Why Companies Should Reconsider Downsizing As a Cost-Cutting Strategy

At the last corporate webcast, your CEO delivers an optimistic review of quarterly results. Profits are up, revenues are strong, and stock performance is solid. But at the next departmental meeting, management unexpectedly appointments layoffs. Your coworkers exchange blank stares and confusion ensues. In the past few years, there have been acquisitions, facility upgrades and…

At the last corporate webcast, your CEO delivers an optimistic review of quarterly results. Profits are up, revenues are strong, and stock performance is solid. But at the next departmental meeting, management unexpectedly appointments layoffs. Your coworkers exchange blank stares and confusion ensues. In the past few years, there have been acquisitions, facility upgrades and expansions. When did the company start experiencing problems, you wonder.

Running a company requires a combination of long- and short-term strategies. Especially during periods of economic uncertainty, executives must find a way to keep the company afloat in the short-run but prepare it for future growth.

Mergers and acquisitions help companies share resources and knowledge that are otherwise too much to pursue alone. There is also the added benefit of reaching new customers, gaining market share and increasing product offerings.

When the economy is boring, interest rates drop to encourage investment. Borrowers invest in new capital projects or purchase additional buildings at the lower rates. These new spaces can house future employees, should expansion occur, or be subleased to stimulate revenue flow.

Payroll expenses are targeted to avoid paying high salaries and to eliminate redundant functions. Roles once held by middle managers are delegated to supervisors and upper management. Tenured employees can be replaced by interns, temporary workers or new hires for less pay.

There are setbacks to downsizing though. First, the work of patience is tested. Workers find themselves having to assume more responsibilities and dedicated longer hours. They start feeling expendable, which triggers fear and mistrust. This leads to poor work habits that extremely compromises the quality of output. With an already increased workload, burdened department heads must train new hires to meet looming deadlines.

It's a vicious cycle, but one many believe a necessary evil to sustain their future. Or is it? Ron Ashkenas, business blogger and consultant, argues there are three alternative strategies:

• Keep it simple. As companies grow, needless positions and locations are added. This leads to a complex reporting structure and more costs. Instead, consolidating tasks and re-evaluating expansion efforts will keep short-term expenses to a manageable level.
• Value-added products. Any product that no longer serves the needs of the customer or the business should be eliminated.
• Think future-oriented. Reducing jobs is a temporary fix. A focus on future growth strategies will keep a company afloat now and provide opportunities for additional expansion in the long-run.

Ultimately, the company will retain its reputation, gain the trust of its work, and help drive down costs until the economic nightmare is over.