2014 TMA2: Question 3 Downsizing question

tanbc

TMA2 Question 3 Downsizing question

a) During an economic downturn, a firm must carefully consider its options and assess the feasibility and applicability of alternatives to downsizing.
Describe these alternative means and discuss their effectiveness in terms of the strengths and the weaknesses of each alternative.  

b) Assume you are the HR director of your present organisation (or any organisation of your choice), the corporation-wide downsizing seemingly is the only options for cost-reduction in order to keep the organisation survive in the economic downturn.  Based on (a), which alternative strategies to downsizing will you choose? Discuss some of the effective ways to conduct for the alternative strategy you selected.

tanbc

EXAMPLE ANSWER 1
3(a)
There are some alternative means to downsizing as below:

I) Pay cuts
Pay cuts usually happens to organised labour which they agree to sacrifice a portion of their pay. In the same time there are in return no lay-offs will happen.
Strength: Pay cuts could remain the amount of labor and in the same time allows companies to maintain consistent levels of productivity. For example, the boss reduces the salary for accountant, but the workload is still remaining the same.
Weakness: Pay cut could incur dissatisfaction from the employee and would cause a lots people quite the jobs and seek for another job. Besides that, it could damage a company’s public reputation which can cause to a drop in revenue.

II) Pay freezes
Pay freezes means organization hold the employee salary amount until further notice instead of pay on time.
Strength: Pay freezes could save company money in payrolls for subsequent years, as they are no need to spend so much of the money for the payroll. This scenario happens when some company lack of money and need to pay money urgently for other purposes.
Weakness: Same as pay cuts, as people will seek employment elsewhere. This is because a lots people not willing to do so as they need money urgent for their food, family and commitment as well.
Besides that, pay freezes also create uncertainty of this companies, employee would assume this company is not stable and not reliable. If the company couldn’t handle the pay freeze properly, the company may suffer trade dispute when received complain from Labor Union.  

III) Reduced hours
A reduced-hour strategy allows employees to keep their same total wages, even though they are only work fewer hours.
Strength:  Reduced hours could save company budget and employees do not need to work so many hours.
Weakness: Total productivity for the organization will decrease due to insufficient working hours. According to the Labor act, the minimum working day they can arrange to employees is 4 days.

IV) Job sharing
Job sharing just only require fewer working hours, even though it also essential for the coordination of multiple workers. For example, a company hires two technicians but then needs only one of them because of restructuring. In the same time, company want to remain the 2 employees which can backup each other.
Strength: Job sharing allows the employees to work by sharing the mutual responsibilities of a single job. Besides that, it could save money as each worker just only work fewer hours. Besides that, job sharing also allows for flexibility in coverage when one of the employee is on leave or on medical leave, other employee still can cover the job from the other sharer.
Weakness: Employee have to learn all the things at the first in order to back up the sharer. For example previously chef A is in charge of Indian Food and Chef B is in charge Malay Food, now they need to learn all the cooks. Sometimes, job sharing would lower down the productivity as the job will messy and do not know what exactly the sharer do .



3(B)
In order to keep the organization survive in the economic downturn, there are two alternative strategies (as mentioned in questions 3 (A)) to downsizing will be chosen, which is job sharing and pay cuts/ freezes. These strategies could reduce the cost effectively.
I) Job Sharing
Job sharing is very common in many industries such as banking, education and insurances, which just requires fewer working hours. Besides that, job sharing could reduce the wages in the same time able to remain the coordination of multiple workers, no matter part time or full time employees.

Here I would like to discuss some of the examples of job sharing based on my case study. Those who applied this strategy are the successful example.

As we know, job sharing is very common in education line, especially in New Zealand. According to terms and employments in New Zealand, job sharing terms are protected well for teachers who apply to job share with various employment conditions and also the payment conditions. For example, a job sharer’s salary is paid on a pro rata basis. Through this strategy, job sharing is good for education as it determines a great impact to quality learning and teaching for students.

Case Study
Besides that, it is shown to have mutual benefits for the school and for staff associated with flexible work practices.
Besides that, job sharing also very common in coaching line, especially for coach driver who require drive for the long journey. Coach driver may job share with his/her working partner in the duty, such as take turn the driver. If let say, the long journey is from Johor Bahru to Bukit Kayu Hitam.

Drive will be take turn as it takes at least 10 hours for the journey. Driver A fetch the passengers from Johor Bahru to Kuala Lumpur, Driver B fetch the passengers from Kuala Lumpur to Bukit kayu Hitam. In this way, it could reduce the cost for the driver wages as it requires fewer hours for the duty. In the same also could reduce the accident happens on the road.

Matrix Resources is an IT professional solution provider in US. It is one of the successful job sharing company, which consists of 6 job sharing team, including 180 full times employees.
One of the successful job share partners is Donnel Ping. In this way, their work schedules are flexible and there is no gender-specific. Therefore their performance is very good, especially employees below age of 30 and female who have young children.

II) Pay cut/ freeze

During economic downturn, majority of the company may practice pay cut/ freeze in order to reduce the company cost.
Malaysia Airline crisis is one of the hot topics nowadays, following the mysterious disappearance of its fight MH370 and Boeing 777 plane crash in Ukraine.  MAS suffered loss of RM443.40 Million ended March 31. In order to survive, they would cut jobs and freeze wages and bonus payments .

tanbc

EXAMPLE ANSWER 2
3(A).

According to Ferris and Buckley (1996), downsizing refers to a set of activities designed to make an organisation more efficient, productive and/ or competitive through the planned elimination of positions or jobs (WOU), i.e. reduction of company’s labour force. While the pain associated to downsizing can’t be avoided entirely during economic downturn, it can be mitigated.  
Anticipating the duration and the depth (criticalness) of an economic downturn, it can help the company to plan, prepare and deploy appropriate HR practices that will, hopefully, help both employees and company to adjust to difficult times. Instead of lay-off workers, the employer can consider various alternatives for e.g. reducing the amount of payroll, hiring freeze, etc. Whichever is the option chosen, there is a need for the firm to follow the country’s laws pertaining to labour. Below are numerous alternatives that a firm can consider, which help to minimise, defer, or even avoid the adoption of downsizing-related layoffs.

Hiring Freeze
This option is a mild form of downsizing, a way to reduce labour costs without resorting to eliminating employees in the short term. Using standard attrition for example employees quit, retire or terminated under causal circumstances, the firm decreases its labour force by not filling the vacancies caused by the departure.
The strength of this alternative is it does not require the firm to fire workers during economic downturn, it ensures the livelihood continuation of the “remaining” workforce, i.e. a source of income and peace of mind to focus on their jobs. Additionally it will “improve” the firm’s image as a good employer (helps in talent recruitment in future), not inviting friction with the trade union, and etc.
Nevertheless, this process of labour reduction is slow and may not have immediate impact on the bottom-line of the firm. In addition, the workload left due to the unfilled vacancy will require the remaining employees to absorb, i.e. over-burdening them, loss of productivity and morale in long-term. Important positions that are left vacant and not filled due to hiring freeze will have considerable setbacks to effectiveness and efficiency of the firm (brain drain), hence loss of opportunities and competitiveness.

Pay Cuts and/ or Freeze
Pay freeze are less dramatic compared to pay cuts but they have the same implication or result, for example morale and loyalty. This option frequently is used as a trade-off with union in return on agreement of no lay-offs will occur.
Pay cuts or freeze allow firm to enjoy and maintain productivity because there is no change in the labour amount! Unfortunately, an extended time on pay cuts or freeze may have considerable effect on employees’ morale and loyalty (may seek new employment elsewhere). Top performers may be encouraged to join competitors that offer competitive and better compensation; this is a clear risk for the firm.

Reduced Workweek
This alternative translates into the reduction of working hours per week, i.e. from 40 hours to 32 hours or fewer hours and thereby reduces the short-term payroll expenditures.
The strengths of this option are that employees still keep their job, and employees may able to appreciate the idea of having extra time to spend with their families (reduce absenteeism), nonetheless may not always be the case if there is a reduced pay-cheque. It also enables firm to retain highly skilled and valued employees to continue working full-time, particularly some whom prefers to have work-life-balance option. It’s a good way of allowing phased retirement for older employees.
Reduced workweek must not be done at the expense of productivity. If such was the case, employees may find that the same amount of work stills need to be performed within the less time, hence the burden and fatigue. In addition, reduced workweek means increase in administrative workload (scheduling of jobs) for firm and line managers to plan and balance the manpower need along the shorter workweek.

Mandatory Vacation
This requires employees to used their accrued vacation days or mandating that employees take a number of unpaid vacation days during a certain time period. The pros of this alternative are employees are reaffirmed of job security and the firm able to reduce the payroll cost. The cons are certain activities may not be performed due to absence of certain “decision maker” or experts, hence impacting on productivity.

Employee lending
This is rather a new option wherein the current employer, i.e. the lending firm, lends its employees to another employer firm under a contractual agreement for a set period of time while continuing to pay salary and benefits. In return the borrowing firm will reimburse part or full amount of the salary. The pros here are it dramatically reduces the medium-range expenditures and employees still keep their jobs. The cons here instead might be the employees are not in favour to work for another party/ firm, the borrowing firm may decide to hire the employees upon the expiry of the contract or the risk of critical knowledge based “leaked” to another firm especially if the borrowing firm is a competitor!

Job Sharing
This alternative was first coined in 1960s, a way to create more part-time opportunities in positions which could not be reduced in hours or split into two part-time jobs. Job sharing arrangement enables firm to preserve jobs in full-time form while tapping the expertise of two or more employees.
        Job sharing has numerous advantages, it allows firm to tap wider range of skills and experience in one job, supports learning opportunity from each other, i.e. employees whom share the job, duties can be covered even one of the job sharer is on leave and most important, having the job means employees continue to retain and preserve their career skills and status.
        While having strengths, job sharing is not without weaknesses. The greatest challenge is to provide a suitable partner to avoid incompatibility of their working style and behaviours that can fall apart. In addition, higher overheads due to having training cost, work compensation, furniture and equipment for having two persons for one position.

Clearly there are many other alternatives with its strengths and weaknesses where the firm can adopt and reduce its short-term expenditures instead of pure downsizing during economic downturn such as outplacement services, voluntary sabbaticals, exit incentives (voluntary separation scheme or mutual separation scheme) and others. While some firms may be able to come up with fairly creative ideas, others simply resort to corporate layoffs as the first option. Whatever is the option taken; the firm must ensure that the downsizing is done in accordance to the labour laws in that country!



3(b)


Malaysian sovereign wealth fund Khazanah Nasional, which owns 69.4% of MAS (Malaysian Airlines), has announced it will delist the airlines and establish a company to take over the airline’s business as a private company. Khazanah will inject RM 6bn funding for MAS to reset its business model, in particular its cost structures. This includes cutting 6,000 jobs in a bid to return MAS to profit in 3 years.

As the HR-director, the key is to ensure a win-win situation for both the employer as well as employees who are represented by Malaysian Airlines Employees Union (MASEU) by determining an appropriate workforce management strategy and to consider alternative strategies to downsizing as the last resort, aligning the organisation’s cost-cutting methods with cost reduction stage.


While there are many alternative strategies, my preference will be pay cuts and employee lending as the alternative plan. Each alternative strategies plan work effectively when implemented during its established time frame or cost reduction stage.


According to Vernon (2003), six factors affecting the choice of selection of the strategies need to be considered (Gandolfi 2008);

• Expected duration or time to bring MAS to profit again, i.e. 3 years.
• Resources particularly the cash resources at hand, in this case RM 6bn is injected by Khazanah Nasional.
• The financial condition of MAS, unfortunately was in red for many years!
• Corporate culture, for example the organisation’s values and anticipated effects of cost cutting. In this case, need to note that airlines industry hardly or almost never resort to downsizing by means of layoffs.
• Labour market aspect, herein Malaysia is a country that has net inflows of foreign workers due to shortages as well as talent pool availability, i.e. to the extent the government agency Talent Corporation is tasked on promoting and persuading Malaysians abroad to return home and contribute with various programmes and incentives.
• Demographics, the location of the organisation of employees the organisation would like to retain or relieved.
  

Employee lending strategy
This is rather a new HR-method wherein the current employer, i.e. the lending organisation, lends its employees to another employer company under a contractual agreement for a set period of time while continuing to pay salary and benefits.
In return the borrowing company will reimburse part or full amount of the salary.


The effective ways to conduct this strategy are

• HR evaluates and analyse the right sizing of manpower required by the organisation, align it with the managers by identifying departments and functions that are strategically critical and having the right set of skills to move forward and decide which jobs have excesses. Decide on how many and which jobs will be placed under outplacement services. Document it down and keep the file accordingly, this is to ensure if the managers move on (to a new department) the new coming managers will be able to review the written record.
• HR and Corporate Communication to devise a communication plan that are transparent about the current conditions that the organisation faces and the potential impact on the workforce, i.e. keeping workers engaged and involved. Invite employees to ask questions and raise concerns. Allow them to point redundant jobs, wasted activities, bloated cost structures or any activities elimination that will improve efficiency and cut costs. Clear and continuous communication is essential to keep all employees informed on the latest developments.
• Ensure that procedures used to make decisions are communicated clearly to employees so that the decisions are seen as just and fair.
• Find reliable Outplacement Service Agencies based on its track records as well as the quality of their services relative to costs, which can help to mobilise the “redundant” employees to a new borrowing company. This agency provider should best familiar with the Airlines industry. Ensure all proper documentations are in place, i.e. salary and benefits to continue for the employees with the present company and the duration they will be on “loan”.
• Develop an effective monitoring system to track the benefits generated by the scheme. Set clear goals and targets, i.e. have a contingency plan if the strategy did not make much impact on the cost structure for the company.
  

Pay Cuts
This option frequently is used as a trade-off with union in return on agreement of no lay-offs will occur.
The effective ways to conduct this strategy are

• Build an effective communication plan, be clear and continuously communicate the progress of the plan, the situation or latest developments of the company, etc.
• Involve and engage workers from the beginning in search of ways to reduce costs, waste and inefficiencies. Evaluate how far the savings will be and what needs to be change and the costs involve.
• Management to relook into the cost structure after the findings on the savings possibilities to ensure only appropriate degree of pay cuts is being designed. In order to get employees buy-out of the idea, management should take the heavier responsibility by having a bigger slash of their salary followed by different tier level of salary cuts depending on the jobs and pays.
• Ensure the pay-cuts are done in accordance to the country’s laws, find reliable law firms, check their quality of service in relative to costs and make sure the recommendations are included in the pay-cuts plan.
• Ensure proper documents are “signed” by employees agreeing to the pay-cuts to avoid and legal repercussions to the company.
  

Downsizing is not a cost-cutting cure-all strategy, nor does it guarantee short-term savings will exceed long-term costs (e.g. employer branding, re-trainings, etc.).
Cash flow is the lifeblood of any organisation; therefore it is inevitable some level of employment downsizing may be necessary to preserve it.  Organisation hence needs to be mindful of the short-term and long-term consequences of downsizing, instead should consider the variety of effective alternatives available.

tanbc

EXAMPLE ANSWER 3

3(a)
According to Cameron, 1994 (p192), downsizing is defines as a set of activities, undertaken on the part of the management of an organization and designed to improve organizational productivity, efficiency and competitiveness.
Many organizations will faced the decision to downsizing especially in tough economic times. There’s an acknowledgement that adopt the downsizing might linked to corporate mismanagement and also strategic errors (Kets de Vries & Balazs, 1997). Thus, in order to be effective, planning and caution are essential before choosing the alternative to downsizing.

Cameron, Freeman & Mishra (1991) identified 3 forms of downsizing strategies such as workforce reduction, organization design and systemic strategies.
The workforce reduction strategy is concentrates on the elimination of headcount through the layoffs, buyout packages and retrenchments.
For an example, a bagging helper position at the grocery store may not be viewed as a significant job. Thus, this position may be replaced with the cashier or may be eliminated during the workforce reduction.
An exit incentive is one of the alternative buyout schemes. This option gives employee the option of leaving the company with collecting severance pay or taking early retirement (Vernon, 2003).
In 2007, Electronic Data Systems (EDS) offered extra retirement benefits to its 12k U.S employees in an offer to accept early retirement (EDS, 2007).
This strategy enables company to target job while recognizing employees for their service and helps the company retain the remaining employees (Gandolfi, 2008). However, the exit incentives can be costly and may also create an entitlement mentality for the remaining workforce in the future.
Another alternatives strategy is called compulsory termination, which the employees are given no choice to leave the company. Example, plant closures and the wholesale elimination of departments or business units.
Although it is, of course, unappealing to employees, the managers who make the decisions do have the opportunity to design and implement criteria based on the needs of the business. Eliminating jobs or entire business units also makes it less likely that employees will prevail in lawsuits alleging discrimination.
However, this is the least effective downsizing option. As such cuts ignore the strategic importance of different departments to an organization’s overall success and ignore different performance levels of employees. Example, suppose 1 department is comprised of superstars and another is comprised of slackers. But why should the same percentage of superstars and slackers be laid off?

Between, the organization redesign strategy focuses on the eliminating work including abolishing groups, functions, products and divisions rather than reducing the number of employees (Luthans & Sommer, 1999). This way can save jobs and help the organization maintain a positive reputation.
Hiring freeze is a mild form of alternative downsizing by simply placing a freeze on all hiring and then shifting employee internally to cover all the function. This approach carries the advantages of minimal risk and reduces labor costs in short term (Littler, 1998) and is less likely to diminish employee morale.
However, longer time commitments are required to realize somewhat limited savings. Between, no one can institute a true freeze. As no matter how fervent the company is, some position will still have to be replacing if the key workers leave because the company can’t run without them.
Also, the freeze is unpredictable. According to a commentator on www.city-data, normally fewer workers want to quit with a bad economy. Thus, the hiring freeze becomes less effective.
Lastly, the systematic strategy focuses on changing the company’s intrinsic culture, attitudes and values of its workforce and is considered a way of life (Filipowski,1993).
Thus, instead of focusing on the job loss and company gain, this approach places emphasis on the customer. Such emphasis leads to better customer service during economic downturn, which ultimately leads to increased profit.
Increasing productivity is also the key points for this approach. The systematic strategy is most effective at the beginning stages of the financial difficulty and least effective during major crises.

As a conclusion, before making any decision to downsizing, organization should consider the other variety of effective alternatives available.

3(b)
Given the speed and depth of the economic crisis, lot of companies’ organization had experienced precipitous drops in sales and revenue. According to The Star, 2014, Masterskill Education Group Bhd will integrate and downsize its business operations in Malaysia. The corporation-wide downsizing seemingly is the only option for cost reduction in order to keep the company survives in this situation.
However, workforce reduction should not be the first strategy of downsizing that company seeks although this is a way to gain immediate profit. But if the workforce reduction is inevitable; for my opinion, exit incentive is the alternative strategies will be selected instead of sell its assets in 3 states (The Star, 2014).
As with exit incentive strategy, when lay off the labor force, the company not only save on wages and benefit after they left, but additional money by disconnecting surplus phone lines, software licenses, office equipment etc. The most important is the company operational of 3 states is still belong to Masterskill.

Thus, as the HR director, effectively managing the process of downsizing is just important as defining appropriate criteria for downsizing decisions.
Firstly, it is imperative to communicate with employees. Even the company knew that it is not appropriate to inform a subordinate of every company detail, it is important to be honest about the current company conditions that the company faces and potential impact on the workers. Example, company should often call meeting to updates on current business strategy, net income, revenue and future prospects. Pretending things will only hurt a leader’s credibility.
Also, invite employees to ask questions and rise if they’ve any concerns. This will allow them to identify any wasted activities, redundant jobs and bloated cost structures, which will improve the efficiency and cut costs. Besides that, if the employees know that their employer was tried to use other options to preserve jobs and had to use downsizing as a last resort, this will help to ease the pain.
For example, the CEO for Reflexite company communicated the effects of downturn regularly, and employees also had been involved in the discussions about the business. Thus, when the company cut 75 positions in one division, the employee’s general reaction is like “losing our jobs is painful, but at least we know you did all you could” (Holland, K, 2008).  

Between, we should treat the laid off employees with respect and sensitivity. Give employees plenty of advance notice and if appropriate, tell them that the company will write them a strong letter of reference on their behalf. It is in poor taste to inform employees of firing or layouts on the day of execution.
Supervisor should deliver the layoff’s news to the affected employee, allow employees to vent and always treat them respectfully. In this situation, the role of HR is to listen and to empathize, not to argue.
Then, create a severance plan that reflects management’s compassion, provides tangible economic benefits and understanding of the termination impact.
This is precisely what eBay did when they’re reduced 10% of its global workforce in 2008, almost 1000 employees allowed to stay for up to 4 weeks to take care of their personal needs. This way provides the laid off employees at least some sense that they’re still in command of events that affect them. According to Beth Axelrod, eBay’s senior vice-president of HR, “How you treat the leavers has a strong impact on how the stayers feel about the company.”

Besides that’s, give employees the options on how they want their exit handled on the day of discharge. Let them depart with as much dignity and grace as possible. Don’t allow an unwarranted fear of sabotage govern the exit process, but use some sensible security measures. Example, protect computer systems by taking away the access codes from terminated employees.

Apart of that, give new hires a reason to join and survivors a reason to stay. Explain on what is the decision is necessary for the company’s long term health. Give survivors hope by describing about business future targets, details and plans.
Encourage everyone to participate inventing the future. Describe a future full of promise, one that will allow the company to seize business opportunities. And also explain that the company will be investing in those who remain, building skills by retraining everyone in the new ways of operating.

Last, we need to carefully examine the impact of employment downsizing on all the HR systems. As recognize that downsizing is just a tool in a portfolio of strategies to improve the firm performance. These portfolios include performance management, workforce staffing, compensation, employee relations, training etc.
How should each area change in light of the new strategy or environment facing the organization? Let’s use constant innovation, committed people, and care of customers guide that examination.
Example, Matsushita Electric Industrial shaved billions of dollars from its cost base by cutting 19% of its domestic workforce between 2001 & 2005 and by closing 30 factories. At the same time, they boosted spending on R&D and renewed its focus on creating the innovative products. This result the company stock was up 33% after 2 years (Tozzi. J, 2009).

As a conclusion, company should use the effectively way as suggested above to treat employees in humanely, dignity, and to be proactive in dealing with the needs and reactions of survivors.