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.

RELATED TERMS
  1. Fat Cat

    A fat cat is an executive or industry leader who earns an exorbitant ...
  2. Cash Charge

    Typically a one-time charge off that a firm makes against its ...
  3. Fat Man Strategy

    A takeover defense tactic that involves the acquisition of a ...
  4. Elimination Period

    Elimination period is the length of time between when an injury ...
  5. Occupational Labor Mobility

    Refers to the ease with which workers can switch career fields ...
  6. Credit Reference

    Credit references can be a credit report or documented letter ...
Related Articles
  1. Managing Wealth

    Will Downsizing Your Home Pay Off?

    A little math can help you determine whether downsizing your home is worth it. It involves subtracting the costs of such a transition from expected gains.
  2. Investing

    9 Things to Consider as You Downsize Your Home

    These are the things that need to be considered when downsizing to a smaller home.
  3. Retirement

    Retirement Downsizing Tips (Not Your Home)

    Worried about your budget but still want to keep your house after you retire? Check out these alternative downsizing ideas.
  4. Retirement

    5 Critical Steps to Take Before You Retire

    Exiting the workforce soon? You need to make sure your financial house is in order. These actions will help you on your way.
  5. Investing

    3 Ways Your Children Can Take Over Your Mortgage

    Different strategies are available to have your children take over your existing mortgage.
  6. Financial Advisor

    5 Ways to Use Your Home to Retire

    Retirement is going to cost a lot, and for homeowners who face a shortfall, their home can be a source of income. From downsizing to renting, here's how.
  7. Personal Finance

    Prevent Bankruptcy With These Tips

    This financial decision should only be used as a last resort. Find out how to avoid it.
  8. Financial Advisor

    How to Get Clients to Save More for Retirement

    Americans aren’t saving enough for retirement. Here are some tips for financial advisors who must convince them to change their ways.
  9. Investing

    Fat Tail Risk Makes Global Warming Scarier

    The cost of global warming does not take into account climate change-related catastrophes. Here's where fat-tail distributions come in.
  10. Small Business

    Why Traditional Retailers Keep Struggling

    Here are some core reasons that the traditional retail industry is struggling today
RELATED FAQS
  1. How can a company increase its return on total assets?

    Learn about return on total assets (ROTA) and how a business can increase its ratio by increasing revenue, decreasing expenses ... Read Answer >>
  2. How does transfer pricing affect managerial accounting?

    Learn how transfer prices affect managerial accounting in terms of divisions' incentives to deal with each other, performance ... Read Answer >>
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center