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What is downsizing?

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Last editedNov 20202 min read

Downsizing is a word that’s being heard a lot in 2020, and it comes up frequently during periods of difficulty and economic downturn. Essentially, downsizing means reducing your staff in order to save on expenses and overheads. It can be a difficult decision to make but may ultimately help keep your business afloat. In some cases, there are even benefits of downsizing a company. It’s important to understand where you stand legally when it comes to downsizing, as well as how to carry out a proper analysis of the costs and benefits to your business. Find out a little more about the effects of downsizing an organisation, right here.

How do you know it’s time to downsize a business?

There are many different considerations that may lead to you deciding to downsize your business. The most obvious example is a reduction in profits. This doesn’t always mean the company is facing failure or closure – it could simply be a pre-emptive move in order to make sure you maintain your profits or don’t get into trouble in the future.

Another common reason for downsizing is the decision to outsource work. In some circumstances, it makes sense to contract another organisation to take care of a particular aspect of your business, such as customer service or accounting. This may be because it’s more affordable, more efficient, or because the organisation you’re outsourcing to has a particular expertise. This often means reducing in-house staff, who may no longer be needed.

Methods of downsizing

Downsizing is most often associated with redundancies, but there are other methods of downsizing that may have a reduced impact on your business and employees.

The first technique often deployed is a hiring freeze. This means no new positions are opened up, and you don’t seek to replace employees that leave. Some companies have also reduced working hours and workweeks, although this often has the most significant impact on the lowest-paid employees. A similar approach is an overtime freeze, particularly as overtime hours are usually paid at a higher rate than standard hours.

Other methods of downsizing that can be used include mandatory vacation and temporary site shutdowns, which both offer temporary relief for businesses that are struggling with profits. Of course, these may not be viable long-term solutions and may ultimately need to lead to more permanent measures.

Downsizing and divesting older business

Divesting means selling investments, assets, or other aspects of your business to maximise your profits and strengthen your financial position. This often means getting rid of high cost and low-value elements that are not performing as projected or which you expect to take a downturn in the next period.

In relation to downsizing, this can often mean selling or disposing of particular divisions of the company, which can be accompanied by a reduction in your workforce.

The effects of downsizing on employee morale

It’s essential to consider the effects of downsizing on employee morale. As well as the potential fear of being made redundant or having their hours cut, it often means that employees will be separated from former team members, which can have a severe emotional effect. Because downsizing can also lead to a sense of financial instability, the effects of downsizing on employee morale also extend to stress and dissatisfaction at work. Ultimately, this may cause some employees to leave voluntarily.

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