by Ian Buchanan

Created on: January 03, 2011

Downsizing has a much more profound impact on the private sector than it does in the public sector. Essentially, jobs in the private sector do not have the imagined protection or options to transfer to other departments that those in the public sector do. Imagined rather than real protection might be more accurate because the public sector moves at a snail’s pace, and “politics” is more likely to delay or soften redundancy action than it ever would in the private sector. A corporation can disappear in a flash, but government will endure for ever.

Most private sector companies survive on small margins and can be rattled by economic downturn, competition, or employee behaviour. Most don’t have the financial depth to outlast a lengthy recession such as we have just experienced without cutting costs more deeply than the potential revenue shortfall. Most companies do not have the option to ride the rollercoaster with the status quo.

Labour is unfortunately the highest single cost in many cases, and the pressure from fixed costs leaved no option but to trim headcount in tough times. Wage freezes are common, but that only saves one to two percent, and the pressure to cut costs can be dramatically higher than that as both customers and suppliers are faced with the same issues.

Morale suffers where uncertainty exists, and that in turn impacts on productivity, a key component to survival. This is particularly true in unionized environments. Historical labour contracts can limit options that non-union shops can access to minimize the implications in a wider sense.

Banks force downsizing to protect financing much quicker in the private sector, particularly by calling in loans or renegotiating terms more favourable to themselves. Small businesses simply don’t have the resources to withstand these calls and shedding large numbers of employees can be the only option, short of administration, to survival.

Apart from the obvious constraints, downsizing can result in product rationalization which, in turn, threatens revenue generation and continues the downward spiral.

On the other hand, downsizing can bring efficiencies to companies that have been lax and loose. There should always be a tension between cost and revenue positions, and every once in a while adjustments must be made. In addition product lines end and new opportunities arise that strengthen a company’s position. New methods and equipment are introduced to increase productivity and inevitably result in terminations.

What matters is that a conscientious company does what it can to assist downsized staff find new jobs, and compensate to some degree for the loss of employment.

Downsizing, either way, forces a new level of focus on a company. Focused on its mission, it will reallocate its resources to break out of the doldrums. Scatter shooting and downsizing simply to appear active will lead to demise.  

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