Downsizing Can't Save Businesses

Currently, the coronavirus pandemic continues to add pressure to many businesses that are having a difficult time adjusting to the new business environment. With less traveling and people staying home more often, businesses that rely on people to come outside are struggling. Airlines, cruise companies, retail stores, restaurants, and event planners are all struggling.

Because of the struggles, many businesses in those industries are downsizing in hopes of being able to live another day. Many of those business owners find downsizing as an opportunity to cut costs, become leaner, and preserve their resources. Another reason why some firms downsize is that they believe that downsizing helps improve performance. It is reasonable considering that those that aren't pulling their weight would be kicked out. Meanwhile, studies have down that downsizing can actually reduce employee performance. This is because job insecurity makes people more stressed at work and reduces their overall well-being. 

Interestingly, downsizing provides more problems than just making employees insecure about their jobs. According to the Harvard Business Review, downsizing firms experience:

• a loss in valuable knowledge as employees exit
• increasing workloads for existing employees, making their jobs harder
• also, that negative effect doesn't allow them to take time to learn new skills
• a loss in trust by employees

Overall, all of these effects reduce innovation and increase the likelihood of the business to go bust. Look at companies like IBM. Before, they were a tech giant that many loved. Even Warren Buffett invested in IBM at one point. As IBM started laying off people to improve their financial performance and reduce costs, IBM started lacking innovation. Those layoffs caused the company to remove great employees that had great minds and that created a lot of value for the company. This is just one of the many cases that shows how important human capital is and the huge consequences that come with laying off people.

When looking at companies that downsized and compared them to companies that didn't downsize, excluding their balance sheet data and their industry, companies that chose not to downsize amidst a recession or issues within their industry did better than those that did downsize.

Why is that? Well, it's because companies that didn't commit to lay-offs were able to benefit from the knowledge existing employees had. The existing employees used their knowledge to improve their company's operations, allowing the business to adjust during hard times and be able to capitalize on the good times. 

Altogether, if you're a business owner looking to downsize amidst a recession, look into all the great employees you have and utilize their brains to come up with solutions that can save your business from calamity. You never know, they might have ideas that can not only help you survive the pandemic but also help you thrive during the pandemic. Employees are a bigger asset than you think.