Research Explores
Hidden Costs of Downsizing
Charlie O. Trevor
Anthony J. Nyberg
What are the unintended costs of downsizing? Research by Charlie O. Trevor and Anthony J. Nyberg of the University of Wisconsin-Madison School of Business on the downsides of downsizing is attracting national attention.
Findings from their study of downsizing and turnover rates at 200 companies were highlighted by U.S. News & World Report and BusinessWeek. The study will also be summarized in the May edition of Harvard Business Review.
The new study, titled "Keeping Your Headcount When All About You Are Losing Theirs: Downsizing, Voluntary Turnover Rates, and the Moderating Role of HR Practices," will appear in the April/May 2008 issue of the Academy of Management Journal, set to release later this month.
With the economic slowdown, 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, the new research finds, may turn out to mean grief not only for laid-off workers but for employers as well.
According to their study, 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 Trevor and Nyberg. "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.”
Trevor is an associate professor in the Department of Management and Human Resources at the Wisconsin School of Business. Nyberg is a doctoral candidate.
Perhaps the most striking finding in their 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 its own accord, more than five times more workers than were laid off.
"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," added Trevor.
Beyond the surge in turnover 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.
There is at least some good news for downsizing companies, however, as the study also identifies human resource practices that can substantially buffer the downsizing effect on subsequent 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. For example, a company that downsizes 2% of the workforce (the median rate of the downsizers) and has high levels of either type of HR practices would be expected to see turnover rate increases less than one fourth the size of the increases at low levels of the HR practices.
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 also increase the likelihood that they will seek employment elsewhere in response to layoffs. That is, through these practices, employers have not only prepared employees for internal opportunities, but also enhanced their ability to search for and signal competence to external employers; downsizing seems to prompt employees to take advantage of these search and signal benefits that career development practices provide.
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.