Layoffs, Downsizing, and Outsourcing

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Layoffs, Downsizing, and Outsourcing

A "layoff" is an action by an employer to terminate employees for lack of work. The term connotes that the termination is temporarybut it may well become permanent. A "downsizing" simply means releasing employees because the operation no longer needs them; reorganization or restructuring of the institution has eliminated jobs. The euphemistic "right-sizing" is sometimes substitutedto flatter management, one assumes. An "RIF," which stands for "reduction in force," is an old and rather straightforward term, its most likely source being governmental and military changes in employment: both actually take place from time to time. The newest addition to this lugubrious terminology (at least from the employees' point of view) is "outsourcing" or "off-shoring," meaning that the work is being transferred to another organization either domestically or overseas.

The layoff is a necessary corollary to seasonal or intermittent employment common in some industries, for example in construction, where building activity typically slows or stops in the winter months and resumes in spring. Industries that manufacture goods sold for winter use often have high levels of production (including lots of overtime) in the summer. The inverse of that takes place when spring and summer goods are made in winter. Industries highly linked with the tourist season typically have layoffs. People employed in these types of activities adapt to the layoffs by having alternative forms of employment in the "off-season." Layoffs also take place in times of economic down-turn because overall demand declines. Producers will cut back from three shifts to two or one or release some employees even when only operating one shift. But economy-driven layoffs are not permanent, and workers are "called back" when things pick up again. Based on statistics collected by the U.S. Department of Labor (DOL), extended mass layoffs have affected on average 1.3 million employees in the period 1996 through 2003at higher rates during the recessionary period that began in 2000, at lower levels in the booming 1990s.

The laid-off worker has no guarantee of being called back to work; similarly, the employer may not be able to hire back labor if contracts don't renew or the business does not pick up. In the last decade or so the layoff itself has become a euphemism for force reduction. It is a telling sign of the times that DOL began collecting data on layoffs in April 1995 for the first time and has since published such data monthly. Even more revealing is the fact that DOL later added categories such as layoffs due to "overseas relocation" and "import competition"the last category indicating jobs lost because work in-house has been replaced by imports. All this suggests that the term "layoff" shades imperceptively into the "downsizing" category.

Downsizing typically has multiple causes of which one may well be increased productivity. According to the DOL productivity in manufacturing (output per hour) increased on average 4.4 percent a year from 1995 to 2005 and 2.3 percent a year in business as a whole. If demand for goods and services is steady, this means that each year fewer workers are needed to supply the economy. The second factor behind downsizing is declining revenue due either to a poor economy or increased foreign competition. Finally, if labor is available at lower costs overseas and the work can be transferred, business will relocate jobs to reduce costs.

The stream of business news over at least the 1990s and the mid-2000s seems to suggest that these factors are very much present, indeed that corporate well-being and layoffs are inversely proportionalas a sampling of headlines shows: Compaq Stock Rises 8% on Sales and Job Forecast (The New York Times, October 9, 1992; the article cites the elimination of 1,000 jobs); Stock Rises on News of Possible, Bigger Layoffs (Annex News Watch, September 29, 2004, regarding EDS); and Ford Slashes Jobs, Stocks Rise (CBS News, January 24, 2006). Many more stories carry the same message in the bodyif not in the headline. To be sure, stocks rise on any news that a companyespecially a troubled companyis cutting costs. Notable in the present context is that so many companies shed jobs as a way of cutting costs.


Small business is also subject to seasonal patterns and therefore lays off employees as needed, calling them back at a later time. More painfully, however, the small business must also respond to economic and market pressures and therefore must occasionally reduce its employment because the revenues are just not there. Every owner, therefore, should have plans and policies for reducing employment permanently. Such managerial techniques involve 1) conformity with law, 2) appropriate communications, and 3) employee assistance, sometimes called "outplacement" in human resources jargon.

In common parlance the first issue is based on fairness but fairness is enforced by employment and civil rights statues. When downsizing the workforce, the owner must base his or her actions on the requirements of the business and lean over backwards to avoid even the suggestion of bias against protected minorities: women, the disabled, racial minorities, workers over the age of forty, and veterans. In most cases job terminations will be based on functions that can no longer be supported; if these have to be reduced rather than eliminated, a neutral criterion like job tenure may be used, with the most junior employees terminated first. Such a rule would also apply if an across-the-board reduction, based on a percentage of all employees, is adopted. The rules being applied should be made public so that their fairness is visible to all involved, whether they stay or leave.

Communications are important both to maintain the morale of employees retained and to hold the good will of those discharged. They may be back again. The practice of announcing a downsizing late on Friday or the day before Christmas reflects very adversely on the owner's courage and tact, of course. Employees may have to leave, but they appreciate a clear statement of the reason why they're being terminated and like to have as much notice as possible. Some owners feel that they may lose the effective labor of those laid off by announcing early; but in almost all such situations, employees have long anticipated problems; therefore early notice may actually improve productivity during this period by removing uncertainty. If the selection rules are obviously fair and impartial, all employees will react favorably toward the company. And this will be doubly true if the announcement includes information about help the employer intends to provide to those leaving.

Providing outplacement help involves extra work on the owner's part but invariably has a favorable effect. Such help may involve getting assistance from one or more employment agencies, providing information on how to file for unemployment benefits, counseling by the owner or a third party, helping to prepare good resumes, providing leads and contacts, and preparing letters of recommendation.

Many owners, quite naturally, feel the need to downsize as a sign of personal failureand this despite a good track record of long and successful employment of lots of people. Experience, however, teaches that business does have its downs as well as upsand also teaches that the owner will benefit from minimizing his or her own frustrations. A good way to do that is trying to help those affected.


A few companies have had, and continue to have, "no-layoff" policies or, more realistically, a "no-layoff" philosophy. Julia King, writing in Computerworld, described two such companies, Lincoln Electric Co. and FedEx Corp. "The employment practices go by different names," King wrote, "but the spirit and business strategies behind them are the same. By shunning downsizing as a matter of corporate values, both companies are looking to create a fiercely loyal and productive workforce, which in turn generates high customer satisfaction ratings and bottom-line results. And so far, it's a strategy that seems to work well, in both good economic times and bad."

Elizabeth Smith Barnes, writing in Workforce Management described the no-layoff policy of Hypertherm, Inc. Barnes provided a telling quote from the company's founder, Dick Couch, revealing the mindset behind such policies. "I was at a conference on entrepreneurship at Dartmouth," Barnes quotes Couch saying. "The guy next to me was a young, very bright venture capitalist who believed that the purpose of business is to maximize shareholder equity. I say that the purpose of business is to satisfy the customer and to focus on the development and well-being of your associates, from which good things will happenincluding the 'accidental' benefit to shareholders. It seems some corporate folks are never going to understand the value of no layoffs because their fundamental philosophy about what we're in business for is very different."

No-layoff policies are not realistic for many small businesses, but the practices of leaders suggest ways and means both of avoiding layoffs and dealing with cost problems creatively. Techniques mentioned include very careful hiring, cross-training of employees so that many are able to shift from job to job, intense employee involvement in the business through suggesting programs and innovations, and, in the extreme case, pay reductions or reduced work hours so that all employees stayand share the hardship in common.

see also Constructive Discharge; Employee Termination


Barnes, Elizabeth Smith. "No-Layoff Policy." Workforce Management. July 2003.

Chappell, Lindsay. "Nissan Sizes Up Detroit Job Seekers." Automotive News. 13 March 2006.

Crew, Vince. "Layoffs Only As a Last Resort." Home Care Magazine. 1 March 2006.

King, Julia. "Jobs for Life." Computerworld. 14 January 2002.

Langreth, Robert, and Matthew Herper. "Storm Warnings." Forbes. 13 March 2006.

"PA Examines Merger-Related Job Losses." TelecomWeb News Digest. 17 March 2006.

"Recent Layoffs In the Mortgage Industry." Origination News. March 2006.

Sheff, Harry. "Weekly News Briefs; Back-Pay, Unions, and LayoffsOh My! Brief accounts of call center news from Tucson to Dubai." CommWeb. 9 March 2006.

Tobin, Bill. "Last in the lifeboat: Being a loyal employee doesn't preclude preparing to be RIFd. It's in your best interest to be prepared for any eventuality." Modern Plastics Worldwide. March 2006.

U.S. Department of Labor. "Mass Layoff Statistics." Available from Retrieved on 30 March 2006.

U.S. Department of Labor. "Productivity and Costs." Available from Retrieved on 31 March 2006.

                                             Darnay, ECDI