THE MERIDIAN INTERNATIONAL INSTITUTE On Governance, Leadership, Learning, and the Future * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Washington, D.C. Office 6800 Fleetwood Road, #205 McLean, VA, 22101 USA (703) 790-1637  Fax 790-8938 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DOWNSIZING by Alexis A. Halley Executive Director, Washington D.C. Office The Meridian International Institute for the Information Cooperative Project Alliance for Redesigning Government National Academy of Public Administration Final Copy: April 5, 1995 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * One Sansome Street, Suite 2100275 Slater Street, Suite 500 San Francisco, CA 94104  USA Ottawa, Canada K1P 5H9 (415) 951-4726  Fax 951-4660(613) 237-0143  Fax 235-8237 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Copyright 1995 by Alexis A. Halley. All rights reserved. CONTENTS OVERVIEW: Introduction 3 1.0 What is Downsizing?3 1.1 Definitions 3 1.2 Information Cooperative Topics Related to Downsizing 5 2.0 Why is Downsizing Important? 6 3.0 Fundamental Choices in Implementing Downsizing 7 3.1 The Incremental Approach 7 3.2 The Strategic Approach 8 4.0 Tools of Downsizing 9 4.1 Tools for Diagnosing the Downsizing Problem 9 4.2 Tools for Workforce Reductions 10 4.3 Tools to Reduce Other Aspects of Size 12 4.4 Related Tools 13 5.0 Results and Lessons 13 5.1 Highlights of Emerging Results 14 5.2 Highlights of Emerging Lessons 15 6.0 Next Generation Issues 17 References Cited in the Overview 19 OVERVIEW INTRODUCTION This overview focuses both on downsizing in the narrow sense (workforce reduction) and on related, generally broader or more fundamental strategies such as rightsizing and rethinking. The document defines key terms, discusses why downsizing is important, highlights implementation approaches, tools, and results and lessons, and suggests next generation issues. It includes a selected, annotated bibliography; examples of experts and resources in downsizing; and illustrative examples of the various approaches (e.g, downsizing, rightsizing, rethinking). Because most lessons of experience" suggest that workforce reductions are rarely effective undertaken in isolation (i.e., downsizing for the sake of downsizing is increasingly regarded as a highly ineffective strategy), the overview attempts to weave together themes pertinent to downsizing, to rightsizing, and to some extent to rethinking. 1.0 WHAT IS DOWNSIZING? 1.1 DEFINITIONS Language is a real problem in downsizing. Downsizing is associated, and often confused, with numerous terms. Gradually, however, we are developing a set of definitions that makes sense of key differences: 1) ADMINISTRATIVE REFORM. Reorganization, restructuring, and virtually all of the definitions below are a subset of an area of study and practice known as administrative reform. Administrative reform is the induced systemic improvement of public sector operational performance, and came of age in the 1980s (Caiden, 1991). It is international in scope. 2) REORGANIZATION / RESTRUCTURING. Changes in organizational structure are usually called reorganizations. Reorganization is a process that changes the distribution of responsibility, and the prevailing lines of authority. It has technical, political, economic, and social aspects. Reorganization concepts apply at many different levels (e.g., branch, division, agency, bureau, section, unit). The scope of the reorganization is defined by the level that is the target(s) of the effort. Restructuring involves moving, adding, or eliminating organizational boxes or units represented by an organizational chart. Restructuring can also be defined as rebuilding the strength of an organization by changing its asset structure and its resource allocation patterns (see Hoskisson & Hitt, 1994). Reorganizations do not include normal, expectable, routine changes or minor changes to which the organization can readily adapt itself. 3) DOWNSIZING / WORKFORCE REDUCTION. According to Steven Applebaum and his colleagues (1987), "downsizing" was coined to define the scaling down of car sizes by automobile manufacturers. The term was first applied to the process of cutting back employees when business and government began making major reductions to their employee bases in response to recessionary pressures in the 1980s. Downsizing is a type of reorganization or restructuring. Downsizing or workforce reduction is a strategy to streamline, tighten, and shrink the organizational structure with respect to the number of personnel the organization employs. As downsizing has become more prevalent, the term has lost its original precision (i.e., workforce reduction). Today, the term downsizing is used both to refer to a narrow effort to reduce the workforce and also to broad efforts to improve work systems or redesign the total organization. 4) REENGINEERING. Reengineering changes the way work processes are carried out, to better serve the customer, client, or citizen. Reengineering is a strategy to redefine, and perhaps reduce, the business processes of an organization. Workforce reduction may be part of reengineering. Today, information technology is usually central to the reengineering of business processes. Synonyms: process management, process redesign 5) RIGHTSIZING. Organization structure, however, is more than the boxes on a chart; more than the number of employees, positions, or jobs; and more than business processes (e.g., it includes formal and informal patterns of interaction that link all organizational elements toward mission accomplishment). Rightsizing can involve reducing the workforce (downsizing) as well as eliminating functions, reducing expenses, and redesigning systems and policies (e.g., to reduce costs or reduce organizational size). It can also require upsizing (increasing the workforce) in certain areas. Rightsizing eliminates unnecessary work and improves and prioritizes the most important work. It is a multifaceted attempt to reshape the total organization. Some adherents also give rightsizing a strong humanistic orientation. Synonyms: lean organization, revitalization, renewal, reinvention, total organizational performance, organizational design 6) RETHINKING. Rethinking is both broader and more fundamental than rightsizing. Rethinking strategically identifies and refocuses the core mission. Rethinking asks, for example: Why do we exist at all? What is our mission? Is it still the right mission? Is it still worth doing? Rethinking also asks: Assuming we should still exist, how should we go about our mission? What are our performance capacities? What redesign is relevant to the core mission? Rethinking is necessary and appropriate in periods of the greatest change. Antonym: repair 7) DECLINE. Organizational decline refers to an involuntary, unplanned loss of resources. Decline does not necessarily produce a reduction in personnel. Organizations can downsize without declining; they can decline without downsizing. Downsizing may be implemented when an organization is growing or declining. 8) LAYOFFS. Layoffs are the termination of employees with or without advance notice and for reasons other than performance. Layoffs are one of many tools used to implement a downsizing strategy to reduce the size of the workforce. Downsizing can be done with or without layoffs. Downsizing includes an array of other tools to reduce the workforce. 9) DELAYERING. Layering is the number and size of management levels. Delayering involves removing, through reorganization, one or more of the layers of management between the head (or chief executive) of an organization and the front or operational lines. 10) DEREGULATION. Deregulation refers to clearing away rules, regulations, paperwork requirements, or approval processes that affect the performance of public servants or the performance of industries, sectors, programs, overseen by public servants. 1.2 INFORMATION COOPERATIVE TOPICS RELATED TO DOWNSIZING Downsizing is related to numerous topics that are in the Information Cooperative database. Downsizing strategies, focused on size of the workforce, can be implemented using the principles and framework of Total Quality Management and Performance Management, Outcome-Oriented or Results-Oriented Management. When downsizing is coupled with rightsizing, for more of a total organization or total system focus, Business Process Reengineering and Information Technology tools are important. When downsizing strategies are part of a broader jurisdictional effort to reduce the size of government beyond workforce reductions, then Privatization and Relationship Realignment strategies are relevant. When downsizing strategies are embedded in efforts to reinvent democracy" or examine the more fundamental questions surrounding the purpose and role of government in a jurisdiction, and /or when citizen support is essential for the long term success of the downsizing / rightsizing, then tools such as Visioning, Strategic Planning, Electronic Town Meetings, and Citizen Engagement are important complements (e.g., to define the purposes and targets of change). 2.0 WHY IS DOWNSIZING IMPORTANT? **IT IS LIKELY TO CONTINUE AND BECOME MORE SIGNIFICANT Downsizing is becoming as popular in the public sector as it has been in the private sector. Most experts believe that downsizing will continue through the 1990s and beyond. Though economic, fiscal, and political pressures are an immediate prompt for downsizing actions, the fact is that in today's rapidly changing business and government environments, size, coupled with industrial age hierarchies, can be a disadvantage. Few foresee an end to restructurings, downsizings, rightsizings, and the gut wrenching changes they bring. Continuous restructuring and fundamental redesign are more likely to be the wave of the future. **WE DON'T KNOW ENOUGH ABOUT HOW TO DO IT WELL. Traditional business and government organizations are changing faster than most of us can absorb. We have a very rich literature and body of experience on organizational design and high performance under conditions of growth. But surprisingly little of that literature deals with high performance in lean organizations, or the ongoing process of getting to leaner organizations. This lack of knowledge is compounded by conflicting goals. Whether downsizing or rightsizing, organizations usually seek multiple, often contradictory goals: reduce costs, reduce the workforce, increase efficiency, improve service delivery, increase productivity, increase entrepreneurship, decrease overhead, achieve same or better results, increase cost consciousness and accountability, and increase managerial flexibility. **IT MATTERS FOR DEMOCRACY. How we "size" our public sector organizations and our public service matters for democracy. The "right size" is very difficult to determine once and for all, and is a question that raises fundamental political issues. Note: Is democracy related in any way to size? Robert Dahl and Edward Tufte (1973) tell us that smaller units are often said to facilitate democracy better than larger units. At the same time, there are complaints that smaller units are incapable of handling their problems and this leads to demands for larger units. Martin Landau (1969) discusses the importance of redundancy and overlap in the American political system. Yet how much and what kind of redundancy and duplication are necessary to check and balance institutions without engendering excessive size, waste, and inefficiency? **IT AFFECTS THE LIVES OF INDIVIDUALS--OFTEN PROFOUNDLY. Last but surely not least, downsizing affects, often profoundly, the lives and productivity of individuals, whether they survive the downsizing or leave the organization. 3.0 FUNDAMENTAL CHOICES IN IMPLEMENTING DOWNSIZING The effective executive is likely to be a person who delights in the chance to choose the best path according to his own lights. For the Public Executive, the feel" of administration is the exhilaration of choice." (Harlan Cleveland, 1972) There is no one best or simple way to undertake structural change aimed toward cutback, retrenchment, downsizing, rightsizing, rethinking, or any of the numerous terms in use today. No matter how the downsizing mandate surfaces, the administrator faces numerous choices. Some choices are CONCEPTUAL (e.g., What model of organization will guide the structural change? What model of governance and public management will guide the structural change?) The most important choice is the OVERALL ORIENTATION TOWARD CHANGE: Whether to be incremental and reactive, or whether to take a more strategic, proactive approach. 3.1 THE INCREMENTAL APPROACH According to Peter Drucker and Scott Fosler, both public and private decision makers often adopt a reactive attitude to the forces of change. When they do so, their responses usually follow a predictable, incremental sequence. The first stage is typically denial that anything is wrong, denial that change is on the horizon. Public servants hear the terms "administrative reform" or "reinvention" or "workforce reduction" and believe this too shall pass." The second stage is patching--an experiment here, a law or rule changed there, an agency reorganized somewhere. But deep or pervasive systemic change is still elusive. The third stage is crisis as the forces of change that have been denied to this point come to the fore. Deep, cost-driven cuts radical downsizings occur at this stage along with other crisis-driven, typically short-term responses or what Drucker calls amputation without diagnosis." These types of downsizings yield mixed, if not dangerous, results: smaller versions of what didn't work before; loss of institutional memory; performance interruptions; and an anxious and mistrustful group of survivors. The fourth stage is rightsizing. Organizations in this stage ask questions about both structure and process. They engage in downsizing and in business process reengineering. They look at the long term, at total performance, and at what they can do to create or add value. But they still tend to assume that the existing organization needs only to be repaired or that the system is simply somehow flawed, and that if only the system is fixed, the solution will be obvious. Organizational members may suspect that the situation is still unsound, but lack the mental maps, tools, and language to express alternatives. Organizations often downsize reactively, with little consideration of the long term costs and implications for future effectiveness (e.g., Kozlowski, et. al., 1993). 3.2 THE STRATEGIC APPROACH Organizations often have a choice: They can take the above incremental approach or they can take a more strategic, proactive approach that interrupts the reactive sequence. While the incremental approach to downsizing is less painful in the short run, in the longer term the strategic approach is likely to produce more effective results more quickly. Strategic downsizing is more complex, involving the use of multiple decision criteria in the selection and configuration of downsizing strategies (Kozlowski, et al, 1993). The strategic approach is fundamentally a process of rethinking, which is a search for new mental maps and new tools. Rethinking asks: Why do we exist in the first place? What results should we produce given the resources available? Cutting expenses becomes a means to broader ends. In the public sector, those broader ends might include effects on the democratic process itself. The following are suggested principles for adopting a strategic approach aimed at seizing downsizing as an opportunity for fundamental rethinking: 1) Use a systematic framework and methodology, rather than an unstructured approach to the downsizing / rightsizing. 2) Determine whether downsizing is driving the process or whether a broader or more fundamental set of goals is appropriate (e.g., changing mission, changing work processes, changing and reducing workforce). 3) Review the conditions precipitating the downsizing as well as the range of tools (see below) possible to achieve it. 4) Develop a change-management plan with a clear vision--especially of the ideal future organizational identity--and specific steps to conduct and oversee the transition. 5) Develop a plan to maintain and improve organizational performance during and after the downsizing. 6) Consider how to involve employees, union officials, citizens, and customers throughout the downsizing planning process. 7) Have a clear understanding of the administrative and legal ripple effects" inherent in the use of downsizing tools. 8) Generate alternative scenarios based on a range of different assumptions about key, unpredictable variables including costs. 9) Develop a plan to implement whatever strategies are chosen. 10) Identify the people who will be affected. Will they need retraining or outplacement assistance? What core competencies must be retained? What are the needs of new employees? 11) Create placement opportunities and allow reasonable time for employees to find jobs elsewhere. 12) Follow-up and engage in ongoing rebuilding. 4.0 TOOLS OF DOWNSIZING Many tools are used in downsizing (narrow and broad efforts). Examples of four sets are outlined below. The evidence on the effectiveness of any of these tools, used singly or in combination, is mixed. 4.1 TOOLS FOR DIAGNOSING THE DOWNSIZING PROBLEM A first set of tools has to do with frameworks for thinking through the problem prompting a downsizing or rightsizing and the accompanying approach. Some examples are: 1) RETHINKING THE FUNDAMENTALS OF GOVERNMENT. To rethink the fundamentals of government, Scott Fosler believes the following questions should be asked: What is the public purpose? Of all the governmental responsibilities, which level of government should assume them? What organizational designs and performance capacities best enable the effective and efficient achievement of missions? If this program or activity were not in place today, would there be justification to start it? What change strategy is appropriate and effective? (Fosler, 1995) 2) DECISION TREES TO ANALYZE PROGRAMS. More limited in scope than Fosler's framework, Vice President Gore's National Performance Review (NPR) has issued various decision trees for analyzing agency programs and ultimately reducing the size of the federal government. One of those trees starts with the question Is this program or function critical to the agency's mission based on customer input?" If it is critical, questions are asked about where that function is best performed and how costs can be cut or performance improved (e.g., devolved to other governments, franchised, privatized). If the program or function is not critical, then the choice is either to terminate it or to privatize it. 3) ANALYSIS OF THE NATURE OF FISCAL STRESS. Ruth Ann Bramson (1992) offers a framework to assist local governments whose constrained budgets are forcing them to rethink and redefine what they do. One aspect of that framework is to link downsizing and rightsizing strategies to the nature of the fiscal stress situation. * A FISCAL CRUNCH (low fiscal stress and short duration) is a temporary, moderate problem which can be addressed through short-term budget balancing mechanisms (e.g., reduce overtime, freeze hiring and expenditures, defer maintainence, stall payments). * A FISCAL CRISIS (high severity but short duration) calls for all the tactics employed in minor stress situations as well as layoffs, terminations of programs, and cancellation of equipment replacement. * A FISCAL SQUEEZE (low severity but long duration) involves an opportunity to anticipate budget cuts and plan appropriate action (e.g., changing in operations and management as well as changes in the size and mission of the government and its agencies). * Finally, a FISCAL CRUSH (deep cuts over a long period of time) requires the greatest change in organization and services (e.g., redefine mission, shed functions, contract out extensively, use temporary employees and volunteers). 4) STRATEGIC PLANNING / STRATEGIC MANAGEMENT. When the ultimate goal is organizational renewal and effectiveness, strategic planning and management should set the context and oversight of the downsizing process. The strategic management process is the full set of commitments, decisions, and actions required for an organization to achieve high performance or overall optimum effectiveness (e.g., Hitt, Ireland, & Hoskisson, 1995). In strategic restructuring, choices may be made among downsizing, geographic contraction, process and business reengineering, product rationalization, and downscoping (reducing diversification to focus on core businesses). 4.2 TOOLS FOR WORKFORCE REDUCTIONS When the focus is limited to workforce reductions, then tools and techniques available to achieve a reduction in the workforce include: 1) Workforce reductions can be made across the board with all units sharing the reductions equally, or targeted to particular units, or executed in varying proportions throughout the organization. 2) TOOLS OTHER THAN LAYOFFS TO REDUCE PERSONNEL COSTS: To reduce the size of the workforce, agencies can: * Reduce overtime, * Freeze hiring, * Reduce by attrition (leave vacancies unfilled), * Conduct cross training, * Negotiate wage and benefit concessions from employees, * Implement furloughs (mandatory, unpaid leaves), and * Reduce position ceilings which limit the number of full time permanent staff allowed in each agency. 3) INCENTIVES AND SERVICES TO PROMPT EMPLOYEES TO VOLUNTARILY SEPARATE: Agencies can provide a variety of incentives and services to prompt employees to voluntarily separate and to ease the stress of change. These include: * Early retirement, * Increased separation pay, * Financial assistance, * Career transition or outplacement assistance, * Education, training, and retraining assistance, and * Emotional counseling. 4) REDUCING LAYERS: The number of organizational layers can be reduced and whole layers of management or operations can be eliminated. 4.3 TOOLS TO REDUCE OTHER ASPECTS OF SIZE When the focus is more a mix of reducing the workforce and reducing programs and other cuts, then the following are examples of additional tools that have been used in the past: 1) LOAD-SHEDDING THROUGH PRIVATIZATION, LOAN GUARANTEES, DEREGULATION, AND DECENTRALIZATION: These tools involve transformations in the organizational framework that provides government services: * Privatization introduces choice, competition, and potential load-shedding by contracting out or transferring government services to the private sector. * Government can guarantee loans provided by the private sector rather than make direct loans to beneficiaries. * Deregulation (suspending rules, changing laws, terminating or limiting regulatory agencies, increasing the discretion to those regulated) can be a means to reduce the number of people required to administer regulations. * Decentralization shifts the responsibility from one level of government to another. 2) PROGRAM REDUCTIONS: Still other tools to reduce government include: * Discontinuing programs and services, * Limiting eligibility or reducing the number of people who qualify to receive program and service benefits, * Reducing the benefit amount and level of service, and * Charging consumers for services. 3) LOAD SHEDDING THROUGH CHANGES IN ORGANIZATIONAL TYPES: Even when programs are retained in the public sector, another tool of retrenchment or reduction is to ciphon them off into smaller, presumably more accountable and efficient mission-oriented organizations granted greater flexibility in administrative procedures in exchange for accountability for results. This has been seen in the formation of Special Operating Agencies in Canada, administrations de mission in France and Belgium, executive agencies in the United Kingdom, and Projektgruppen in West Germany. 4) PERFORMANCE AUDITS: Performance auditors can play a helpful role in the downsizing process. Performance audits can identify downsizing options that focus on efficiency and quality and use performance measurement and benchmarking (comparison) as audit techniques. 5) CONSOLIDATIONS / MERGERS / COLOCATIONS: To give order to the number of annexations and incorporations in a jurisdiction, or to change the size of the jurisdiction, efforts are sometimes made to consolidate service districts or jurisdictions (e.g., combine city and county governments). Categorical grants can be consolidated into block grants. Programs can be consolidated by co-location and by changing how they are differentiated and integrated in various organizational structures. 4.4 RELATED TOOLS When the focus is more on changing the way work processes are designed and implemented, tools of "business process reengineering" are being used (with mixed results). (These tools are identified in the Information Cooperative Cluster on Business Process Reengineering.) Downsizing has also been linked to the tools of "Total Quality Management (TQM)," where there are debates as to whether TQM promotes or prevents downsizing. (TQM tools are identified in another Information Cooperative Cluster.) Many recent management concepts (e.g., TQM, business process reengineering, downsizing), focus on intra-corporate or intra-organization restructuring. These concepts are also appropriate to examine with respect to strategic alliances, public-private partnerships, and other types of inter-institutional relationships. (The Information Cooperative has clusters on "Public-Private Partnerships," and "Restructuring Relationships" that contain relevant resources.) 5.0 RESULTS AND LESSONS Efforts are being made to cumulate the lessons of experience from efforts to downsize, rightsize, and rethink public organizations, the public sector, and private organizations. Following is a compendium of results and lessons that reflects the varying points of view. 5.1 HIGHLIGHTS OF EMERGING RESULTS Results of downsizing efforts are mixed. One emerging theme is that there are conflicting views about whether any particular effort is successful or unsuccessful. For example: * MOST ARE NOT SUCCESSFUL. Today, many large, mature companies find themselves in the throes of change. In ambitious, sometimes bold efforts to gain control of their future, these companies have implemented one or more of the currently popular change programs such as total quality management, process reengineering, and even complete reinvention. Unfortunately, many of these efforts are not very successful. (Miles and Snow, 1994; Drucker, 1995) * SOME ARE SUCCESSFUL. In just the first year, the National Performance Review has confounded its critics. It has also launched a broad reform movement in the right direction. It has at least been asking the right questions. Its critical problem is that it is not now a self-sustaining revolution. (Kettl, 1994) There is an emerging, limited and cautious body of experience documenting some generally positive illustrations of actual efforts to use the tools of downsizing (see Appendix B, C). There is also an emerging body of work attempting to conduct the more difficult task of rethinking (see Appendix B, C). In general, experience to date provides some important, specific cautions: 1) Some research shows that fewer than half of the downsized companies achieve a reduction in overall expenditures, and less than one quarter show increased productivity. Moreover, many organizations and individual employees experience unexpected and undesirable outcomes. 2) Numerous studies show that following a downsizing, surviving employees become risk-averse, distrust management, and show productivity and morale drops. Indeed, a nearly unanimous pattern among survivors" of downsizings, sometimes called lay-off survivor sickness" is initial anger and pain, followed by fear and cynicism, declines in efficiency, and erosions of productivity. These effects are much more pronounced when the downsizing is short-term, deep, across the board, and handled with limited communication and employee and stakeholder participation. Recent work at the Center for Creative Leadership (Bunker, 1995) seeks to make this more precise by distinguishing four ways people respond to major organizational changes such as downsizing (e.g., they either feel entrenched, overwhelmed, jockey for position and do not learn well, or are ready to be stretched, to mature, and to assume new responsibilities. 3) Pioneers of popular tools and approaches (e.g., Michael Hammer and James Champy) have become very concerned about the effects those tools have had on careers and organizations, as well as the resistance the tools have encountered. Like Miles and Snow, and Drucker, they think that the so-called redesigns, brilliant though they may appear, don't get results because of managerial thought and ideology. Champy, in a recent Wall Street Journal article (Lancaster, 1995) said, Some companies are just downsizing and calling it reengineering. ... We're brutalizing the workforce right now during this transitional period. If we're going to get what we need, the brutalization has to stop. I think it will when we dramatically downsize and learn to do much more with much less. Then we can settle into the new social contract with our people and be more stable." 5.2 HIGHLIGHTS OF EMERGING LESSONS Other, still very preliminary, lessons are now being drawn from our experience with downsizing: 1) The way in which downsizing occurs is more important in accounting for effectiveness than is the size of the work force reduction or the cost savings that accrue. (Cameron, Freeman, & Mishra, 1991) 2) Some people believe strongly that issues faced by downsizing organizations in the public sector are different from those faced by downsizing organizations in the private sector. For example, public organizations are generally not rewarded for downsizing efforts. In addition, their downsizing is often legislation-driven and is measured more by full-time-equivalent reductions in workforce than by cost savings. In government, for examp