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The Upside of Downsizing Done Right -by Peter Tingling

Posted by Phillips, Lynn at Monday, 05/07/2012 12:57 am
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2.9 from 36 votes

The Upside of Downsizing Done Right
By Peter Tingling, PhD, written for

We all know that one of the most important managerial functions is hiring. Who we hire not only has a direct effect on performance but also sends important signals about our priorities, capabilities, and competencies. As a result, modern selection processes are rigorous evidence-based processes that involve multiple decision-makers and varied input.

However, if the benefits of methodological, systematic and analytic selection processes are so well-established, why are they not applied to termination and layoff decisions? In short, why are there so many examples of companies that pay high performers to leave; conduct ongoing multiple rounds of layoffs; or have to bring back erroneously released key employees?

Although it is tempting to suggest that economic termination decisions are different because they are characterized with a sense of urgency and are often imposed from the top down, such an explanation simply makes excuses and perpetuates poor management. The very fact that there is a sense of urgency argues for more rigor and analysis not less, and, unlike the information asymmetry of hiring decisions where the candidates know more than the employer, the company tends to have much more information than the employee.

Among the many layoffs with which I am familiar, one or two managers quickly and collectively review the employees within their departments and provide a list of those that can be released.
There are three problems with this approach.

The Duress of Stress: Without the proper process managers often make poor decisions. Decision-making is notoriously difficult and decision-making under stress and time pressure even more so. Many managers have been trained in how to evaluate or interview candidates but few have experience making layoff decisions and are typically underprepared and under supported.

The Problem with Appraisals: The second problem is that managers usually rely on partial information obtained from rearward facing performance appraisals that were not only designed for an entirely different purpose (predominantly salary adjustment), but may not only have been poorly conducted (a problem that many HR professionals freely acknowledge) and vary significantly across the organization. As a result, a low performing employee from one department or division may still be more valuable than a highly rated employee in another and the wrong employees are retained or released.

The Diversity of True Teams: The third problem is that such an approach rarely reflects the “go forward” environment and lacks the ongoing dynamic that is essential to higher levels of performance. As anyone who has seen a professional team of high paid athletes knows, it is not just about assembling raw talent. Almost invariably all organizations have a few high performing employees who are more trouble than they are worth and a few who, while they may be evaluated poorly on traditional metrics, form the social glue and connective tissue that holds the organization together. Rarely however do managers review their decisions in context.

Tips for Tough Calls
The fact that layoff decisions should never be easy does not mean that we should not try to improve them. Here are three suggestions:

Avoid thinking too quickly about “who” and instead think about “how”. It is well known that better decisions are made when collaboration is delayed until individuals have formed their own initial ideas rather than rushing towards group think. Einstein is famously quoted as having said that if he had one hour to save the world he would spend 55 minutes defining the problem and only five minutes finding the solution. Helping managers think about “how”, a process many human resource professionals are good at, means that managers will make less mistakes regarding “who”.

Recognize that good decisions take time. Although it is naïve to think that the business will wait significant amounts of time no organization should be in a hurry to make bad decisions. These are decisions with significant employee implications and they deserve management’s full attention and reflection rather than intuitive or capricious guesswork. A rule of thumb is to allocate at least the same amount of time and energy as was spent in initial selection.

Consider reversing the problem. That is, rather than identify which employees are to be released, assume that you are reforming the organization from scratch and have the luxury of identifying which employees you would like to rehire. Begin by identifying the competencies, attributes and characteristics required by the new environment. Then have the new management team individually assess and evaluate all candidates against these criteria while allowing provisions for those candidates who may be high performers but not part of the go-forward organization or those whose particular knowledge or circumstances require that they be selected regardless of their performance.

This approach of course requires significant effort. Employees however deserve this level of attention. If we are to overcome the fact that most downsizing efforts at white collar knowledge intensive organizations fail, we must try new approaches. Done properly, downsizing does not simply reduce short-term costs, but positions the organization for the future. It will not and should never be easy; that doesn’t mean that we should not try to make fewer mistakes.

Peter Tingling is an Associate Professor at the Beedie School of Business and the CEO of Octothorpe Software Corporation, a decision sciences company. He has worked with numerous organizations on restructuring decisions and holds a PhD in organizational and technological decision making.

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