More Downsizing: The Unlearned Lesson

We predicted as much in our Management Review editorial nearly a decade ago. Since then, many articles have been written about the consequences of wholesale downsizing. Here is one more from England's "The Independent," published Sunday, July 30, 2000:

A new study published by the Journal of the Royal Economic Society has put the practice of downsizing in its place. Decades of cost-cutting by American and British companies will be shown to have harmed economies, stifled innovation and increased unemployment.

The research will add to the controversy over cost-cutting measures by corporate giants such as NatWest, Proctor & Gamble and Corus. In recent weeks the steel giant Corus has announced thousands of job loses at its Welsh factories giving the strength of the pound as the main reason. The move was condemned by trade unions and MPs. However, some of the strongest criticism has come from one of the largest companies, Procter & Gamble, which sacked its chief executive after he fired 15,000 workers. The reason given was that the chief executive had changed too much and too quickly.

The new study finds that companies usually overestimate the benefits of firing employees and that calculations of profit gains are usually outweighed by broader societal loses.

The report also claims that gains in efficiency are not translated into higher output. This conclusion is backed by the Wall Street Journal, which showed that in only 9% of cases did downsizing measures improve the quality of products.

The report points out that new products are often staff-generated and getting rid of staff on a large scale often removes the very people who can innovate and could save the company with new products.