Ethics in Management

Table of Contents

Introduction
Is downsizing ethically justifiable?
Is downsizing worth the cost?
How can downsizing be done ethically and humanely?
Recommendations
Final Thoughts
References

Gus Prestera (June, 1998)

Introduction

Fortune 500 companies downsized, rightsized, reengineered, or restructured out of existence 3.2 million jobs in the 1980's. Despite that fact, it is estimated that America is 25 percent overstaffed (Quigley, 1992). Facing global competitive pressures and shrinking markets, today's organizations are becoming smaller, leaner, and certainly meaner. For some organizations, downsizing has represented a last chance to save themselves from bankruptcy. In other companies, downsizing has been used as a Wall Street sugar pill, creating the illusion of productivity and inducing improvements in short term stock performance. The pruning of the American workforce raises several issues for today's executives. Is downsizing ethically justifiable? Is downsizing worth the cost? If so, how can downsizing be done ethically, humanely, and realistically?

Is downsizing ethically justifiable?

Some would argue that companies have no further obligation to society than to generate profit. In today's marketplace, organizations must work efficiently and cost-effectively in order to stay competitive. Employees, as a prime beneficiary of the firm's success should "give a day's work for a day's pay" (Sirico, 1996) and expect little more in return. The organization's main stakeholders are the shareholders and the customers. Both expect the business to offer value through high productivity and cost control. The healthcare industry offers an example of how costs are "spiraling out of control" at a much faster rate than other costs, leading to public sentiment in favor of reform (Naran-2, 1996). Downsizing is merely a cost cutting tool that helps ensure the competitiveness and indeed the survival of the organization (Sirico, 1996). Furthermore, downsizing protects the consumer and the shareholder from inefficiencies of sub-optimal productivity. Today, employees must simply expect "to do more, in less time, to higher standards, and with fewer resources" (Navran-1, 1996) if their organizations are to thrive.

On the other hand - what of the victims of downsizing? Casualties of War - At the top of the casualty list are the people being downsized. Imagine the shock, anger, and shame (Illes, 1996) of those individuals. In a society where you are what you do, layoffs can inflict irreversible harm to the individual's self-esteem. In addition to the emotional trauma of the former employee, consider the negative impact on the families of these downsized workers and the economic burden placed on the communities where layoffs have occurred. Downsizing shatters the belief that good performance leads to reward and positive recognition. Can this damage be justified in the name of cost control?

Those left behind - Next on the list of victims are the workers that are left behind. Though you would expect these employees to feel relieved at being spared the axe, these individuals often suffer as much, if not more, stress than those being laid off.

Guilt over continued employment while their friends are escorted out of the building is a very common emotion during layoffs (Quigley, 1992).
Overworked by trying to do more with less time and resources, survivors of downsizing often burn out and leave the organization. A recent survey suggests that (on average) employees work 10 hours per week more now than they did 10 years ago (Navran-1, 1996). The line between work and family time appears to be shifting in the wrong direction.
Under-trained in their new roles, with less support from managers (who have wider spans of control), and with higher expectations, downsizing castaways often wish they had sunk with the ship. Those left behind are expected to function in teams; to initiate process improvements; and to make more decisions. These things often require the development of new skills. With training resources scarce (as they are normally top on the list of expenses to be cut), these workers are usually ill prepared to meet the lofty challenges given to them (Navran-1, 1996).
Disillusioned by the company's blatant disregard for its employees, workers take on a look out for number one attitude (Quigley, 1992). The sound of resumes being prepared resonates off of the cubicles. A day-to-day mindset becomes the norm and loyalty flies the way of the Carrier Pigeon. Developing and maintaining the trust of its employees is one the biggest challenges that organizations face. How can short term cost savings justify the long-term dissolution of trust, loyalty, and credibility?

The customers - In service industries, such as health care, hospitality, banking, and education, as well as in goods industries which have a strong service component, there is likely to be a tradeoff in customer service for the cost savings of downsizing (Anderson, 1997). As an example, Discovery Zone Fun Centers reduced its workforce three years ago by approximately one third. Children and their parents visit Discovery Zone to enjoy the rides, food, and activities of a small indoor park. The safety, security, and entertainment of the children are the company's primary customer service objectives. Shortly after the layoffs, complaints doubled; safety incidents increased 400%; and security became little more than a charade. A television journalist who reported the kidnapping of a 7-year old child from one of the "fun" centers eventually exposed the weak security enforcement caused by the short-staffing situation. With the stock price in a tailspin, Discovery Zone filed for bankruptcy protection within six months of the incident.

The covenant - A company, through its customer service objectives, its mission statement, and its advertisements, creates a quasi-contract of sorts with its customers. Discovery Zone agreed to provide a safe and secure place for children to have fun. The parents of these kids trusted that the company would do everything possible to protect the children. Sadly, it did not. Productivity, as measured by the costs of performance, is not compatible with superior customer satisfaction, as measured by the quality of performance, if the organization's operations are highly dependent on the efforts of people (Anderson, 1997).

Is downsizing worth the cost?

Though layoffs create short-term savings, creating the illusion of productivity in the eyes of investors, they "usually fail to raise profits or (true) productivity" (Trudel, 1996). In fact, as was the case with Discovery Zone, companies normally resort to layoffs when they cannot compete adequately in the marketplace. Proponents of "rightsizing" would argue that the need for downsizing reflects a lack of proactive human resource management (Morrall, 1998).

The Training Bullet - After downsizing, the workers left behind often require training both in narrow technical areas as well as broad coping skills areas, such as time, change, and stress management as well as team building and coaching. It is difficult, if not impossible, to create the necessary productivity improvements without conducting extensive training at every layer of the company. Without productivity improvements, it is physically impossible to do more work with less resources (Navran-2, 1996). To head off severe setbacks in performance, more and more downsized organizations are biting the magic training bullet. The cost of training, however, should dramatically cut into the savings realized from the layoffs.
Dizzy Days - When an organization is in the midst of dramatic organizational change, as is the case during downsizing, it typically goes through a "frozen in headlights" stage (Trudel, 1996). Employees are in a dysfunctional state of shock and panic; many functions fall through the crack until they are reassigned; and communication is under-utilized. This state of confusion is not only unproductive, it also makes the organization quite vulnerable.
Community Pressures - When AT&T Chairman Robert Allen announced elimination of 40,000 jobs, he became an instant celebrity, of sorts. Facing mounting public pressure, corporate executives are struggling with their responsibility to improve shareholder value (regardless of the cost) and their responsibility to society (Hammond, 1996). President Clinton has called on business leaders to accept their companies' obligations as corporate citizens and behave accordingly.

How can downsizing be done ethically and humanely?

The one string that runs across all downsized organizations is the drive to cut costs (Navran-1, 1996). There are, however, three alternatives to the slash-and-burn technique used in typical downsizing programs: rightsizing, passive downsizing, and the combination approach. All three require a good deal of planning.

Rightsizing - An organization, based on an in-depth need assessment, develops a short and long-term human resource plan. The firm then communicates this plan the workforce. Then, over time, training is given as needed; workers are moved internally; and new hiring is tightly monitored (Morrall, 1998). Peter Drucker recommends that a position be left vacant for at least three months to see if that position really needs to be filled after all. If it is not necessary, do not fill it. This type of disciplined human resource management is a proactive way to restructure the organization continuously. This constant vigilance helps ensure that the organization does not grow the layers of "fat" which would commonly lead to drastic downsizing activities.
Passive Downsizing - According to U.S. Labor Secretary Robert Reich (1996), "if you're going to downsize, do it gently." He claims that if downsizing is done passively through buyouts and attrition, the organization ends up much better positioned for long term success. If layoffs must occur, companies should provide outplacement services. Better yet, to avoid laying off blue-collar workers, companies should re-train them for white-collar jobs, which are more appropriate for our information age. The pay-off is in the extra effort (higher productivity and better performance) recceived as a result of the good will, loyalty, and trust the organization has earned. Reich reminds us that the "employees are closest to customers…to production processes…to the technology." They are the ones who will make the process improvements and quality enhancements that will improve productivity and customer satisfaction (Reich, 1996).
Combination Approach - Generally, downsizing practices run counter to high performance practices. Yet, more and more organizations are combining these two approaches as part of their restructuring programs. Downsizing helps break down the traditional organization chart, facilitating the introduction of cross-functional teams, empowerment, and broad job descriptions. High performance practices in turn help fill the gap of productivity and customer satisfaction. This model provides a clear vision for the workers who remain, tearing down the old system while at the same time erecting a new, improved structure. Without a clear vision, the future can become rather uncertain and bleak for the survivors of downsizing.

Recommendations

If you have to downsize, here are some recommendations.

Pre-Downsizing

Needs Assessment - Do not wield the axe blindfolded. Conduct an assessment to identify the fat that needs trimming. Beware of cutting service workers as that will likely have a significant impact on customer satisfaction and therefore long-term profits.
Discriminatory Practices - Workers with the least seniority are often the first to be cut. A majority of these workers are women and minority ethnic groups. Be aware of explicit and implicit discriminatory practices.
Strategic Planning - Identify not only what jobs will be lost but also what steps will be taken to revive productivity, regain trust, improve morale, and communicate the corporate vision. The plan should include communications, training, and layoff provisions.

During Downsizing

Humane Treatment - Treat the person being laid off as if it were their first day on the job. As you would with a new hire, provide support, communication, and empathy. Be aware of the impression left on co-workers when someone is escorted out by security. Provide notice, career counseling, exit interviews, and a generous severance package (Settles, 1988). Create a system for tracking these people after they leave. You may want them back some day. It will be worth the investment in time and money.
Communication - Treat this program as if it were a marketing campaign, because it is. Provide remaining workers with a clear vision of where the organization is going; what their role is in the process; and how the transition process will be handled (Hofman, 1996). Maintain a constant two-way flow of communication. In these times of much speculation, no news is worse than bad news. Be truthful and sincere for you are trying to re-build trust, a very difficult thing to do.
Evaluation - This is an ideal time to conduct performance reviews for the remaining workers. This gives you an opportunity to provide positive feedback (let them know where they stand), describe the new roles and responsibilities, set new objectives, and identify training needs. The performance review provides closure for the old and helps chart a course through the new.

Post-Downsizing

Customer Focus - With so many distractions, it will be easy to forget the customer's needs. Putting in place new productivity and customer satisfaction measurement tools will help strike a balance and keep workers focused. Be sure to reward top performers.
Rightsizing - As discussed before, rightsizing is the proactive restructuring of the organization. After you have downsized to the optimal "size," implement a rightsizing program to keep your organization from becoming fat again.
Rally the Troops - Rally the front line workers in a common cause. Often, outside competitive pressures will provide you with ammunition to use in firing up a rallying cry.
Establish a Routine - Restructuring will be very stressful on the organization. Avoid any major restructuring until workers have had a chance to settle into the new norms. Maintain constant two-way communication and provide a feedback mechanism.
Abandonment - Do not be afraid to abandon practices and procedures. To optimize efficiency, quality, and service, the organization must focus its precious (even more precious after downsizing) resources on activities that add value. If something is done because, "oh well we've always done it that way," then consider abandoning it if it does not contribute to the organization's value chain.

Final Thoughts

In a study conducted by Quigley (1992) of 1,468 restructured companies, more than half reported that productivity either stayed the same or declined after downsizing. Though very much a part of the business landscape today, downsizing and its ramifications should be thoroughly considered before an executive chooses to utilize it. The short term benefits of restructuring should be weighed against the emotional and financial damage done to laid off workers and their families; the stress and conditions placed on the workers left behind; and the impact on customer satisfaction. If downsizing must occur, steps should be taken to plan, communicate, train, and facilitate. A proactive approach which considers the most ethical and humane practices may help to salvage the organization's productivity and performance. Above all, today's executive must find ways of re-gaining trust and loyalty. Only with these elements can organizations reap long term benefits in profitability from downsizing efforts.

References

Anderson, Eugene W. et al (1997). Customer satisfaction, productivity, and profitability: Differences between goods and services. Marketing Science, pp. 129-145.

Hammonds, Keith H. (1996, May). Soul-searching time in the corner office. Business Week, pp. 42-43.

Hofman, Paul B. (1996, January). The ethics of downsizing. Healthcare Executive, p. 46.

Illes, Louise-Mouser (1996). Sizing down: Chronicle of a plant closing. Ithaca and London: Cornell University Press, pp. 120-153.

Morrall, Abraham, Jr. (1998, Spring). A human resource rightsizing model for the twenty-first century. Human Resource Development Quarterly, pp. 81-88.

1. The Investment Paradox: An argument supporting increased training in the downsizing organization.

2. Leadership's roles pre and post downsizing.

Quigley, Michael E. (1992, March). Ethical downsizing. Executive Excellence, pp.18-19.

Reich, Robert (1996, September). Performance strategies: Q&A. Successful Meetings, pp.56-61.

Settles, Michal F. (1988, December). Humane downsizing: Can it be done? Journal of Business Ethics, pp.961-963.

Sirico, Robert A. (1996, December). True morality. Forbes, P.85.

Trudel, John D. (1996, June). Easy road to profits is littered with roadkill. Upside, p.24.