Although the severance of staff is occasionally necessary for the health of a business, if it’s done the wrong way the business can bleed to death. By Nicholas Way
When BHP decided to announce the closure of its steel-making operations in Newcastle in 1997, the inevitable downsizing had the potential to be devastating – for the remaining employees and for the second-biggest city in New South Wales.
Instead, the strategy put in place by BHP, local authorities, interested unions and the state Labor Government helped to ensure an orderly transition when the word came down that 3000 jobs had to be shed by 1999.
It is not that Novocastrians were unaware that the Big Australian was bringing the curtain down on an industry that has been synonymous with this central NSW city for much of this century. The rumors had concerned not so much if the closure would come but when.
So when the official announcement was made in May 1997, Newcastle was prepared. So too were the affected parties, despite some political grandstanding at the time. After all, BHP had been culling workers from its steel division in the second half of the 1980s and all of the 1990s. This downsizing was merely the final leg of a long journey. Not only was the city prepared for the news, but BHP had taken important steps to ensure that employees keeping their jobs understood the full ramifications of this pivotal event in the company’s history.
A civic duty
In any considered assessment of how to downsize an operation, it must be said that BHP got it right in Newcastle. What the company realised is that any large-scale downsizing has enormous flow-on economic and social effects. Community dissatisfaction with how a downsizing is implemented is sure to affect employees staying on almost as much as it affects those who have to go. It is not just a company issue.
Newcastle had been preparing for the downsizing for years. Roy Green, associate professor at Newcastle University’s Employment Studies Centre, says: “On balance, the shock of the BHP closure has been cathartic for the region. It has finally put paid to the idea that jobs come from big companies that locate here from the outside. Anything that happens here depends on the people here.”
Green makes a valuable point. In any downsizing, the tendency is to look inwards at the effect on the company. What this overlooks is that those employees who stay on will be more willing to accept the decision if they know that former colleagues have been treated reasonably and have been able to find work elsewhere. To a great extent this is why BHP was able to minimise the effect on the community of its decision to effectively shut down its Newcastle operations.
The obvious contrast to how BHP handled Newcastle is the way the banks have been behaving. Although no downsizing will ever be easy, particularly when it occurs in large, well-established companies, the way that banks handled this issue in recent years has been disastrous: angry communities (particularly in rural areas) when branches have closed; dissatisfied clients; and, most significantly, disgruntled, even bitter, employees who resent the way former colleagues have been treated and how they are now expected to pick up the workload. The way BHP adeptly managed what one academic has called “handling the survivor syndrome” – assisting employees who have kept their jobs after a downsizing to come to grips with the restructured organisation – is in direct opposition to the banks response to this issue.
The result is that the banks failed to combat the negative effects of organisational change that US academic Gary Jackson discusses in a paper entitled Beyond Survivor Syndrome. He writes: “These effects on the workforce include confusion, fear, apathy, depression and other mental and emotional states which can result in impacts on the workplace such as temporary productivity improvements, long-term productivity loss, poor morale, workplace injuries and even violence.”
In the US, where there has been much research into the effects of downsizing, better companies have taken to following checklists in a bid to keep employees (whether those being retrenched or those remaining) and their communities fully informed.
One checklist, quoted in an article entitled Managing Transition: How to Avoid the Survivor Syndrome, illustrates just how the banks have failed to meet most of the criteria regarded as being the bare minimum to ensure a smooth transition in the aftermath of a downsizing. Such a failure as the banks, Jackson says, can lead to serious erosion in human health and safety and organisational performance.1
The reality is that downsizing is a common phenomenon in the business world. All companies will go through the process, as a result of a downturn in business, a change in corporate direction or the need to rationalise following an acquisition.
Herman Maynard and Susan Mehrtens, in their book, The Fourth Wave, make the point that “virtually all large and mid-sized corporations in the US and, to a lesser extent, Europe, are imploding, a process that has been under way since 1985.
“Implosion is the act of repeatedly liquidating assets, business units, manufacturing capability, technologies, research efforts, market development programs and people, to improve short-term earnings and cash performance.”
In such a business environment, employees have the right to expect their employers to have strategies in place when downsizing occurs.
So back to the checklist. The first point – and the most crucial – is that management maintain the perception of fairness throughout the process. All employees must be told the real reasons for the downsizing. This will help to maintain the trust of the employees who are not being given a pink slip. One senior human resources executive with a big bank has conceded in conversation that the banks did not do this.
He said: “The decisions to cut staff and to close branches were made at a board and senior management level. Once the decisions were made, they were pushed down the line. Not a lot of thought was given about how staff would react and, particularly in the early days, precious little was given to what impact it would have on those communities in which the banks operated. To be brutally honest, it was bottom-line driven. Employees and communities came a bad second.”
By adopting this approach, the banks were failing to distinguish what the checklist article calls the difference between “change” and “transition” in a downsizing operation. The article says: “While change is circumstantial and takes place outside the person, transition is a psychological process that occurs within.
“Change is event-based, result-oriented and can occur quickly. In contrast, transition is experience-based, process-oriented and always takes time.”2
As the anonymous informant at the bank acknowledged, the banks, in sharp contrast with BHP (it had a two-year deadline at Newcastle), were simply agents of “change” in their downsizing operations. They were driven by the need to cut costs, paying little attention to the consequences; certainly not to the psychological needs of those who had to make the transition.
“There’s no doubt we have paid a price for this,” he said. “We are going to have to work hard to re-establish the faith that communities and employees had in us. The problem for us is that, more than likely, we are going to have to do this in an environment in which one would think there are more cuts to come. It is not going to be an easy task.”
In particular, the informant was critical of the banks failure to adequately explain to employees why downsizings were necessary.
“We were skimpy with the information. People just didn’t know what to expect next. We only paid lip-service to the notion that there should be effective lines of communication up the organisational chain so that staff with any questions could feel free to ask senior management what was happening. With hindsight, I guess you could say that the thinking of senior management was that there are obvious benefits in this downsizing. Staff will see that and understand the need for it. What we forgot is that employees, especially those with long years of service who have never known any other sort of work, don’t see the big picture. They see the small picture. The very small picture. Themselves.”
The way in which the banks have downsized in recent years has attracted the critical attention of the Finance Sector Union. Although the union lacked the industrial clout (as all unions do these days) to prevent the lay-offs, it did enter the debate to argue that the banks downsizing was not just harmful to employees (and their members) and communities, but, in the long term, to the banks themselves.
Quoting research from surveys by the American Management Association3 and the University of Southern Queensland Department of Human Resource Management4, the Finance Sector Union issued the following critique of downsizing by the banks:
- It presents uncertain gains and does not necessarily lead to cost reductions.
- Downsizing organisations are more likely to experience no productivity gain than to experience productivity improvements.
- Downsizing organisations have less dynamic adaptability.
- A frightened organisation is not innovative in the best interests of the business and may be less capable of adapting to a smarter and more competitive environment. Developing this point, the union argues that downsizing can result in employees being less inclined to innovate and take risks and, by creating a destructive cycle, can reduce organisational efficiency to the point at which further cost reductions and retrenchments are required.
More specifically, the union looked at the “survivor syndrome” of employees remaining at the banks after a downsizing. It noted that, despite high levels of unemployment, there was increased labor turnover, falling productivity and heightened job insecurity. Quoting a report from the Australian Human Resources Institute, it said a survey of remaining employees after downsizing resulted in:
- 72% saying their job security had fallen.
- 53% saying their commitment to the company had fallen.
- 50% saying they were less motivated.
- 65% saying staff morale had fallen.
One employee, quoted in the University of Southern Queensland Department of Human Resource Management report, summed up the views of many bank employees: “Unfortunately, there is a culture of fear in the bank. Any constructive criticism is viewed negatively; many staff in the bank are working unpaid overtime to cope with their workloads.”
Increased workloads are often the most obvious contributing factor to dissatisfaction among remaining employees. Hours are longer – and don’t even consider asking for overtime. As another bank employee said: “I believe there is too much work and expectations put on the branches. It’s getting to the stage where people cannot cope with the level of work required in the amount of time given. This is resulting in unpaid overtime, high levels of stress and staff becoming exasperated about not being able to perform their job at the level of quality and expectations that they place on their time.”
In this environment, the obvious casualty is morale. The cancer of indifference and resentment spreads, and productivity is the ultimate victim. Another bank employee says: “Senior management refuses to accept low morale currently found in the branches. They have completely lost touch with the real world and are too focused on the almighty profits, which continue to increase each year. They should be focusing on the other areas that are increasing staff discontent, stress and disillusion, and customer dissatisfaction.”
Although the bank informant agrees that there was little understanding of these issues in the past, he says it is changing. He adds that senior managers, using the argument that they work even longer hours, still seem to have little sympathy for employees who resent working harder for the same money. “What these senior managers conveniently forget is that they are more than adequately compensated for their long hours. Their salaries are six figures, sometimes seven. Plus their other perks. It is a lot harder for a young person to get as excited – working in a busy bank and earning $30,000 a year.”
There can be little doubt that the survey result dovetails with the experiences of the informant. What needs to be done, as he and the union agree, is to tackle these issues in order to remove as much as possible of the stress involved in downsizing.
It should be remembered that many of these cuts have come in rural areas. It has meant more than just job losses in areas in which finding work is difficult; it has also led to a loss of services for that community.
Down with downsizing
The Financial Sector Union and, with it, many human-resources specialists, are questioning the merits of downsizing. Today, it is not just an issue of how to handle downsizing; more and more it is becoming an issue of whether downsizing is the right strategy at all.
For much of this decade downsizing was seen as a vital management tool to meet profit projections. Companies that did so, were often rewarded by the market in the form of a higher share price. What was often forgotten in all this was the historical perspective: just as adding management layers to get better performance was the corporate panacea in the 1970s, so downsizing has been in the 1990s.
Australian companies came to downsizing later than their US counterparts. What began as a need to restore balance-sheet health in the early 1990s following Australia’s worst economic downturn since the Great Depression became a management catch-cry. In this world of downsizing and restructuring, it was not just workers that found themselves receiving pink slips; management also suffered as companies stripped off – “delayering”, to use the corporate jargon – levels of management.
The figures are staggering. Research by the University of Southern Queensland Department of Human Resource Management, cited by the Financial Sector Union, shows that that between 1987 and 1994 more than 3.5 million jobs were lost. Although many of these job losses were cyclical, many more were structural.
This is not to argue that downsizing is not a useful management tool. It undoubtedly is. As the economy changes even more rapidly in the information age, as employees have to adapt to more than one career (possibly four or five), downsizing has become and will remain an integral part of corporate life.
That is not to say it should be – as has often been the case in the 1990s – the first and, frequently, the only management tool when a company finds itself in trouble. As the banks have shown, there are downsides to downsizing, and it seems at least arguable that these institutions have a long way to go to restore their relationships with staff and the community.
BHP demonstrated at Newcastle that a downsizing can be handled professionally and compassionately. It worked with the community, unions and governments to ease the financial and emotional pain of those retrenched and to ensure that those remaining on the payroll fully understood why the company made the decision.
It is a method that the banks, which will inevitably be involved in future downsizing exercises, would do well to emulate.
1. Gary Jackson, Beyond Survivor Syndrome: Risks and Intervention.
2. Management Transition: How to Avoid the Survivor Syndrome. Pony Express, 1997.
3. American Management Association: Survey of Company Downsizing, 1987-1996.
4. University of Southern Queensland, Department of Human Resource Management, Employee Relations Survey, 1996.