One of the most unpleasant and stressful management jobs is downsizing the workforce. It takes a toll on employee morale who can feel betrayed. It can result in increased voluntary turnover and decreased innovation, higher levels of work demand, role conflicts, supervisory problems, job insecurity, teamwork disruption, lower levels of friendship bonds, and promotion opportunities.
There is always pain in downsizing on the part of management and staff. That is why it had to be managed well to ease the pain; otherwise, it could cause a huge disruption to your business. There are four major challenges that management must face in downsizing:
- How to deal with the constraints of the law on downsizing
- How to choose those to be laid-off
- How to maintain the morale and engagement of the surviving staff
- How to let go of the excess with less pain
The law requires you to observe the procedural due process of serving two written notices – one to the employees concerned, another to the appropriate DOLE Regional Office one month ahead of your intention to lay off. In installation of labor-saving devices and redundancy, one has to give one month pay per year of service while in retrenchment, one half month pay per year of service.
How do you choose those to be laid-off?
Two options are open: mandatory or voluntary. Mandatory is when you choose at your own will those who are low performers, troublemakers and other undesirables. But if your company is unionized, your CBA may provide that in case of lay off, the principle of LIFO should apply - last in, first out. Even if it is absent in your CBA, the union may most likely demand lay-offs in the order of seniority, i. e., less senior should go first.
In any case, whether unionized or not, there are three criteria to be observed in mandatory retrenchment:
- Less preferred status, i.e., temporary employees
- Efficiency rating
- Seniority
While mandatory could be bloody, voluntary creates no labor problems. However, you may end up with the ‘dregs” of your organizations while the young, high achievers may have flown the coop. Such a great loss of talent!
Maintaining the morale and engagement of the surviving staff
Those left behind may suffer the so-called “survivor syndrome.” It’s bad enough to mourn over the loss of a good friend who was laid off but it’s worse if the survivors feel insecure. Will they be the next?
There is also the problem of re-allocating jobs and adjusting the pay of those whose job contents have increased considerably. Otherwise, you will have morale and engagement problems.
How do you help those who lose their jobs?
Undoubtedly, you had to help those who were laid off. You cannot just leave them to fend off for themselves. It is the moral obligation of the company to help those who lost their jobs. You may organize a seminar on how to - prepare a CV, conduct themselves in the interview, be an entrepreneur, manage their severance funds, prepare bookkeeping record. An outplacement unit may be put up to help them find jobs. You might also promise them that when there is a need for more people in the future, they will be given priority if they are still available. These acts of the company somehow ease the pain of losing one’s job.
Economics of downsizing
There are two extremely important economic aspects in downsizing: determining its cost and payback period. Assuming that the cost of separation would be P3 million, to convince the board, management must show the length of time that the company would get its return savings. The following formula is recommended:
- Number of persons to be separated x average monthly pay x average length of service = cost of separation pay
- No. of persons to be separated x average monthly pay plus estimated fringe benefit cost = monthly carrying cost
- Cost of separation pay divided by monthly carrying cost = payback period.
Space limitations prevent me from showing it in numbers. Do the number crunching yourself. I can assure you that the board would be impressed with your numbers. That’s talking from experience.
Major causes of downsizing: Mergers and acquisition, consolidation, automation, reengineering, streamlining, delayering, rationalization, retrenchment due to losses or to avoid losses.
Retrenchment can be voluntary or involuntary. The advantage of involuntary is it gives you the opportunity to rid of the undesirables though it may give you legal problems if the reason was not based on solid grounds like efficiency and performance. Be sure that your performance management system is quantifiable and unassailable.
Voluntary, on the other hand, may also result in your loss of young, highly employable achievers who, rich in their separation pay can get easily another job in a company. I know of a computer company that did a voluntary redundancy exercise. It lost a good number of their young, high performing staff and get employed in another competing company.
Natural attrition
I was HR head of two companies, a manufacturing and a sales/distribution company. Under its new international policy of “one company, one country” system, only one company has to survive. This cut down accounting, and other support functions. The attrition has to be done in one year’s time by way not replacing those who resigned, retired or died. The natural attrition was the easiest job I ever had in manpower reduction.