In both Canada and the United States, there have been many stories of woe across a large variety of organizations as a result of the underperforming global economy. Thousands of jobs have disappeared in Canada, especially in manufacturing and construction. The provinces of Alberta, Ontario and Quebec have been particularly hard hit in these areas. In the U.S., where the picture is even bleaker, their numbers of negatively impacted employees increased by orders of magnitude compared to Canada. And this is a global phenomenon that is being mirrored in Europe, where whole economies have crashed (e.g., Iceland) or are on the verge of crashing.

This tactic of reducing numbers is a common one, adopted by management ostensibly to reduce costs, demonstrate increased flexibility, reduce bureaucratic structure, increase efficiency regarding decision-making, improve communication and cultivate entrepreneurship. But the knee-jerk response begs the question of whether it actually delivers the benefit(s) that are expected. Here I will examine downsizing and the conditions under which it is implemented, with a specific focus on whether it actually works.

What is downsizing?
Downsizing is a business tactic that aims to improve the financial standing of a firm by reducing and changing the structure of the workforce. This practice has been prominent in the U.S., and has become commonplace in other countries such as Canada, Japan, and Korea. Companies in the United States have downsized to improve business since the early 1970s, according to Professor Boris Kabanoff, Head of the School of Management, Queensland University of Technology, Australia. Downsizing got its bad name in the late 1980s and 1990s, when it became synonymous with the massive job cuts in the two recessions. Nonetheless, since the 1980s, downsizing has gained legitimacy. Indeed, recent research on downsizing in the U.S., United Kingdom, and Japan suggests that downsizing is being regarded by management as one of the preferred tactics for improving organizational performance (The American Management Association annual surveys since 1990; Chorely, D., 2002. How to manage downsizing, Financial Management, May, p. 6; and Ahmakjian, L. C. & Robinson, P., 2001. Safety in numbers: downsizing and the deinstitutionalization of permanent employment in Japan. Administrative Science Quarterly, 46[4], pp. 622–658).

Some cuts are driven by decreased demand for a firm’s products or services. Firms, however, may also reduce jobs even in environments in which demand is robust, seeking increased operating efficiencies (as technological changes provide opportunities to substitute capital for labor, or to organize work in new ways, for example). This second type of downsizing came to prominence in the 1980s and, as the economy boomed during the 1990s, many firms with strong product demand engaged in it.

It is possible to posit that Bay Street's and Wall Street’s prevailing overemphasis on the achievement of positive quarter-by-quarter financial performance contributes to large employee dismissals during challenging economic times, or even when profitability does not meet arbitrary targets. Shareholders and stockholders share culpability in that they demand to see profits from their investments in as short a time as is possible, certainly within one, or no more than two, fiscal quarters, no matter the cost. Since any effective change requires longer time horizons to demonstrate valid results, the expectation of quick turnarounds is unreasonable. The markets and the shareholders need to be weaned from their untenable expectations and become more focused on longer-term performance.

Does downsizing really work?
The short answer is "No." Reports suggest that the results of downsizing are illusory. Jeffrey Pfeffer, the Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University, said in the February 9, 2009 edition of the Washington Post, “There are two things to say about downsizing: It seldom works and is often done incorrectly.” Downsizing has a negative effect on corporate memory and employee morale, disrupts social networks, causes a loss of knowledge, and disrupts learning networks. As a result, downsizing risks handicapping and damaging the learning capacity of organizations. Further, given that downsizing is often associated with cutting costs, downsizing firms may provide less training for their employees, recruit less externally, and reduce the research and development budget. Consequently, downsizing could “hollow out” the firm’s skills capacity.

Notwithstanding that there are circumstances in which downsizing may be an appropriate response to business conditions (e.g., organizational survival), there are many others when, instead of facing the challenge inventively, corporations have reacted as has been their habit for decades. That is, they have bet that the one best way to ensure their future survival and prosperity is to put their faith in “tried and true” control-based practices like reduction in numbers. Most analysts perpetuate these traditional and unoriginal attempts at turnaround by praising organizations for “doing the right things” such as downsizing. These analysts ignore the fact that downsizing is a narrow-minded, one-dimensional response to what is a complex issue. Furthermore, there is evidence to indicate that significant restructurings are likely to be successful only in the long run, and when combined with more participatory practices.

While organizations may claim that their decision to lay-off employees is economically driven, downsizing is not carried out solely to meet cost-reduction targets. Many times it is also a consequence of a management agenda unrelated to cost control. Furthermore, the decision to downsize at any organization is, for the most part, not legitimized by blaming the current economic conditions, and is certainly not justified by the standard reason provided by their executive management, spokespeople and PR people - the need to cut costs – except under the most extreme conditions, such as has been seen in the North American automotive sector. Even in this latter case, alternative solutions to wholesale downsizing have been seen (for example, the painful concessions and alternative work arrangements made by the CAW in recognition of Chrysler’s near bankruptcy). Neither is any statement of duplication of jobs a valid excuse, since in those conditions management has generally not considered new work practices and structures that could minimize the number of employees dismissed as noted earlier.

Generally speaking, downsizing has at best a 50-50 chance of providing the cost reduction and flexibility benefits that management expects that it will. Research has shown that the decision to downsize is a political one rather than one based on any valid financial rationale. That is, downsizing decisions undertaken by organizations are taken because that is what managers have decided to do rather than because they expect to realize any real financial benefits. Often, another, preferred management agenda is in the background. So, while organizations such as Bombardier Aerospace, Bombardier Recreational and Pratt & Whitney may claim that their decision to lay-off employees is economically driven, the reality is that in both the short- and long-term, they are exposing themselves to more risk and consequences, in the guise of potentially increased turnover, “survivor’s syndrome,” negative company reputations that are reflected in poor performance, reduction of share price, reduction of trust of management, severance costs, and outplacement and recruitment costs. The so-called "right-sizing" tactic is likely to cost far more than it is worth.