Recent Downsizing in Companies as a form of Restructuring
In recent news, Ameriquest Mortgage had closed 229 branch offices, and laid 3,800 employees off in Arizona and in other states (Business Journal, May 3rd, 2006). The California based company has operated in the mortgage lending business since 1980. It offers home loans and home equity loans to customers with less-than-perfect credit. The main reason for downsizing was the company's decision to shift toward a business model that emphasizes Internet and phone service over sales associates. The managers believe that this will help them to cope better with the rising interest rates and decreases in mortgage lending. Aseem Mital, the chief executive of the Ameriquest, announced that the company was moving strategically and decisively to remain a leader in an industry that was undergoing fundamental changes.
General Motors is also having difficult time for recent years due to the economic slowdown and decreases in sales. Media reported in 2005 that GM was about to go bankrupt, if the company failed to stop its cash-burn rate of $2 billion a quarter (BusinessWeek). Some experts predicted that the company might choose to restructure and eliminate nine factories with 30,000 workers over three years. The experts were right and GM is still removing the line of low class models, including the models of best selling cars, from the market. The latest GM's downsizing touched Europe. The Routers UK reported that workers at General Motors Europe's Vauxhall plant in Ellesmere Port walked off the job on May 11th after the company proposed cutting nearly 1,000 jobs. Before closing a plant in UK, GM eliminated several plants in Antwerp, Belgium, Bochum and Germany.
Telecommunication and high technology companies are also facing downsizing these days. Three companies, the Newark Telecommunications and Entertainment Company (IDT), British cable giant NTL Inc and AOL; one after another, they shutdown their call centers and laid off thousands of employees. The main reason was to cut cost and move call center jobs to sites in South Africa and India.
Generally the downsizing occurs in two circumstances: 1) when company need to increase its profits by generating the same revenue with a smaller number of employees; and 2) when the company faces a situation where workers cannot produce goods profitably at current market prices. The result of downsizing is the loss of intellectual capital that was built for years. Although, the downsizing can be an organizational lifesaver, when layoffs are used repeatedly without a thoughtful strategy, it can destroy the company's effectiveness. The downsizing is extremely difficult. It is really hard to decide, who must be laid off, how much notice they will be given, the amount of severance pay, and how far the company will go to help the laid-off employee find another job.
News of coming layoffs can destroy the motivation and harm the productivity as employees, who are likely to be affected are engaged in searching for a new job. The anxiety within the organization can ruin any creative and innovative ideas that people may have. And when the downsizing happens, especially with the company like GM, the local community and countries economy are affected as well. Corporate downsizing is bad for society as a whole, according to Jan Boone, Doctor of Economics at Tilburg University in the Netherlands. The costs to the fired employees outweigh the gains for firms. He also claims that downsizing increases unemployment and reduces economy-wide growth.
It is not only bad for society but it also bad for the company and the organizational culture. After downsizing, the surviving employees will talk about what's happened and, furthermore, it will dramatically increase mistrust of management among surviving workers, since they will fear that they may suffer the same fate in future. So, we need to keep in mind the drastic outcomes that can occur when we are planning a downsizing.
By Alisher Muhammadiev
(May 24th, 2006)
References
1. The Business Journal of Phoenix (2006, May 3). Ameriquest cutbacks include Arizona operations.
Retrieved May 24, 2006, from
http://www.bizjournals.com/
2. Business First of Buffalo (2006, May 4). Ameriquest Mortgage closing offices.
Retrieved May 24, 2006, from
http://www.bizjournals.com/
3. BusinessWeek online (2005, December 12). What If GM Did Go Bankrupt...
Retrieved May 24, 2006, from
http://www.businessweek.com/
4. Lindsay Wood. Business News: Downsizing is bad for business.
The Galt Global Review,Retrieved May 24, 2006, from
http://www.galtglobalreview.com/
5. Michael Smith and Michael Shields, (2006, May 11). Vauxhall workers walk out over job cut comments.
Routers UK, Retrieved May 24, 2006, from
http://today.reuters.co.uk/
6. Business News, (2006, May 8). NTL to lay off about 6,000 workers.
M&C News, Retrieved May 24, 2006, from
http://news.monstersandcritics.com/
7. Tom Johnson, (2006, April 27). IDT opts to shut Newark facility, meaning layoffs.
The Star Ledger, Retrieved May 24, 2006, from
http://www.nj.com/
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