BACKGROUND:

Downsizing manpower is an evident feature of organisations transforming themselves to meet new technological and competitive factors. Long cycles of slump in demand had reinforced the need to strip corporations of cost ineffective investments - these include redundant human resources. So much so that there has been since the Eighties, a competitive employment demolition at the firm level. Research findings are mixed as to the benefits of manpower downsizing and yet downsizing appears inevitable for several reasons. The benefits of down-sizing would not have been in doubt it was used in the right context and prudently: Contextualising the downsizing tactic than adopting it as a fashionable corporate cure-all; seeing downsizing as part of a systematic change to achieve flexibility than as a stand-alone cost-cutting measure; in adopting an analytical approach than a fragmented reaction. As Senge (1992) observed "From a very early age, we are taught to break apart problems, to fragment the world. This apparently makes complex tasks and subjects more manageable, but we pay a hidden, enormous price. We can no longer see the consequences of our actions; we lose our intrinsic sense of connection to a larger whole. When we then try to 'see the big picture,' we try to reassemble the fragments in our minds, to list and organize all the pieces. But, as physicist David Bohm says, the task is futile - similar to trying to reassemble the fragments of a broken mirror to see a true reflection. Thus, after a while we give up trying to see the whole altogether".

This paper examines the issues connected with manpower downsizing to enable firms to arraign the fit of down-sizing with corporate strategy to that it would stand the scrutiny of an ex-post cost benefit analysis. It covers (a) the contradictory signs as to the benefits of downsizing, (b) gives a theoretical frame work for the contexts of downsizing (c) the dynamics of strategies for down-sizing and (d) recommends a strategic approach for corporations.

Downsizing, it must be clarified at the outset, is distinct from situations calling for lay-off or retrenchment as a temporary reaction to demand recession and infrastructure bottlenecks. Downsizing is relatively more permanent consequent to changes in technology, reassessment of manpower requirements (right-sizing), asset restructuring, out-sourcing and the like.

POPULAR MOVES AND CONTRACICTIONS:

The eighties have been full of the "lean and mean" rhetoric and nearly all the firms in Fortune 1000 reduced manpower between 1985 and 1990. Several firms in the conservative Japan followed suit with firms such as Fujitsu, IBM Japan, JAL, Nippon Trust Bank, Sanyo Electric and like joining the band-wagon of lay-offs, retrenchments and retirement schemes (Reddy, 1994). The more recent period has shown that this process continues to be unabated with several firms reducing their manpower by about 10 - 15%.

Firms in India have begun the process, even if rather belatedly, with several reporting turn around strategies replete with permanent redundancy schemes. A survey reported in the Economic Times points to the popularity of Voluntary Retirement Schemes (VRS) in over 100 major corporates in the country (Amit Jain, 1998). Most had commenced the programs in 96 when the economic recession and competition demanded it. The report believes that firms like Philips, Siemens, Indal, Crompton Greaves, ITI have come out of the red consequent to job shedding and recast measures. Several others like Unichem Labs, Otis elevators, Industrial Meters, Merind, and Proctor & Gamble have improved their profits, it is believed.

These quick reports do not give us valid conclusions, for four reasons. The first is that downsizing is often a part of a portfolio of measures and whether it contributed positively or negatively to the immediate turn-around is difficult to fathom. Secondly, the trade-off the VRS causes vis-à-vis other foregone efforts is beyond estimation. Thirdly, the cost of labour as a source of competitive disadvantage is industry and company specific. Lastly, the year in which the VRS is effected must normally see a good out-flow of capital than savings and there is often a mismatch in logic when immediate benefits are reported.

On balance, research from the West on the impact of downsizing on competitive advantage has indicated serious doubts. It is reported that there is tremendous amount of peer pressure among top management to reduce staff and this scuttles objective cost-benefit analysis; that the institutional investors in the West often look to such criteria as downsizing as performance measure for management (even if they do sack the CEO when things do not improve despite slashing manpower); that top managements have been hastily rewarded for pursuing "slash-and-burn" policies which in hind-sight were an embarrassment.

For instance, the Time magazine carried an article titled "When Downsizing Becomes Dumb-sizing" and cited evidence from several firms such as Compaq, General Electric and Campbell Soup to prove the point (Time, 1993). Reflecting the same type of evidence Harvard Business Review looked a scene in Kodak, IBM, American Express and General Motors in an article "Risking the Present for a Powerful Future" (Tracy Goss and other, 1993). A study by Right Associates, found that 74% of senior managers in downsized firms had reported negative results including loss in productivity (Henkott, 1990). A survey by the Society for Human Resource Management, USA had reported that more than half of 1468 firms that downsized indicated deterioration in productivity on downsizing. A Wyatt Associates study of 1005 firms in US which downsized manpower between 1986 and 1991 found that only 46% actually reduced expenses, only 32% actually increased profits, only 22% actually increased productivity and only 17% actually reduced bureaucracy (Bennet, 1991). Though the white-collar productivity had declined in proportion to the blue-collar historically and the number of managers increased in relation to workers, downsizing efforts had been more aimed at the blue-collar than the managerial (Kim Cameron et al, 1995.

Evidence such as the above is mounting even as the popularity for wrenching organisational reform is increasing. The inadequacy probably is not so much in the logic for downsizing as much as in the process of making the choice and managing it. There is possibly a lack of realisation in expectations and also a lack of effectiveness of managing downsizing that contribute to failed schemes.

CONTEXTS FOR DOWNSIZING:

Logically the need for downsizing may arise for several reasons, the most important of which may be-

1. change in assumptions of manpower norms without any change in technology, operational activity, product profile etc., (often arising from competitive bench-marking)
2. ermanent slow down of activity consequent to product decline or long term demand-supply dynamics (an external reason which may influence the internal perspective on manpower requirements).
3. Restructuring/ retrenchment of assets making some groups of employees redundant (often triggered by need for cash/profits)
4. Restructuring / unbundling of activities by out-sourcing (arising from strategic re-focus or for "keeping up with Jones's")
5. Technology change leading to redundancy of some skills (often arising from strategic planning) and
6. Change in the organisational design such as delayering and job enrichment (often arising from an awareness of total quality and its implications for long term HR strategy).

Diagram - 1: Important Triggers for Downsizing

These structural factors may lead to manpower asymmetries between the desired (current or future) and the actual. There are four types of asymmetries, which may occur in combination and may be unique to each firm.

Numerical asymmetry: Most firms have tended to add numbers beyond requirements over the years (Ginzberg, 1985). Some attribute this tendency to a psychological process in the managers of seeking power, prestige and status by increasing manpower on some pretext or the other. In the Indian context, employment being a tremendous source of power, there are several pressures to accommodate extraneous interests. The public enterprises in India have been a classic case of political and bureaucratic pressures resulting in excess recruitment. (Government, of course, is a holy cow that can continue to indulge in fiscal profligacy even as it advises every one else to trim up downsizing is alien to it even if whole departments are disbanded).

It has also been observed that the increased numbers are more in the case of managerial staff and the while collar than the blue collar. The growth in headquarters/regional offices and such other staff functions vis-à-vis the line have also been recorded as a general condition of firms in the 70's and early 80,s. This has led to the popular construct of tail being longer / heavier than the teeth (teeth to tail ratio).

In firms where new technology has been introduced or certain product lines have been closed, this asymmetry becomes more prominent. The numerical changes can never be in tandem with the changes in technology, products and processes. It is important to remember that manpower numbers and costs are generally treated as fixed primarily because of the inherent nature of their stickiness. During periods of good profits and relatively less pressure on managements by the Boards, this numerical asymmetry will be dormant characteristic. It looms larger as an area of attention whenever the concern for costs improves. In this sense, where a firm has been able to build to handle this asymmetry on a continuous basis as a way of organisational life. In others, which may be afflicted by long periods of complacency and shorter periods of concern, manpower mismatch is recognised as problems sporadically. In the former case, even if very rare, it becomes a natural process of change management and adaptation while in the latter, which is the common, a populist fire-fighting approach would be natural. The latter approach often coincides with compelled poor timing as well and may prove ineffective.

Skill Asymmetry:

Technological changes can be of two varieties - harder (new equipment, new raw materials, etc.,) and the softer (MIS, management technology or new ways of doing things). In combination, a firm may bring about a situation of mismatch between the required set of skills and the existing. Some part of such a mismatch is manageable on a continuous basis through training, re-training, skill upgradation, multi-skilling etc., Where such conditions do not exist or in situations where skill redundancies have occurred dramatically, the option for the firm may be confined to downsizing alone. Such downsizing could be effected through retrenchment where it is technically feasible and practical. In contrary conditions, bargaining with the union or announcing a Voluntary Retirement Scheme (VRS) would be a normal proposition. Often, the cost of downsizing in such conditions should be fairly high considering that skill redundancy in one firm may also reflect the redundancy of that particular trade in the industry itself, or at least, prolonged recessionary conditions for such trade. Firms which have strong faith and commitment to re-training may adopt the socially appreciated approach of redeployment and/or out-placements. Such a move could be with the support of special funds (a la NRF) or with own funds, especially if there is a possible trade-off with the severance package that would otherwise be incurred.

Type asymmetry:

Just as firms have product mix and raw material mix, we now have some sort of manpower mix - the permanent workforce (managerial and non-managerial), contract labour, casuals, badli, temporary etc. In firms which rely on budget approaches, often the ratio between the permanent workforce and the rest increases, even under standard conditions (Likewise, the proportion between managerial and the rest gets shifted in favour of the former). If the ratio has increased due to reduction of the permanent work force, it is apparent that some type of downsizing is being effected. However, in several firms, the proportion has changed due to increase in the indirect labour which may eventually lead to redundancy of the permanent workforce. The process of "inching in" by the contract labour or the casuals and temporaries has been an apparent phenomenon. In such situations downsizing of permanent labour has to be weighed vis-à-vis possibilities of reducing fringe labour. Reducing the fringe labour would obviously be less onerous. For instance, MUL is reported to have reduced 20% of the casual labour - (Deccan Chronicle, 1998). There have been instances of firms in India going further and concluding successful agreements with the union whereby the numerical redundancy amongst the permanent workforce was resolved by pushing them into the tasks being carried out by the other types of labour. This move would require aggressive productivity bargaining where feasible and is likely to have better pay off than the more popular moves of VRS for the sticky workforce. In firms where the ratios between different types of workforce have got distorted over the years, the same could be set right to restore the balance for managing the overall people costs. In fact, progressive firms have realised that the numbers and costs of the indirect work-force is often hidden (as "job orders"/ "maintenance work" etc.,) - these firms have made efforts first to obtain adequate data and looked at the non-sticky areas as the first measure of controlling people costs.

Efficiency asymmetry:

The mismatch of productivity of people at the individual level vis-à-vis the standard could arise due to several reasons including those of age, medical condition, attitude as well as disproportionately high wages. It is possible that the output of a segment of employees is no longer cost effective for the above reasons and thus needs rectification. In such conditions specialised packages have been adopted by firms targeting certain groups of employees. (It is assumed that specific individuals are not targeted to rectify this asymmetry as such action would fall into the realm of discharge and dismissals for administrative reasons than with the specific objective of managing costs). The broad categories on the basis of medical condition and age may be simpler to address but it would be hard for a firm to structure such a scheme to attract the set of employees who have poor attitudes. Even if the problem of identification is surmounted, such employees would obviously have little job market and would be expensive for effecting a redundancy programme. (This is not to deny the existence of practices in firms where individual action is initiated by applying other pressures to encourage exit of such employees at less appealing levels of compensation-however, it should be seen as involuntary retirement).

STRATEGIES FOR DOWNSIZING:

The downsizing strategies range from individualsied actions to comprehensive, generic packages. The individualised action require high degree of consensus, accountability and aggression which is normally possible in some private firms. These also generate debates on ethical aspects of the action. On the other hand, the generalised schemes are fraught with several other problems, particularly relating to the eventual cost benefits. There is growing amount of evidence to show that such "grenade" type redundancy programmes, which do not distinguish the population aimed at, have not ex post scrutiny in terms of costs and benefits. Prominent reasons for the disbenefits can be conceptualised as (a) the incentivisation of high value workforce and the 'free rider' problem (b) the link with inestimable economic cycles and (c) the risk of recurrence. These are discussed in the following paragraphs:

1. All firms have some degree of attrition. The composition of this attrition would be on account of superannuating/medical discharge, which are in the realm of invlountary turn over, and resignations consequent to career choices on a voluntary basis. A VRS may create an incentive for those of high value to join the stream of attrition. As it is normally difficult to distinguish between those of such high value and others, firms have little choice in holding on to the former variety. With the result, any generalised voluntary package tends to increase the propensity of voluntary turn over amongst the highly valued workforce. Voluntary turnover is the result of two conditions - the opportunity for leaving and desirability. The incentive implicit in the VRS increases the 'desirability' factor for this valued workforce (Reddy, 1979). The value for such workforce could be for a variety of reasons primary amongst which are the age, skill/competencies and ability factors. Any attempt by a firm to use discriminatory mechanisms for retention of such workforce, against their will to avail of the VRS, very often results in a negative impact. If exit is made difficult for them, they may exercise the option of under-performing or negative behaviour to create an incentive for the organisation to let them go. The free rider problem is similar or co-joint with the above (except that the employees in question may not necessarily be high value) and arises on account of paying an incentive for normal attrition. The rate of attrition increases during expansionary conditions and decreases during contrary conditions. As VRS are not so finely timed, if industry expansion arises while the VRS is still open, the free-riders would be that many more. Employees who would have left the firm in any case and tend to avail of the VRS are the free riders of the scheme which is actually aimed a sticky workforce.The Information asymmetry here is that the firm may not know as to who actually is a free rider, even if we assume that the firm may be able to use that information effectively.

Diagram - 2: Problems of "Grenade" Type

2. Long drawn recessionary conditions often are the cause for downsizing effort. The quirk in this approach is that the recessionary conditions need expensive push factors. The higher the perceived difficulty in the open market the higher would be the propensity of employees to stay with the firm. This situation is compounded in countries like India where there is no State supported unemployment dole/assistance. In such situations, the package will have to be structured in such a way that the employees find it attractive enough to take the risk of continued unemployment, under-employment and the like. Obviously, the higher the package the longer would be the pay-back and riskier the entire project. (The situation is worsened in public enterprises in India where the age for superannuation has been increased in the midst of an economic slow-down.
3. Downsizing is effected on the assumption that there will be no recurrence of extra workforce or that other drastic measures such as closure are not round the corner. If a closure were to follow, soon after a VRS is introduced, the firm would be worse of in hindsight. Similarly, if long drawn recessionary conditions were the instigation for downsizing, there is a probability of further recruitment when good times return and when costs are no longer a matter of similar concern. It is observed that some firms which have used VRS packages to downsize employees had to resort to large scale hiring within a relatively short time as they count not predict the cycles and did not estimate changes in growth strategies. Of course, firms would like to justify such a happening in two ways. Firstly, it is argued that the firm may be in a position to hire more skilled, energetic, younger employees (the 'fresh blood" concept). Secondly, it is argued that high cost labour is being substituted with relatively less expensive ones. Especially if senior people who have earned merit pay / increments over the years are replaced with fresh ones a start of the scale. For reasons of methodological difficulty, the cost of learning and risks in the assumptions about the new employees are often not reckoned in this process.

TOWARDS A STRATEGIC APPROACH:

Diagram - 3: Strategic Approach

Downsizing, on balance, is a risky proposition than what intuition tells us. It is possible that the adverse findings reported about downsizing are primarily because of the reactive schemes to get over temporary glitches. There is merit in adopting a more strategic approach. Such an approach may demand (a) understanding the strategic issues before the firm and the trade-off between downsizing and other possible efforts/investments (b) analysing the profiles and conditions of asymmetries and their costs (c) estimating the target group, effective incentives, the profile of outflow and the time-lines (d) the strategy of effective opinion building and other supportive mechanisms to ensure that the necessary climate is created and maintained for the success for the programme and (e) independent or in conjunction with the above, gaining a "flexibility" which will support a culture of continuous adaptation and change.

CONCLUSION:

Downsizing manpower is a popular tactic for corporate re-positioning though research findings appear to be loaded against it. However, it is probable that downsizing as an objective is eminent in itself but the process is weak. It is necessary for firms to design the context for downsizing which could be of an internal nature or due to external conditions or a combination thereof. It is noted that several types of asymmetry can cause surplus manpower of which four are prominent, i.e., numerical asymmetry due to uncontrolled recruitment in the firm; skill asymmetry due to changes in technology of the harder and softer variety; type asymmetry due to changes in proportion in the manpower mix of permanent, contract, casuals, temporaries etc., the efficiency asymmetry due to conditions of age, fitness, attitude or disproportionately high wages. It is possible that firms have a combination of these conditions, which make each of them a unique proposition. There are several ways of downsizing ranging from the forced versions for a targeted group to a 'grenade type' redundancy programme. The generalised VRS packages appear equitable and ethically sound. However, there are several pit-falls in this approach leading to cost ineffective results. Prominent amongst these reasons are the incentivisation of high value workforce (and the free-rider problem), the link with inestimable economic cycles, and the risk of recurrence. There is an obvious need to get away from launching VRS schemes as a short-term reaction. The need is for a strategic approach, which may give a long lasting advantage and prove cost effective as well. Such an approach may adopt a comprehensive analysis of the strategic issues; the trades off; cost benefits of asymmetries; estimations of effective incentives, out-flows and time lines; opinion building and support mechanisms and a culture of flexibility that is necessary for continuous adaptation and change.

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