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

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.

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.

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.

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 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.

Video – Key considerations to downsizing

Mike Sweeney, Emeritus Professor of Operations Management at the Cranfield School of Management, England, discusses five key steps to successfully manage downsizing or plant closure.