Avoiding the corporate culture of fatigue with restrictions of resources, consider consequences, and beneficial alternatives to downsizing.

1.
Alternatives to
Downsizing in a Poor
Economy
Cutting expenses is not as exciting as increasing gross revenues, but
it is more effective in improving the bottom line. If your company returns
one dollar of profit for each ten dollars of revenue, you have to grow sales by
$10 to gain $1 of profit. However, if you cut one dollar of expense, that one dollar
is directly reflected as one more dollar of profit on your bottom line.
During a poor economic retain its markets, open new markets, etc., after
environment, companies often first reducing the number of its employees?
try to dramatically cut expenses by
reducing personnel costs, typically • Exactly what type of downsizing could be used to
by layoffs. While these steps may be necessary at times, directly address each problem. For example, should you
they have many disadvantages. close one particular operating division or worksite,
because of lack of customer demand for that product,
This article looks, first, at some of the considerations in excess capacity, obsolete facilities or equipment,
deciding whether to downsize; next, at some of the difficulty in hiring competent workers in that area, local
disadvantages of downsizing which may not have been government regulation and taxes, etc.?
considered; and finally, it suggests a more productive
way to cut expenses. • If the problem is short-term cash flow, are there
alternative ways to cut costs? (We will discuss some
Downsizing Considerations: if employment downsizing options later in this article.) Such alternatives might
still makes sense after considering these issues, then include options such as cutting temporary staff,
your company may wish to proceed; if not, then you eliminating overtime, voluntary retirement offers,
should consider other alternatives. reducing work hours, freezing salaries and new hiring,
temporary layoffs (furloughs), or reducing other
• What is the real problem? Is it short-term cash flow, expenses.
long-term decline in competitiveness, management
overstaffing, worker overstaffing, lines of business that • Would the potential layoffs include irreplaceable
are no longer profitable or no longer fit the company’s personnel or skill? (To be very blunt about it, a “10%
business strategy, or something else? Will merely across-the-board” cut is undoubtedly the worst way to
cutting numbers solve that problem? Will it solve any downsize--you are guaranteed to lose people you will
of them? want to re-hire when the economy recovers--but then,
they won’t be available.)
• If so, How and Why? What are the short-term and
long-term rationales, benefits, and detriments of
downsizing for addressing each of the company’s Let Suppliers Pay Some of Your
problems? Will the company be able to serve its Company’s Expenses
customers better, manage its finances better, innovate,

2.
Downsizing Considerations continued
• If layoffs potentially include irreplaceable personnel or skills, how do you persuade them to stay? Similarly, how
will the downsizing affect non-laid-off high performers who would also be difficult to replace? Employee morale is
the first casualty in a downsizing. Beyond that, high performers are always in demand, regardless of economic
conditions. What will you do to retain them?
• What are the short-term benefits from downsizing? What are the short-term costs? What are the long-term costs?
How long will it take you to realize the benefits? When will the costs begin to eat into your profitability? Can you
honestly quantify these benefits and costs properly or are you trying to compare present apples against future
pomegranates?
Disadvantages to downsizing that you may not have quantified:
Studies have tracked the performance of downsizing firms versus non-downsizing firms for as long as
nine years after a downsizing event. The findings: as a group, the downsizers do not outperform the
non-downsizers. Companies that simply reduce headcounts, without making other changes, rarely
achieve the long-term success they desire [1].
In addition to a smaller payroll, a downsized organization often results in the following problems:
• Morale and Productivity/Efficiency: Many studies have found that morale, loyalty, and trust in management
decline after a downsizing. So also does organizational commitment, job satisfaction, and job involvement. At the
same time, stress levels, intentions to quit, and actual levels of voluntary turnover all increase. Retained staff
members are unsure as to the stability of their jobs and morale begins to drop; this drop in morale often develops
into a loss of productivity and employee turnover.
• Turnover: Layoffs reduce the morale, and thus the efficiency, of your workforce. They also create uncertainty,
which often causes your best performers to look for other employment. If you believe that your employees are
grateful just to have a job and would never dream of leaving during a recession, you may be making a costly
mistake. A 2008 study published by the University of Wisconsin–Madison found that downsizing can actually lead
to a higher rate of turnover, which can leave organizations without the critical people they need to keep operating.
Although they may not be actively looking, unhappy employees are usually open to new opportunities if they
present themselves. An organization that lays off 10 percent of its workforce can expect to see a 15.5 percent
rate of voluntary turnover among surviving employees, compared with a 10.4 percent turnover rate among
companies with no layoffs.[ix] [ix] Trevor, C. O., & Nyberg, A. J. (2008). Keeping your headcount when all about
you are losing theirs: Downsizing, voluntary turnover rates, and the moderating role of HR practices. Academy of
Management Journal, 51, 259-276. Since the fully loaded costs of turnover (separation, replacement and training)
can be 1.5 to 2.5 times the annual salary paid for the job, those additional costs can be huge [2].
• Production Changes: Laying off employees during difficult times leaves a company ill-equipped to handle the
future rebounding economy. Management should investigate options such as cutting wages or reducing benefits
before downsizing employees because it affects the company's ability to handle increases in production. Part of
recovering from slow economic times is receiving a surge in customer orders. If your company is not properly
staffed to handle new orders because of downsizing, then that limits your ability to execute a financial recovery.

3.
A downsized organization often results in the following
problems
• Customer Service: If your company has fewer employees, then there are less
people to take care of customer concerns. Your customer service levels will
suffer and so will the public reputation of your company. Without adequate
production staff, you may experience delays in shipping product to retail
outlets. This will cause a rise in customer dissatisfaction that will have a
negative effect on future sales and revenue.
• Business Processes: One mistake a company can make is to downsize
employees without altering the way the company does business. When there is
less staff on hand to do the work, then the processes need to be changed to
maintain productivity. For example, automation can be introduced to help do
some of the jobs that staff members used to do in an attempt to maintain
production levels with the existing employees.
• Taxes, regulation, and other legal problems: Companies can expect to see
increases in their unemployment tax or workman’s compensation rates in the
year following downsizing; this will at least partially offset any savings realized
from decreased employer contributions toward social security and Medicare
taxes. Companies may have worse dealings with regulators if long-term
employees leave, taking their regulator relationship with them. Any the
company may be sued for improper termination on a number of grounds, for
example, age, sex, or racial discrimination.
• Direct costs: the direct costs of layoffs can be significant. Laying off highly paid technology workers in the United
States, Europe and Japan results in direct costs of about $100,000 per worker. In 2008, for example, IBM spent
$700 million in employee restructuring actions.
• Indirect costs: the indirect costs may be even larger. For example, consider the opportunity costs of lost sales: if
experienced sales and marketing representatives with strong client relationships are let go or leave out of concern
that they will lose their jobs (particularly in multinational businesses, where relationships with customers and
suppliers have to be nurtured over long periods of time in order to inspire enough trust to transact business), the
opportunity costs of lost sales may be considerable. Another example is cutting R&D personnel, which may leave
the company with no new products in the future.
• Long-term threats to the organization’s strategic success: Such threats may take the form of loss of mission-
critical skills, loss of institutional memory, inability to meet increases in demand as the economy recovers, and a
sustained drop in innovation, as survivors become risk averse and focused only on saving their own jobs.
• Brand-equity costs, or damage to the company’s brand as an employer of choice. This can be particularly nasty
if there are strikes or lawsuits associated with the downsizing.

4.
Are There Other Alternatives?
There are some alternatives to downsizing. In the personnel area, for example, overtime can be
eliminated or employees can be retrained or transferred to another division that is hiring. Full-time
employees can be placed on part-time status. More generally, new markets can be developed or
more cost-effective processes can be designed. Unfortunately, these responses require a long-
range perspective and an immediate improvement in cash flow may not appear [3].
Reducing Telecom and IT Services Expenses
Foremost among these alternatives to downsizing, we suggest that you also consider cutting other expenses--such
as telecom and IT. Although telecommunications and IT services produce the kinds of efficiencies that businesses
need to compete and profit, they also typically represent two of the top five largest expense categories a business
incurs, and because of carrier tactics, these expenses continue to increase even in a declining economy.
Why reducing telecom expenses is difficult for companies
In other expense categories such as personnel or equipment, executives can typically visualize, manage, and track
expenses quite efficiently. They use the processes and expertise of
their personnel to continuously bend the cost curve down in order to
gain greater efficiencies and continuous improvement. However, in Company
executives
generally
telecom, it’s not quite the same.
find
that
expensive,
In order to maximize its profits at the expense of its customers, telecom frustratingly
slow,
and
complex
suppliers have developed tactics that make it almost impossible for the
efforts
to
reduce
telecom
executives of companies to really understand and take control of their
costs. Pricing depends on secret discounts against published rates, and expenses
yield
only
very
for inventory and service mixes that are only completely understood by modest
savings.
To
produce
the suppliers. As a result, the best competitive market pricing is
telecom
savings,
you
need
an
completely obscured by suppliers. Further, suppliers invest heavily in
building career-long relationships with influential employees who outside
expert.
influence budget and technology decisions at its customer’s companies.
What this means
While its customer’s employees grow more and more dependent on the supplier to provide information, service and
pricing, and guidance, at the same time, the competitive information that really demonstrates the true market pricing
is obscured.
Due to these tactics, company executives generally find that expensive, frustratingly slow, and complex efforts to
reduce telecom expenses yield only very modest savings. To produce telecom savings, you need an outside expert.

5.
What you can do to immediately reduce your telecom and IT expenses:
Get the most capable and qualified outside expert that specializes in reducing these
expenses.
When AuctionIQ is hired to reduce a client’s telecom expenses, it 1) analyzes the client’s current
telecommunication services, service providers, and costs to establish a baseline of what the client
needs and desires; 2) projects potential cost savings available through auctions, optimization or
repurposing or realignment of assets, audits, etc.; 3) conducts auctions and other proven processes as required. 4)
Compels suppliers to competitively bid against each other to provide services to the client 5) Reports results by
presenting the results of the auctions and other events to the client and, 6) based on the results, recommends services
and service providers to obtain maximum reasonable savings to the client; 7) negotiates with the client-selected service
providers to obtain executable contracts; 8) continues to interface with the selected service providers and reports to the
client whether the contracts are being properly implemented; and 9) monitors billings, and reports to the client whether
the contracted savings are being delivered by the service providers.
Through its process, AuctionIQ historically delivers over 50% Telecom AuctionIQ
can
usually
and IT savings to the client, and depending on how fast the client can complete
the
project
so
the
move, AuctionIQ can usually complete the project so the client can book
the savings in the same quarter. How much would that be in terms of client
can
book
the
savings
in
your telecom spend? the
same
quarter.
How
much
So, this time when you’re looking at the budget and trying to balance it, would
that
be
in
terms
of
your
instead of turning to reducing people expenses, look first to cut your telecom
spend?
telecom costs.
Citations
[1] See, for example,
Cascio, W. F., & Young, C. E. (2003). Financial consequences of employment-change decisions in major
U.S. corporations: 1982-2000; In K. P. De Meuse & M. L. Marks (Eds.), Resizing the organization: Managing layoffs, divestitures,
and closings (pp. 131-156). San Francisco: Jossey-Bass. De Meuse, K. P., Bergmann, T. J., Vanderheiden, P. A., & Roraff, C. E.
(2004). New evidence regarding organizational downsizing and a firm’s financial performance: A long-term analysis. Journal of
Managerial Issues, 16, 155-177.
[2] Cascio, W. F., & Boudreau, J. W. (2008). Investing in people. Upper Saddle River, NJ: Pearson.
[3] For more on downsizing and its alternatives, see, generally, Wayne F. Cascio, The Business School, University of
Colorado Denver, Employment Downsizing and Its Alternatives (2010). Alexandria, VA: Society for Human Resource
Management Foundation.

6.
About the Authors
Richard Kennedy, AIQ Legal Counsel
Richard Kennedy received his B.A. with High Honors from the Brigham Young University Honors
Program in 1970 and his J.D. from the University of Utah in 1973, where he was the Schiller
Scholarship recipient.
Richard retired from the Office of Chief Counsel of the Internal Revenue Service, where he was the
National Trust Coordinator and tried numerous cases.
He is admitted to practice before the bars of the States of Utah and California, the United States Tax Court, and various
other Federal Courts.
Brad Buxton, AIQ CEO
With 30 years of experience, Brad provides visionary leadership, support and advocacy to his
clients. The results are enduring, and they speak for themselves.
Continuous development of best practices learned from hundreds of clients including C-level
executives of Fortune 500 clients. By applying these experiences with a technological, financial,
design, and process approach, Brad produces significantly larger gains in profit, speeds time to
delivery, and creates competitive advantage for AIQ clients.
Contact AIQ by visiting us at www.AuctionIQ.com
Or call / email us at:
1 (801) 727-4007 / info@AuctionIQ.com