Why do Companies Downsize?
Reducing costs
Employee compensation and benefits are a liability for the company and reduce the owner’s equity. Every company incurs considerable salaries and other benefits and expects the employees to help increase profitability. Therefore, if employees are not positively contributing to the company’s growth, it is better to let them go.
Shift to outsourcing
Keeping permanent employees is costly. The company must provide several benefits along with the gross salary, annual increments, and more. If the company believes outsourcing employees will reduce costs, bring in more skilled labor, and add to its competitive edge, it decides to downsize.
Mergers
Mergers are a crucial reason for downsizing. When two companies merge, they start working as one unit, sharing the resources. The chances are that various employees are hired for the same job, which causes redundancy in work and must downsize to maintain productivity and efficiency.
Positive Effects of Downsizing
Controls cost downsizing allows companies to reduce costs by laying off employees who are either no longer needed or have not been productive. The company will not pay employees who are not positively contributing and merely add to the undue expenses.
Emphasizes on performance
After downsizing, the employees who remain in the company know that their survival depends on the performance and the quality of work they deliver. It naturally emphasizes the need to improve and maintain their performance and enhances productivity in the company. Also, it differentiates hardworking employees from freeloaders, as those who are not willing to sharpen their skills and work in a competitive work environment eventually leave.
Makes management easier
A company is left with a minor team after successfully downsizing. This allows Management to develop professional relationships, understand employee challenges, and resolve their concerns while fostering employee satisfaction.
Retains talent and skills
Companies do not want to carry extra luggage in the form of unproductive employees. More often, employee performance decreases with time as a secure job makes employees comfortable, and they do not try to learn new skills. Downsizing allows the company to enjoy a pool of talented and skilled workforce.
Negative Effects of Downsizing
Increases work pressure
The employees left with the company must do some part of the work that the downsized employees were responsible for. This lays work pressure on the employees and leaves them exhausted and frustrated.
This may raise legal issues
A significant downsizing in the company can lead to legal risks and problems. Several unions and agencies work for employee rights and can create havoc! The company may face discrimination lawsuits which can take a lot of the company’s time and money.
Damages company reputation
Downsizing is a negative term for employees and the rest of the world. People do not like companies who let go of their employees, as it snatches their source of earning bread and butter. Also, employees avoid working in companies that have a history of downsizing.
Raises job insecurity
Downsizing means that all employees are on the radar! Job security raises employees’ concerns, and they wonder if they are following. Therefore, they keep looking for employment opportunities and switch jobs as soon as they can!
Downsizing is often necessary to keep the company profitable by reducing the costs of keeping unproductive employees. However, it must be conducted meticulously, and employees should know why they are asked to leave. Also, the retained employees must be motivated to work with the best of their skills and potential and ensure that their jobs are not in danger!
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