Downsizing has been a pervasive managerial practice for the past three decades.

Over the years, a firm’s

standard response to finding itself in financial difficulty was to reduce its workforce. While there is
ample evidence suggesting that downsizing activities rarely return the widely anticipated benefits, there
is also a sobering understanding that downsized firms are forced to deal with the human, social, and
societal aftereffects of downsizing, also known as secondary consequences. Research shows clearly that
the human consequences of layoffs are costly and particularly devastating for individuals, their families,
and entire communities. While workforce reductions cannot always be avoided, there are compelling
reasons why downsizing-related layoffs must nonetheless be seen as a managerial tool of absolute last
resort.

During an economic downturn a firm must carefully consider its options and assess the feasibility and
applicability of cost-reduction alternatives before deciding on layoffs. While a considerable number of
research articles that discuss alternatives to downsizing have been published, there is no conceptual
understanding of downsizing-related layoffs as they relate to the actual cost-reduction stages of a firm.
Indeed, it is critical for an organization to factor in the concept of cost-reduction and to recognize the
specific cost-reduction stage that characterizes the firm’s current business position and environment.
Thus, a firm needs to determine the expected duration of the business downturn. In order to do so
successfully, the executive manager must know exactly where the firm is in its cost-cutting stage. A
firm’s cost-reduction stage, by definition, refers to the timeframe the company requires to be able to
reduce operational expenditures successfully.

The purpose of this article is to present a methodology that enables firms to minimize, defer, or even
avoid the adoption of downsizing-related layoffs. In order to do this, the research presents and discusses
the framework of cost-reduction stages of a firm coupled with creative modern-day human resource
(HR) practices that firms typically adopt. This paper builds upon Vernon’s (2003) and George’s (2004)
work of the three cost-reduction stages: short-range, mid-range, and long-range phases. The underlying
framework of the cost-reduction stages.

Cost-reduction stages

The framework depicted in Figure 1 comprises three timeframe-related phases. Each commands several
internal cost adjustments that have produced a variety of stage-related HR practices:

Stage one: Short-range cost adjustments

According to Vernon (2003), the first stage of the cost-reduction framework represents short-range cost
adjustments in response to a short, temporary decline in business activities. Most likely, the firm resorts
to minor, moderate cost-reduction measures in this early stage. These preliminary adjustments should
enable the firm to shun downsizing-related layoffs and involuntary cutbacks, and return to normal
business activity within a timeframe of four to six months. A firm experiences this stage because of an
unexpected drop in sales and a decline in sales forecast. It is characterized by short-term expenditure
adjustments in order to prevent a medium-range downturn or a more lasting, long-range decline. The
immediate recognition of a temporary business slip and the resolute engagement in preliminary cost-
reduction methods should allow the firm to focus its operations in a cost-sensitive mode for a quick
recovery.
The likelihood of success for short-range cost adjustments hinges on a number of factors. First, senior
management must be able to effectively articulate why the cost-adjustment measures are necessary
and the short time frame of the strategy. Executives’ ability to convey the message that the
implementation of preliminary cost-reduction measures at the present time will prevent future layoffs is
critical. Second, the HR Director’s role is to communicate the decision(s) made by the executive board to
the entire workforce promptly and to implement the cost-reduction methods effectively. Third,
employees’ flexibility in allowing the firm to modify cost structures increases the chance of success for
the planned cost alterations. In sum, a firm’s capacity to overcome a business downturn in the first stage
will depend on the organization’s ability to respond to the new environment by immediately modifying
expenditures.

HR practices for short-range cost adjustments

There are several HR practices that firms can adopt in an effort to engage in preliminary cost reductions.
Some of the more popular approaches that have emerged are:

Hiring freeze

A hiring freeze constitutes a mild form of downsizing and reduces labor costs in the short term. Some
firms continue to hire new employees while cutting jobs at the same time. While this practice may make
sense in terms of supplying the firm with key personnel, it also tends to send a confusing message to the
rest of the workforce. In its latest attempt to fight rising jet fuel costs and a weakening U.S. economy,
American Airlines imposed an immediate hiring freeze on management and support staff (Maxon, 2008).

Mandatory vacation

Implementing mandatory vacation involves requiring employees to use their accrued vacation days or
mandating that individuals take a number of unpaid vacation days during a certain time period. While
employees might not want to be told when and how to use their entitlements, they will nonetheless
appreciate the reaffirmed job security. Chrysler LLC currently plans a corporate-wide shutdown of its
U.S. operations during the weeks of July 7 and July 14, 2008, with the intention of improving the
automaker’s efficiency and boosting productivity (Govreau, 2008).

Reduced workweek

Firms sometimes resort to a reduced workweek. This may translate into the reduction from 40 to 35 or
fewer hours and thereby reduce the short-term payroll expenditures. While most employees appreciate
the idea of being able to spend more time with their families, they may not always welcome a reduced
paycheck. Also, employees may find that the same amount of work still needs to be performed while
they spend less time on the job. Nucor Steel Corporation in South Carolina has avoided layoffs for 35
years by reducing to two- and three-workday weeks for its employees during downturns (George, 2004).
Recently, workers at a St. Thomas automotive parts plant in the UK have voted to reduce their work
week rather than see 200 employees leave permanently (De Bono, 2008).

Cut in overtime pay

Reducing or abolishing overtime pay for employees can be a potent technique for reducing operational
costs in the short term. Firms may decide on an across-the-board (i.e., all employees) abolition or it may
confine the cut to selected categories only (e.g., non-management, blue-collar employees, or salaried
employees, etc.). In 2004, automotive firms, such as Visteon Corporation, General Motors, and Ford,
slashed overtime pay for most employees indefinitely (Dybis & Garsten, 2004).

Salary reduction

Salary reduction has been a standard practice for firms experiencing unexpected financial pressure.
Whereas salary reduction may mitigate financial concerns in the short-run, extended salary reductions
can affect employee morale and loyalty. Also, while companywide salary reductions may prevent layoffs,
there is a clear risk that top performers will be encouraged to leave for competitors that offer superior
compensation? In 2006, White Electronics Designs implemented salary reductions of 5 percent for
salaried employees and 10 percent for management. Hourly workers remained untouched. In 2006, a
collation of Intel managers agreed to take a temporary 100 percent pay-cut to avoid layoffs. Prior to
that, Intel announced that it had planned to cut 10,000 employees, including 1,000 managers (Paul,
2006).

Temporary facility shutdown

Temporary facility shutdowns occur when a work site closes for a designated period of time, while some
administrative functions are still performed. A shutdown allows employees to have time off without
using their vacation days. While the overall company production decreases, the firm can achieve
considerable cost savings while avoiding layoffs. In 2008, Aleris International shut down its rolling mill
production in Virginia in order to align production with demand. The production for customers was
phased out and transferred to other facilities within the United States. (Aleris, 2008).

Soliciting cost-reduction ideas from employees

Employees appreciate the opportunity to make a positive impact on their workplace and environment.
Firms frequently solicit cost-reduction ideas from employees who are often creative in producing cost-
reduction solutions. This HR practice has shown to be most effective when employees are able to make
suggestions in the early stages of cost cutting (Vernon, 2003). At Martin Heyman Associates in the U.S.,
all professional construction consultants are encouraged to contribute cost-reduction ideas.
Unfortunately, many executives still do not realize that employees are the best source of cost-reduction
ideas, in that workers on the job are in a prime position to identify and recognize waste (Yorke, 2005).

Clearly, there are many HR practices and options that firms can adopt to reduce short-term
expenditures. While some firms have come up with fairly creative ideas, others have resorted to
corporate layoffs as a first resort.

Stage two: Medium-range cost adjustments

According to Vernon (2003), the second stage of the cost-reduction framework constitutes medium-
term cost adjustments in response to a business downturn exceeding six months. These secondary cost-
reduction adjustments are frequently signaled through extended company-wide or industry-wide
forecasts of diminished sales activity. If properly recognized and executed, the firm may be able to
transition to mid-range cost adjustments and thus prevent long-term layoffs and forced downsizing
activities. Constituencies need to recognize that deeper cost-reduction strategies may be required in
order to avert downsizing-related layoffs. Executive management and the HR Director must be able to
articulate the underlying purpose and objectives of the expenditure adjustments to the entire
workforce. This should ensure buy-in and commitment on the part of employees. The application of HR
practices in this stage could potentially alter employees’ work environment. Thus, the HR department
will play a critical role in the conduct and transition of these practices.

HR practices for medium-range cost adjustments

Firms typically adopt several HR practices in an effort to engage in secondary cost reductions:

Extended salary reductions

Extending salary reductions can be a method of choice if an economic downturn exceeds 6 months.
While extended salary reductions can negatively affect employee commitment and morale, advocates
stress that employees would prefer a smaller income temporarily rather than seeing their jobs disappear
permanently. As with short-term salary reductions, there is a risk that high-performing individuals will
be encouraged to pursue external employment opportunities. Firms have generally been creative about
altering variable pay options. For instance, while some firms balance the reduced salaries by distributing
once-a-year payments over 12 months, others substitute stock awards for variable cash payments. The
U.S. firm 415 Production offered an overall 5 percent pay cut or a four-day work week reflecting the
appropriate decrease in pay to its employees (Morss, 2008).

Voluntary sabbaticals

Voluntary sabbaticals, also called furloughs, allow salaried employees to take voluntary leaves for a
designated period of time. Companies may offer sabbaticals with considerably reduced pay or no pay at
all. Most firms continue to provide benefits during sabbaticals. Sabbaticals enable firms to reduce their
medium-term expenditure and act as a potent method for avoiding downsizing-related layoffs. While
employees may feel motivated and re-energized upon their return, HR experts point out that medium-
range and long-term sabbaticals may cause employees to lose their leading-edge and return with
outdated skills. Interestingly, there is evidence suggesting that firms offer generous sabbaticals during
times of economic growth while companies refrain from this HR practice during tough financial periods
(Vernon, 2003). In 2001, the consulting firm Accenture announced that 800 employees qualified for a
special voluntary sabbatical program, while 600 employees were going to be laid off permanently (Taub,
2001). In 2001, one of Siemens’ divisions, Information and Communication Mobile, offered its German
employees a one-year ‘time-out’ at reduced pay without permanently eliminating the jobs (Perera,
2001). Siemens was thus able to reduce costs without losing high-performing employees during difficult
economic times.

Employee lending

Employee lending is a modern-day HR practice whereby the current employer, the lending firm, lends an
employee to another employer firm for a set period of time while continuing to pay salary and providing
benefits. The borrowing firm, which can be a competitor, in return, reimburses the lending company for
part or all of the salary. While employee lending can dramatically decrease medium-range expenditure
of the lending firm, some employees may not wish to work for a third-party. There is also the risk that
the borrowing firm may decide to hire the employee permanently once the contracted period is lapsed.
As a consequence, the lending firm would thus loose a critical knowledge base. Texas Instruments
engaged in lending HR staffers to vendors for up to 8 months with the intention of bringing them back to
their original jobs at the end of that period. The supplier reimbursed Texas Instruments for their staffers’
salaries during the loan period and agreed not to offer them permanent jobs (Morss, 2008).

Exit incentives

This option entails offering employees incentives to leave the firm in the form of optional severance or
early retirement. This strategy enables firms to better target jobs and units in that it recognizes
employees for their service and helps retain the remaining employees. At the same time, exit incentives
can be costly and can create an entitlement mentality for the remaining workforce in the future
(George, 2004). In 2007, technology-outsourcing firm E.D.S. (Electronic Data Systems) offered extra
retirement benefits to 12,000 employees in the U.S. if they were to embrace early retirement (EDS,
2007).

In sum, corporate executives and HR directors need to find innovative ways to reduce medium-term
expenditures. Unfortunately, similar to the first stage, too many firms resort to layoffs by default.

Stage three: Long-range cost adjustments

According to Vernon (2003), the third stage of the cost-reduction framework represents long-term
adjustments which are necessary if a firm experiences a prolonged business downturn exceeding 12
months and beyond. This stage may be recognized through an extended decline of current and
projected customer demand and/or extremely volatile economic conditions. This third stage generally
requires extended long-range expenditure adjustments on the part of the firm. It is in this phase that
downsizing-related layoffs are frequently inevitable. While permanent layoffs should always be seen as a
final resort, firms must try to avoid across-the-board, mass layoffs at all costs (Gandolfi, 2006).
Companies who find themselves forced to engage in extensive layoffs must adopt practices that instill
loyalty and commitment in the remaining and exiting workforces (Vernon, 2003).

HR practices for long-range cost adjustments

Firms that are forced to embrace downsizing have shown to adopt various layoff-related strategies and
with various degree of success. It is beyond the purpose of this paper to review and present the
literature on the actual outcomes of downsizing. Essentially, the primary goal in this third stage is to set
the scene for the firm to be able to re-attract and re-gain layoff victims in a post-downsizing phase. This,
of course, is based on the presumption that the economy will bounce back sufficiently and that the firm
will be willing and able to hire again.
Rehiring bonuses

It is not uncommon for firms to rehire laid-off employees. While some firms provide a monetary rehiring
bonus for veterans to return to the company within a specified period of time, other companies hire
previously laid off employees as external consultants. In some cases, firms realize that they cut too many
and/or the wrong employees, while in other cases management decides to hire back after the economic
downturn. Research shows that employees and consultants frequently return to the downsized firm
with improved monetary rewards (Gandolfi, 2006). Back in 2001 and after two rounds of layoffs, Charles
Schwab Corp. offered a $7,500 bonus for any previously downsized employee who was rehired by the
firm within 18 months following the layoffs (Morss, 2008).

Maintaining communication with laid-off employees

Firms should make an effort to maintain friendly relations with laid-off victims. Modern-day technology,
including internet forums, 24-7 hotlines, e-mails, and mailings, provide and facilitate highly-effective
ways to foster and sustain positive employer-employee relationships (Lublin, 2007). This is particularly
important if firms intend to rehire the former employees when the economic climate has improved.

Internal job fairs

Firms should make every possible effort to retain high-performing employees. A powerful method is an
internal job fair, where firms host events in order to help place and redeploy downsized employees
within the company. The Ford Motor Company is currently running internal job fairs in its plants to
entice employees to find new careers beyond the assembly-line (Vlasic, 2008).

Selecting a downsizing strategy

Determining an appropriate workforce management strategy remains a vital task for firms. In order to
select a downsizing strategy effectively, aligning a firm’s cost-cutting methods with the cost-reduction
stage as outlined in Figure 1 may prove to be a powerful method. While there are many HR tools at an
executive’s disposal, each practice works most effectively when implemented during its established time
frame, or cost-reduction stage. At the same time, the assumptions underlying the framework (Figure 1)
are somewhat simplistic and probably do not capture the complexity of corporate decision-making.
According to Vernon (2003), at least six factors affecting the selection of a downsizing strategy need to
be considered:

 time, or the expected duration of an economic downturn)

 resources, such as cash resources at hand
 budget, namely the financial condition of the firm)
 corporate culture, for example, the institutional values and anticipated effects of cost cutting
 demographics, the location of the firm/demographics of employees the firm would like to retain
or rehire
 labour market, specifically the state and condition of the labour market

These factors should be considered when selecting a particular downsizing approach. For instance, if the
expected duration of an economic downturn is prolonged (i.e., factor time) and, thus, the firm opts to
engage in across-the-board layoffs, then there will be the inevitable impact upon the firm’s corporate
culture, as mass layoffs have shown to produce negative consequences. Similarly, an established ‘no
layoffs’ policy (i.e., corporate culture) may prompt the firm to retain all its salaried employees if it has
the capacity to remain liquid during an economic downturn (i.e., factors budget and resources).

This paper has demonstrated that the ability to correctly forecast the cost-reduction phase assists a firm
in determining appropriate employment strategies. This paper presented a methodology of cost-
reduction stages enabling firms to minimize, defer, and avoid downsizing-related layoffs. It appears as if
the key lies in the alignment of a firm’s downsizing methods with the cost-reduction stage in which the
firm finds itself. While the introduced framework remains simplistic, it is nonetheless alleged that
implementing HR practices that are aligned with the six factors above should allow for a more successful
downsizing. There is ample evidence that downsizing-related layoffs are devastating for all parties and
that permanent layoffs should be not be considered at all cost.

Outsourcing is a business practice in which services or job functions are farmed out to a third party. In information
technology, an outsourcing initiative with a technology provider can involve a range of operations, from the entirety
of the IT function to discrete, easily defined components, such as disaster recovery, network services, software
development or QA testing.

Companies may choose to outsource IT services onshore (within their own country), nearshore (to a neighboring
country or one in the same time zone), or offshore (to a more distant country). Nearshore and offshore outsourcing
have traditionally been pursued to save costs.

Outsourcing benefits and costs

The business case for outsourcing varies by situation, but the benefits of outsourcing often include one
or more of the following:

lower costs (due to economies of scale or lower labor rates)

increased efficiency

variable capacity

increased focus on strategy/core competencies

access to skills or resources

increased flexibility to meet changing business and commercial conditions

accelerated time to market

lower ongoing investment in internal infrastructure

access to innovation, intellectual property, and thought leadership

possible cash influx resulting from transfer of assets to the new provider

Some of the risks of outsourcing include:

slower turnaround time

lack of business or domain knowledge

language and cultural barriers

time zone differences

lack of control

Outsourcing services

Business process outsourcing (BPO) is an overarching term for the outsourcing of a specific business
process task, such as payroll. BPO is often divided into two categories: back-office BPO, which includes
internal business functions such as billing or purchasing, and front-office BPO, which includes customer-
related services such as marketing or tech support. Information technology outsourcing (ITO), therefore,
is a subset of business process outsourcing.

While most business process outsourcing involves executing standardized processes for a company,
knowledge process outsourcing (KPO) involves processes that demand advanced research and analytical,
technical and decision-making skills such as pharmaceutical R&D or patent research.

IT outsourcing clearly falls under the domain of the CIO. However, CIOs often will be asked to be
involved in — or even oversee — non-ITO business process and knowledge process outsourcing efforts
as well. CIOs are tapped not only because they often have developed skill in outsourcing, but also
because business and knowledge process work being outsourced often goes hand in hand with IT
systems and support.

For more on the latest trends in outsourcing, see “7 hot IT outsourcing trends — and 7 going cold.”

Outsourcing IT functions

Traditionally, outsourced IT functions have fallen into one of two categories: infrastructure outsourcing
and application outsourcing. Infrastructure outsourcing can include service desk capabilities, data center
outsourcing, network services, managed security operations, or overall infrastructure management.
Application outsourcing may include new application development, legacy system maintenance, testing
and QA services, and packaged software implementation and management.

In today’s cloud-enabled world, however, IT outsourcing can also include relationships with providers of
software-, infrastructure-, and platforms-as-a-service. In fact, cloud services account for as much as one
third of the outsourcing market, a share that is destined to grow. These services are increasingly offered
not only by traditional outsourcing providers but by global and niche software vendors or even industrial
companies offering technology-enabled services.

IT outsourcing models and pricing

The appropriate model for an IT service is typically determined by the type of service provided.
Traditionally, most outsourcing contracts have been billed on a time and materials or fixed price basis.
But as outsourcing services have matured from simply basic needs and services to more complex
partnerships capable of producing transformation and innovation, contractual approaches have evolved
to include managed services and more outcome-based arrangements.

The most common ways to structure an outsourcing engagement include:

Time and materials: As the name suggests, the clients pays the provider based on the time and material
used to complete the work. Historically, this approach has been used in long-term application
development and maintenance contracts. This model can be appropriate in situations where scope and
specifications are difficult to estimate or needs evolve rapidly.

Unit/on-demand pricing: The vendor determines a set rate for a particular level of service, and the client
pays based on its usage of that service. For instance, if you’re outsourcing desktop maintenance, the
customer might pay a fixed amount per number of desktop users supported. Pay-per-use pricing can
deliver productivity gains from day one and makes component cost analysis and adjustments easy.
However, it requires an accurate estimate of the demand volume and a commitment for certain
minimum transaction volume.

Fixed pricing: The deal price is determined at the start. This model can work well when there are stable
and clear requirements, objectives, and scope. Paying a fixed priced for outsourced services can be
appealing because it makes costs predictable. It can work out well, but when market pricing goes down
over time (as it often does), a fixed price stays fixed. Fixed pricing is also hard on the vendor, which has
to meet service levels at a certain price no matter how many resources those services end up requiring.

Variable pricing: The customer pays a fixed price at the low end of a supplier’s provided service, but this
method allows for some variance in pricing based on providing higher levels of services.
Cost-plus: The contract is written so that the client pays the supplier for its actual costs, plus a
predetermined percentage for profit. Such a pricing plan does not allow for flexibility as business
objectives or technologies change, and it provides little incentive for a supplier to perform effectively.

Performance-based pricing: The buyer provides financial incentives that encourage the supplier to
perform optimally. Conversely, this type of pricing plan requires suppliers to pay a penalty for
unsatisfactory service levels. Performance-based pricing is often used in conjunction with a traditional
pricing method, such as time-and-materials or fixed price. This approach can be beneficial when the
customers can identify specific investments the vendor could make in order to deliver a higher level of
performance. But the key is to ensure that the delivered outcome creates incremental business value for
the customer, otherwise they may end up rewarding their vendors for work they should be doing
anyway.

Gain-sharing: Pricing is based on the value delivered by the vendor beyond its typical responsibilities but
deriving from its expertise and contribution. For example, an automobile manufacturer may pay a
service provider based on the number of cars it produces. With this kind of arrangement, the customer
and vendor each have skin in the game. Each has money at risk, and each stands to gain a percentage of
profits if the supplier’s performance is optimum and meets the buyer’s objectives.

Shared risk/reward: Provider and customer jointly fund the development of new products, solutions,
and services with the provider sharing in rewards for a defined period of time. This model encourages
the provider to come up with ideas to improve the business and spreads the financial risk between both
parties. It also mitigates some risks by sharing them with the vendor. But it requires a greater level of
governance to do well.

IT organizations are increasingly looking for partners who can work with them as they embrace agile
development and devops approaches. “Organizations are rapidly transforming to agile enterprises that
require rapid development cycles and close coordination between business, engineering and
operations,” says Steve Hall, a partner with sourcing consultancy Information Services Group (ISG).
“Global delivery requires a globally distributed agile process to balance the need for speed and current
cost pressures.”

Outsourcing and jobs

The term outsourcing is often used interchangeably — and incorrectly — with offshoring, usually by
those in a heated debate. But offshoring (or, more accurately, offshore outsourcing) is a subset of
outsourcing wherein a company outsources services to a third party in a country other than the one in
which the client company is based, typically to take advantage of lower labor costs. This subject
continues to be charged politically because unlike domestic outsourcing, in which employees often have
the opportunity to keep their jobs and transfer to the outsourcer, offshore outsourcing is more likely to
result in layoffs.

Estimates of jobs displaced or jobs created due to offshoring tend to vary widely due to lack of reliable
data, which makes it challenging to assess the net effect on IT jobs. In some cases, global companies set
up their own captive offshore IT service centers to to reduce costs or access skills that may not result in
net job loss but will shift jobs to overseas locations.

Some roles typically offshored include software development, application support and management,
maintenance, testing, help desk/technical support, database development or management, and
infrastructure support.

In recent years, IT service providers have begun increasing investments in IT delivery centers in the U.S.
with North American locations accounting for more the a third of new delivery sites (29 out of a total of
76) established by service providers in 2016, according to a report from Everest Group, an IT and
business sourcing consultancy and research firm. Demand for digital transformation–related
technologies specifically is driving interest in certain metropolitan areas. Offshore outsourcing providers
have also increased their hiring of U.S. IT professionals to gird against potential increased restrictions on
the H-1B visas they use to bring offshore workers to the U.S. to work on client sites.

Some industry experts point out that increased automation and robotic capabilities may actually
eliminate more IT jobs than offshore outsourcing.

The challenges of outsourcing

Outsourcing is difficult to implement, and the failure rate of outsourcing relationships remains high.
Depending on whom you ask, it can be anywhere from 40 to 70 percent. At the heart of the problem is
the inherent conflict of interest in any outsourcing arrangement. The client seeks better service, often at
lower costs, than it would get doing the work itself. The vendor, however, wants to make a profit. That
tension must be managed closely to ensure a successful outcome for both client and vendor.

Another cause of outsourcing failure is the rush to outsource in the absence of a good business case.
Outsourcing pursued as a “quick fix” cost-cutting maneuver rather than an investment designed to
enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage
is more likely to disappoint.
Generally speaking, risks increase as the boundaries between client and vendor responsibilities blur and
the scope of responsibilities expands. Whatever the type of outsourcing, the relationship will succeed
only if both the vendor and the client achieve expected benefits