What is downsizing? Reasons why companies downsize

In business, Downsizing refers to reducing operating costs – making a company leaner – often described as ‘trimming the fat’. This involves reducing the size of the workforce, plant closures, and making the firm’s departments more productive and efficient.

The aim of downsizing

Downsizing aims to restructure an organization to make it more competitive. It is a natural progression in terms of the development of an organization.

Strategically, downsizing can also be viewed as an opportunity for companies to align their workforce with current business objectives and market needs.

Some people say downsizing differs from a layoff, with downsizing being a more permanent measure, while a layoff might include a chance of rehiring the workers who lost their jobs at a later date. Today, the term ‘layoff’ can mean either the temporary suspension or permanent termination of a job.

If not prepared and carried out properly, downsizing can have unpleasant repercussions for a business.

  • A common measure

It is a very common measure that businesses enforce during times of market volatility or poor financial performance.

Many people, especially workers unions, say downsizing is simply a euphemism or doublespeak for a layoff.

  • Companies typically downsize in order to:

  • Improve efficiency (by replacing employees with machinery).
  • Reduce costs.
  • Rightsize resources relative to market demand.
  • Take advantage of cost synergies after a merger.
  • Increase profits by reducing overhead costs.
  • Respond to a decline in demand for the company’s products or services.

Businesses can go about downsizing in different ways. Some may go for a ‘gentler’ approach by offering early retirement and the possibility to transfer to a subsidiary company.

Unfortunately, for some of the workforce, the most common way to downsize is to terminate the employment of a chunk of workers.

Those in charge of downsizing will target staff and departments that are seen as ‘redundant’ (surplus to requirements) or loss-makers.

Businesses that are downsizing attempt to take the necessary steps to ensure that people who are highly valued are kept on. However, often employees who consider themselves as ‘key personnel’ find themselves out of a job, especially if the trimming is aimed at management personnel.

  • Timescales vary

The trimming process may occur gradually, bit-by-bit over a period of a couple of years, or suddenly, with one giant slice.

Even when prepared meticulously and carried out properly, the whole process of downsizing can be extremely nerve-wrecking for employees, even for those who are kept on, because everyone starts wondering how safe their jobs are and whether they might be next.

Proactive communication with remaining staff can mitigate the climate of uncertainty and fear that often accompanies downsizing.

How should companies approach downsizing?

It is important to look at the consequences of downsizing and ensure that the value created from trying to make the business more streamlined outweighs the potential damage to the reputation of the company and decline in employee morale.

There are costs associated with the process. It is vital to carefully evaluate factors such as the potential lower productivity, talent loss, cost of severance packages, and future hiring and training costs.

Most experts say it is in the company’s best interest to make sure the downsizing process is done smoothly. This can be achieved by proper planning and determining the right amount of job cuts – one that suits both the company and its shareholders.

Outplacement

Outplacement refers to a downsizing company’s efforts to help former employees transition to new jobs. Some consultancy firms provide outplacement services, which are paid for by the former employer.

The aim of the outplacement professional is to provide advice and psychological support. The service includes:

  • career guidance,
  • resume writing,
  • career evaluation,
  • interview preparation,
  • job search skills, and
  • how to target the job market.

Vocabulary and examples

There are many terms in business English that are closely related to the concept of “downsizing,” especially compound nouns. Compound nouns, such as “downsizing impact,” are terms that consist of two or more words. Let’s take a look at some of them, their meanings, and how we can use them in a sentence:

  • Downsizing Plan

Definition: A detailed strategy outlining how a company intends to reduce its workforce and operations.
Example: “The board of directors reviewed the proposed downsizing plan, which included the closure of two factories.”

  • Downsizing Wave

Definition: A trend or period during which multiple companies or industries implement downsizing measures.
Example: “During the economic downturn, a downsizing wave hit the tech industry, leading to massive layoffs.”

  • Downsizing Initiative

Definition: A specific project or set of actions aimed at reducing the size and cost of operations in a company.
Example: “The new CEO launched a downsizing initiative to cut costs by 20% over the next fiscal year.”

  • Downsizing Impact

The effects that downsizing has on the remaining workforce, company culture, and overall business performance.
Example: “The downsizing impact was felt across the organization, with lower employee morale and increased workload for those who remained.”

  • Downsizing Strategy

The approach a company takes to reduce its workforce, which can include layoffs, early retirement offers, or attrition.
Example: “The management team developed a downsizing strategy that focused on voluntary separations and retraining programs.”

  • Downsizing Outcome

The result or aftermath of a downsizing action, which can include financial savings, operational efficiencies, or unintended consequences.
Example: “The downsizing outcome was not as positive as expected, with savings being offset by the loss of experienced staff.”

  • Downsizing Measures

Specific actions taken by a company to reduce its workforce, such as layoffs, hiring freezes, or salary cuts.
Example: “The company announced a series of downsizing measures in an effort to remain competitive in the market.”

Two Videos – What is Downsizing

These two educational videos, from our YouTube partner channel – Marketing Business Network, explain what ‘Downsizing’ and ‘Outplacement’ are using simple and easy-to-understand language and examples.

  • What is Downsizing?

  • What is Outplacement?