What is 'Downsizing'

Downsizing is the permanent reduction of a company's labor force through the elimination of unproductive workers or divisions. Downsizing is a common organizational practice, usually associated with economic downturns and failing businesses. Cutting jobs is the fastest way to cut costs, and downsizing an entire store, branch or division also frees assets for sale during corporate reorganizations.

BREAKING DOWN 'Downsizing'

Downsizing is not always involuntary. It is also used at other stages of the business cycle, to create leaner, more efficient businesses. Eliminating any part of an organizational structure that is not directly adding any value to the final product is a production and management philosophy known as lean enterprise.

Consequences of Downsizing

However, there is evidence that downsizing can have adverse long-term consequences that some companies never recover from. Downsizing may actually increase the likelihood of bankruptcy, by reducing productivity, customer satisfaction and morale. Firms that have downsized are much more likely to declare bankruptcy in the future, irrespective of their financial health.

Losing employees with valuable institutional knowledge can reduce innovation. Remaining employees may struggle to manage increased workloads and stress, leaving little time to learn new skills – which can negate any theoretical gain in productivity. Losing trust in management inevitably results in less engagement and loyalty.

Because severe long-term consequence can outweigh any short-term gains, many companies are wary of downsizing, and often take a gentler approach, by cutting work hours, instituting unpaid vacation days or offering employees incentives to take early retirement.

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