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Downsizing and rightsizing

Performance improvement

For many managers the need to make improvements means cutting costs and this often ends up in cutting jobs.
For share holders it gives the impression that rapid and decisive action has been taken.
This action is designed to give short term gains which hopefully will have a long term affect on the profitability of the company.

Return on equity

This is not often proven by the facts.
A lot of companies will measure performance as ‘Return on Equity’.

ROE (return on average common equity) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. ROE is viewed as one of the most important financial ratios.
It measures a firm's efficiency at generating profits from every pound of net assets, and shows how well a company uses investment pounds to generate earnings growth.
ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage.

But not all high-ROE companies make good investments.
Some industries have high ROE because they require no assets, such as consulting firms.
Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners.
You cannot conclude that consulting firms are better investments than refiners just because of their ROE.

Generally, capital-intensive businesses have high barriers to entry, which limit competition.
But high-ROE firms with small asset bases have lower barriers to entry.
Thus, such firms face more business risk (see The Complete Risk Management package) because competitors can replicate their success without having to obtain much outside funding.
As with many financial ratios, ROE is best used to compare companies in the same industry.

In general, it is not unusual for a company’s ROE to drop by 50% after downsizing cost cutting measures.

The problem with reducing personnel is that it only reduces costs and doesn’t address any of the issues that are more likely caused by poor performance.


Managers will happily evaluate the numbers of staff required to run their departments. They will do this on the current performance of their staff good or bad.
On the assumption that most departments are not working at their best levels a manager will always overestimate the number of staff actually needed. Hence, when downsizing occurs managers are just told that staffing levels will be reduced to a particular level. Apparent cost savings in this manner are easy to see.

The aim is to carry out all the activities that are needed with the minimum resource.

How many managers have you heard suggesting that change will mean new people coming in?
This injection of a new way of doing things is really a recognition that the old behaviours were not working.
New blood can bring new skills, new experiences and better leadership skills (see The Complete Leadership package).
The aim seems to be to improve systems and behaviours lead by the new intake thus increasing motivation.

Reduced markets and increased competition often leads to these sort of measures as a quick fix.

When downsizing occurs who goes first?
In the majority of cases long serving and experienced personnel will take early redundancy and take their skills with them.
This adds a burden to those left behind who are now asked to do more work with reduced experience and skill at their disposal.

Key points

When jobs go it is usually by redundancy and that means the job position has to go and it is not technically the person.
This suggests that many activities that were associated with that position are either no longer required or must be transferred elsewhere.
If this is the case, the question needs to be asked why managers could not see the need to remove some redundant activities prior to job cutting.

Hence, one area for cost cutting is the removal of activities that need not be there, that are redundant.
One way to approach this is to ask personnel for their suggestions where work can be removed.
The reinforcement for this behaviour must overcome the fear of job losses which is not the aim of the exercise.

Any changes will require changes in behaviour. In order to support these consequences must be appropriate and immediate.
Long term uncertain rewards and vague reasons such as ‘job security’ don’t improve motivation.

Many situations will require the change of behaviours or habits. This can’t be done with a simple edict.
Changes should be gradual with frequent reinforcement all the way until the old habit has been replaced by the new.

Changes in attitudes are often accompanied with changes in management styles, for example, the use of empowerment.
Management’s job is not merely to set up the systems for taking on increased responsibilities but to nurture the change with constant reinforcement for the new behaviours.

Change behaviours slowly in small steps.
People will make mistakes don’t develop a scapegoat culture of blame.

It’s not good enough to have a vision.
This has to be translated into things like Mission Statements which in turn must be broken down into tasks and the behaviours that will deliver the required results.

If you can remove activities that are redundant and provide positive reinforcement to personnel on a regular basis You will, over a period of time, raise performance levels and thus productivity.
In this situation, you may not have to consider downsizing; that will be the prerogative of your competition.