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The Dirty Dozen – The Side Effects of Downsizing

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In September 2014 the world was just fine for the energy/oil/commodity industry. The oil price was above $100 and the recovering world economy signaled a growing demand in energy. Since then, things have changed significantly. The oil price tumbled below $30 and every recovery above $40 is kind of celebrated.

The energy/oil sector faces now challenges which the industry is unfamiliar with since a long time. Big Oil puts capital intensive projects on hold, midsize players with debt laden balance sheets come under pressure and smaller explorers are risk to disappear into oblivion.

To survive, all energy/oil companies must react with cost cutting and restructuring. With the news about this development we also read about downsizing, layoffs, right sizing. This seems always to be the recipe of the time when economic challenges need to be met. Even when companies are hesitating to go in that direction, after some start, there is usually a wave of downsizing rolling over the industry. Many companies are applying a fair play and are trying to be as respectful as possible to those affected, thus minimizing impact on people, despite some reports in the news telling otherwise.

However, there is less talk about those who stay in their jobs. One might say that they should be happy to have a job, but this is a short-sighted view. Those who stay in the job in a company affected by a downsizing program are those who the company counts on for getting out of the crisis again or even becoming a winner. These employees, crucial for the future of their company, are usually less considered in these discussions.

Doing it right for those impacted by a downsizing program is already difficult enough. Then there is the pressure from investors and from the public on management for getting the numbers right and for showing the right financial and social implications of their programs. Under these circumstances there is a high risk of underestimating the impact on those who are staying.

If downsizing is a medicine for overcoming a crisis or to adapt to new economic conditions, then there will be side effects that need to be dealt with. Rather than wait and see and trying to struggle through this situation I am suggesting a proactive approach to tackle the implications and consequences of the implementation of a downsizing program. Over the years one could observe in such programs repeating side effects on organisations and their employees. If the implications of these side effects are not dealt with, this might create further burden on a company and therefore might counteract the actual intention of cost savings, becoming more efficient and more competitive.

The recurring side effects of downsizing programs and their implications which have been observed repeatedly in the past are described below.

“The Dirty Dozen”: The side effects of downsizing programs

Side Effects

Implications

1. Centralization Shift of decision making to upper levels and less authority to act granted.
2. Short-term crisis mentality Time horizon focused on the short-term and negligence of long-term thinking.
3. Loss of enthusiasm for innovation Trial and error learning cancelled and an overall lack of tolerance for risk and mistakes.
4. Resistance of change Increased conservatism and preservation of established positions.
5. Change for the worse in internal relationships
Friction and decreasing mutual support.
6. Micro politics
Special group interests more visible, increase of politicising.
7. Mentality for lawn mower budget cuts
Decrease of prioritizing; avoiding of conflicts through companywide budget cuts.
8. General loss of trust
Leaders lose trust of subordinates; growing mistrust among employees.
9. Increase in conflicts
Intensified competition for fewer resources.
10. Decline in communication capability
Only the good news gets reported upwards. No open access and sharing of information because of fear and mistrust.
11. Lack of teamwork
Evolving individualism and disconnect complicating teamwork.
12. Lack of mobilizing leadership
Weakness forming in leadership because leading managers suffering as scapegoats; emerging “fortress mentality”.

Conclusion

Be aware that any program which has implications on jobs will be carefully observed by those not affected. Therefore, the behaviour of the company and its representatives towards affected employees is influencing the engagement of those staying on.

The recurring side effects described above should be monitored closely and acted upon by an action plan mitigating the “Dirty Dozen” effects and avoiding their evolving consequences. Such an action plan should be an integral part of any Downsizing Program.

Downsizing does not solve a company’s issues for the long-term but is the last resort for not having solved issues in the past. Elaborating a clear prospect about how your company wants to compete in the future can avoid a further down spiralling by taking care of those the company wants to count on. A systematic approach for building the capabilities to compete and consistently executing your strategy will be the way to emerge stronger from a downturn. Start acting now will make you also better prepared and even more resistant against upcoming crises.

By Dr Wolfgang Kissel (Click on the name for more info about the author)

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