The Meaning of Downsizing: Basic Tips for HR Teams

What does “downsizing” mean in the business world? Well, downsizing, meaning “size reduction,” might sound obvious but, given the connotations this word has gained through the years, HR professionals should be aware of all the elements and nuances behind this strategy.

In this article, we’ll examine the meaning of downsizing as a business practice, how it relates to workforce reduction, and the best approaches for HR teams in this challenging scenario.

Downsizing means permanently reducing an organization’s structure by eliminating underperforming or unproductive positions or company divisions. In many cases, downsizing results in terminating multiple employees simultaneously. However, it can also involve streamlining operations, optimizing resources, and realigning business objectives to enhance efficiency, cut costs, and remain competitive.

Downsizing is a very common strategic decision in the business world. It’s typically associated with economic downturns, market shifts, and struggling businesses. It’s also common in relocations (such as business units moving countries), as large workplaces are becoming less relevant due to technological innovation.

There are various ways through which a company can downsize. The most common downsizing tactics are workforce reductions, cost reductions, and organizational redesign. Let’s see them in detail:

• Workforce reductions – Reducing staff is almost always a go-to in downsizing efforts, since it typically results in immediate, relevant cost savings. However, this tactic can negatively impact reputation, so this decision must be taken with the utmost care and strategic vision.
• Cost reduction – Similar to workforce reductions, this tactic aims to save money. However, it involves eliminating costs seen as less than essential, like freelance contracts, underused digital services, and bonuses. If the reason for downsizing is purely based on saving money, cost reduction helps the company avoid layoffs.
• Organizational redesign – This is the process of restructuring roles, teams, and workflows to better fit a company’s needs. During downsizing events, it helps by refining operations, reallocating responsibilities, and ensuring that the remaining staff is aligned efficiently.

A common question people ask is whether downsizing is the same as layoffs. While closely related, they’re not the same. A layoff is when the company decides to dismiss one or more employees due to a business decision outside the individual’s control. Downsizing is a more broad strategic decision that involves reducing an organization’s size and, while it frequently leads to layoffs, it can also have many different outcomes.

For example, instead of laying employees off to reduce headcount, a downsizing initiative can result in individuals moving to new teams or roles if their department is restructured due to a business shift. So, layoffs can be a part of downsizing, but they’re just one of several possible outcomes, meaning that the terms aren’t interchangeable.

An organization can explore alternative methods, like voluntary layoffs and early retirement, before resorting to layoffs in a downsizing event. Here are some common alternatives to layoffs:

• Voluntary layoffs – You can stimulate employees to voluntarily leave your organization with incentives like outplacement and severance pay.
• Early retirement – Some of your employees might be approaching retirement age. If so, you can offer them the option to retire earlier with financial incentives.
• Hiring freezes – Many companies stop hiring for non-critical positions for business continuation, leveraging this option as an alternative to layoffs.
• Pay reduction – Reaching an agreement with employees to reduce their pay is an option, but be cautious since it could lead to litigation.

For HR, downsizing means balancing the organization’s needs with the wellbeing of employees. On one hand, HR plays a key role in planning and executing a downsizing strategy to meet the company’s goals. On the other, they need to communicate clearly and empathetically with those affected, explaining the reasons behind the downsizing and offering assistance through resources like outplacement, severance packages, and emotional support.

HR also plays a critical role in managing the morale of remaining employees, ensuring they feel secure and valued after the downsizing event. This effort may involve reorganizing teams, supporting managers to adjust workloads, and reinforcing a positive workplace culture to maintain engagement and productivity during the transition.

This is likely the most crucial and challenging part of downsizing: deciding who stays and who goes. HR must establish clear selection criteria to ensure the layoff process is fair, straightforward, and aligned with the company’s goals. Here are some elements to consider:

• Seniority. In many companies, the most recent hires are the first to be let go. This method helps guard against discrimination claims and simplifies the layoff process, but you risk losing newer employees who may be valuable assets.
• Employee Status. This approach prioritizes full-time employees over part-time and contract workers. It can help maintain the company’s brand reputation, as part time and contract roles are often seen as more expendable.
• Performance. Many managers select employees based on performance, since they aim to retain high performers. However, using performance as the only criterion can be risky and lead to legal issues, so extra caution is advised.
• Skills. This approach focuses on retaining employees with critical skills for the company’s success. Prioritizing skill sets pivotal to business goals helps preserve top talent and quality without sacrificing key capabilities.
• Multiple selection criteria. This is usually the most effective selection method. Rank employees according to a list of criteria with different weights that best meet your company’s goals. Then, the ones with the “lowest score” are let go. This way, you’ll customize all previous methods to fit your organization’s needs.

Explaining downsizing to staff requires transparency, empathy, and a clear outline of the reasons behind the decision. It’s vital to communicate that downsizing is a strategic move to address specific business challenges, while emphasizing that the decision wasn’t taken lightly and that every effort was made to minimize the impact on employees. This honesty helps build trust and demonstrates that the organization values its people.

HR should also clarify what downsizing means for the team moving forward, including immediate changes, support resources, and how the company is helping affected employees, like offering outplacement services. Finally, reassure them that HR and leaders will answer questions and provide individual support. This openness will increase the chances that employees will feel respected and informed in this transition.

Downsizing is far from a popular practice in the corporate world but, sometimes, it’s inevitable to maintain competitiveness during challenging periods. That’s why it’s so important to communicate openly and empathetically with employees about the reasons behind such a drastic decision.

Also, being there for those who were laid off is essential to building a positive corporate culture, maintaining morale and productivity, and preserving the company’s reputation. In that respect, offering outplacement services is vital, especially with a provider who follows the latest technology and best practices in the field.

This is the case with Careerminds. We’re a modern outplacement firm with a people-first, result-driven approach. Our effectiveness is proven by numbers, such as:

• 95% placement rate
• 80% participant engagement rate
• 99% participant satisfaction rate

Contact one of our experts today and learn about the Careerminds approach!

Rafael Spuldar

Rafael is a content writer, editor, and strategist with over 20 years of experience working with digital media, marketing agencies, and Tech companies. He started his career as a journalist: his past jobs included some of the world's most renowned media organizations, such as the BBC and Thomson Reuters. After shifting into content marketing, he specialized in B2B content, mainly in the Tech and SaaS industries. In this field, Rafael could leverage his previously acquired skills (as an interviewer, fact-checker, and copy editor) to create compelling, valuable, and performing content pieces for various companies. Rafael is into cinema, music, literature, food, wine, and sports (mainly soccer, tennis, and NBA).