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In downsizing, firms often lose more than they bargained for, study suggests

April 1, 2008

For more information, contact: Benjamin Haimowitz, HHaimowitz@aol.com

They have become commonplace even in good times. Now, with fears of economic slowdown multiplying by the day, layoffs and downsizing appear likely to become even more commonplace, as employers seek the quick cost savings that is their chief allure.
 
But this allure, new research finds, may turn out to mean grief not only for laid-off workers but for employers as well. According to a study in the current issue of the Academy of Management Journal, downsizing can set off an exodus among retained employees that in some cases is much greater than the reduction achieved through the layoffs.
 
"The downsizing-turnover relationship suggests a sad irony in that employees are laid off by companies that may subsequently find themselves understaffed," write the study's authors, Charlie O. Trevor and Anthony J. Nyberg of the University of Wisconsin - Madison.
 
"Moreover," they add, "to the extent that turnover rates hinder organizational performance, the performance of downsizing companies may well suffer further through the leaving behavior that the layoffs generate."
 
Perhaps the most striking finding in this study of quitting rates in some 200 companies was the considerable exodus that even a small downsizing could set off. For example, companies that laid off a mere 0.5% of their workforce sustained, on average, a  turnover rate of 13%, a rate that was 2.6 percentage points higher than the average turnover rate of non-downsizing firms. In other words, an extra 2.6% of the workforce left of their own accord, more than five times more workers than were laid off.

Comments Prof. Trevor: "Employers sometimes use downsizing as a way of getting rid of undesired workers. Our findings ought to persuade them that this could very well result in the loss of even more employees whom they want to keep."

Beyond the surge in turnovers brought on by any downsizing at all, companies sustain higher rates of quitting the more layoffs they impose. Thus, a downsizing of 0.5% predicts a turnover rate of 13%, while a downsizing of 2% predicts a turnover rate of 14.1%, one of 5% predicts a turnover rate of 14.9%, and one of 10% predicts a turnover rate of 15.5%. The amount of quitting in all these instances substantially exceeds the average 10.4% turnover rate for companies that do not impose layoffs.

In addition to uncovering these hazards of layoffs, the study also identifies human-resource programs that can buffer the effects of downsizing on turnover.

One way is through practices that foster job embeddedness, such as defined-benefits plans, sabbaticals, on-site childcare, hiring for organizational fit, and flextime. Another is through practices that convey a concern with procedural justice -- practices that provide employees with a means of addressing perceived injustices on the job, such as through an ombudsman or a confidential hotline or a formal grievance  process.

Ironically, a third kind of enlightened human-resource practice only seems to increase the amount of downsizing-related quitting. Career-development practices that provide workers with tools and strategies to get ahead in the company increase the likelihood that they will seek employment elsewhere in response to layoffs. But in one way career-development programs do act as a buffer to increased quitting, since they contribute slightly to employee commitment, which in turn substantially reduces downsizing's effect on turnover.

The findings derive from information submitted by companies that were invited to apply for a major business magazine's annual list of the 100 best companies to work for in America. The final sample consisted of 106 companies from one year and 161 companies from the following year, of which 67 firms in the second year were repeats and 94 firms were different. Companies were considered to have downsized if they reported a reduction in force in the survey's calendar year or in the preceding two calendar years. The amount of downsizing was compared to the proportion of companies' full-time workforce that had left voluntarily in the 12 months prior to the survey.

The new study, entitled "Keeping Your Headcount When All About You Are Losing Theirs: Downsizing, Voluntary Turnover Rates, and the Moderating Role of HR Practices," is in the April/May 2008 issue of the Academy of Management Journal.  This peer-reviewed publication is published every other month by the academy, which, with more than 17,000 members in 102 countries, is the largest organization in the world devoted to management research and teaching. The academy's other publications are the Academy of Management Review, Academy of Management Perspectives, and Academy of Management Learning and Education.

Media Coverage:
Business Week. Think Before You Fire. (Monday, April 21, 2008).
Calgary Herald. Alternatives to layoffs under study. (Tuesday, June 23, 2009).
HR Magazine. Cover Story: Learn How to Minimize the Aftereffects of Layoffs. (Saturday, November 01, 2008).
HR Magazine. Not a Time for Layoffs?. (Sunday, June 01, 2008).
HR.BLR.com. Study: Firms that downsize see surge in turnover. (Wednesday, May 07, 2008).
Milwaukee Journal Sentinel. Job cuts can result in more downsizing than anticipated. (Saturday, May 10, 2008).
Montreal Gazette. Cutting Productivity: The Real Downside to Downsizing. (Saturday, July 26, 2008).
The Deal (Australia). Get smart about downsizing. (Friday, July 17, 2009).
The Globe & Mail. Taking a Bullet for the Team. (Monday, January 26, 2009).
US News & World Report. Setting the Tone for Turnover. (Monday, April 21, 2008).
Washington Business Journal. The Talent Fight Heats Up. (Friday, February 20, 2009).

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