Downsizing can be a killer

July 8, 2014
By: Professor R. Carlisle "Carl" Smith

All businesses of all sizes want to save money and be as lean as possible. However, if taken too far, some cost-cutting measures can have unwelcome consequences and cause a shop to go under.

Figure 1

Downsize, trim, cut back, and be lean—all are buzzwords nowadays that, in theory, help companies save money. While downsizing reduces overhead costs, what about the long-run costs?

I work and have worked as a consultant for several different organizations, and I have yet to observe extreme success for any of those that chose to play the downsizing game. I refer to it as a game because, at minimum, it is a huge gamble, and I have witnessed many more losers than winners.

First to Go

Usually the first thing that happens is that "gray hairs" disappear (Figure 1) as the company encourages its older workers to retire or accept a severance offer. These workers typically have attained a higher rate of pay. But wait—consider the talent and experience that go out the door with them.

Extra Work and No Raise

Next, the remaining workers' work loads increase with no bump in pay. It doesn't take long for these people to begin looking for another job that pays more or involves less work for the amount they currently earn. As the workforce gradually diminishes, the remaining personnel become nervous about their job security. This causes more workers to look elsewhere for businesses that appear to be more secure and progressive.

Loyalty to the company is weakened because the employees believe that the company is disloyal to them.

Rumors Spread

As the parking lot becomes emptier (Figure 2 and Figure 3), the neighborhood begins to surmise that something is going wrong. Rumors start to fly that closure is imminent. Word spreads, and the local news reporters jump on the rumors; even though they don't have the full story, they print an article in the form of a question. "Is ACME fabrication ready to close its doors?" Many times, even with a rebuttal, this article sticks in the company's customers' minds. This is especially true for prospective customers that have just moved into the area and are not aware of the good reputation that the downsizing company has had in the past. A complete recovery sometimes never is accomplished, and the company struggles or even fails completely.

Salespeople Disappear

Reducing the salesforce is another terrible decision. The customer depends on the longtime salesperson to assist in describing a potential job and to help provide guidance for the nuts and bolts that must accompany the purchase order. Most customers ask for a particular inside salesperson they've dealt with over the years. When that salesperson is let go, the customer's confidence in the company drops significantly.

Outside salespeople usually form strong personal relationships with their customers. They typically meet in the customer's workplace, where family photos are on display. This creates a conversation opportunity, and a friendship develops between the customer and the salesperson.

Usually the first cut in the sales department is company vehicles. This is a significant loss, particularly if additional compensation isn't offered to mitigate it.  As the remaining salespeople become more disgruntled with the downsizing and the turning down of work, they seek employment elsewhere. As they leave and are not replaced, the customer base also diminishes and the customer contacts the competition. Once a customer is lost, it is very difficult to regain their confidence in the downsizing company.

Confidence Disappears

I have witnessed the loss of customers who have been dealing with a downsizing company for several years. When the customer visits the shop and observes idle machinery and fewer workers (Figure 4), it becomes obvious that the company is no longer able to accommodate a large job requiring a quick turnaround.

Figure 2 and 3

Also, many longtime customers get to know the workers and their skill level. If the worker who generally performed a particular type of machining or welding is no longer there, doubt is established in the customer's mind. Customers sometimes attempt to track down machinists and welders at their new shops.

Nearly all large companies survey a shop and assess the number and skill level of its workers before placing orders. Even though it is not permissible to ask, the perceived age of the workers usually indicates the experience and skill level. The knowledge and experience of support workers, such as engineers, quality managers, plant managers, and area foremen, also are an intricate part of the survey. The survey typically asks questions concerning the average length of employment at the shop and the time spent performing a particular type of work. This applies to both workers and management.

As the customer continues to walk through the downsized shop and warehouse, more questions arise based on the obvious reduction of inventory. Delivery time and costs are affected when material must be ordered after the customer awards the job. Start and completion dates are almost certain to be extended, even if the lead-time to acquire the material is short.

If the employee count dips to a certain low, the shop can do only one or two jobs at a time. This could cause it to turn down (no bid) some good-paying work, which could lead to the loss of a new or existing customer or contract.

When the trucking fleet is sold out and the drivers are dismissed or moved to a shop position, some customers become uneasy, because it is difficult to depend on an external delivery company to make emergency deliveries or to pick up materials for time-sensitive jobs.

The Company Disappears

If the companies that choose to downsize are just trying to gradually go out of business, which is a good way to go, the customers will perceive that objective early on. If they are trying to cut costs and remain in business, I am afraid they will not remain in business for long. I see lots of rusting buildings that once housed thriving businesses. More than a few were victims of cost-saving downsizing.

My next article will portray the success of a company that chose to upsize. By doing so, it grew from a one-room, dirt-floor shop to a multibuilding campus in just a few short years, and everything is paid for.

Figure 4

Professor R. Carlisle

Professor R. Carlisle "Carl" Smith

Weld Inspection & Consulting
PO Box 841
St. Albans, WV 25177
Phone: 304-549-5606