downsizing is a controversial corporate practice that receives support and even praise from executives, shareholders, and some economists, and criticism from employees, unions, and community activists. Reports of executive salaries growing in the face of downsizing and stagnant wages for retained employees only fan the flames of this criticism. In contrast, announcements of downsizing are well received in the stock markets. It is not uncommon for a company's stock value to rise following a downsizing announcement.

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Table 1

Number of U.S. Unemployed Workers by Month

Adapted from: U.S. Department of Labor, Bureau of Labor Statistics. 2005. Unemployed Persons by Reason of Unemployment. Employment Situation Summary

Type of Downsizing October 2004 November 2004 December 2004 January 2005 February 2005
Temporary downsizing 947,000 941,000 965,000 966,000 965,000
Permanent downsizing 3,127,000 3,124,000 3,144,000 3,082,000 3,015,000

However, economists remain optimistic about downsizing and the effects of downsizing on the economy when the rate of overall job growth outpaces the rate of job elimination. A trend toward outsourcing jobs overseas to countries with lower labor costs is a form of downsizing that affects some U.S. employees. These jobs are not actually eliminated, but instead moved out of...

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