Managers Believe Downsizing Is Effective. Research Says: Nope.

Pim de Morree
Written by Pim de Morree July 07, 2024

Downsizing—it's the corporate go-to move when profits dip and shareholders start grumbling. But let's get real. Is firing a bunch of people really the magic bullet for saving a company? According to research, it's more like shooting yourself in the foot. Let's explore.

The reason I'm addressing the topic today is because it recently came up in a discussion I had around Krisos - another company we created. Through Krisos, we buy traditional companies and transform them into radically progressive ones.

One of our principles is that we do 'no-layoffs' for economic reasons. It's a non-negotiable.

Why? Because it's the right thing to do. That's why.

Oh, and because it builds trust, boosts solidarity, and creates security in a challenging period of transformation.

Want to know how challenging these radical transformations are? Check out the write-up of the ongoing transformation of the company we acquired last year. Read it here.

Unfortunately, a 'no-firing' policy isn't all that common.

The great cost-cutting illusion

In many companies, CEOs love to argue downsizing is a strategic move to "streamline operations" and cut costs.

But here’s the hard truth: it doesn't work.

Why? Because you can't chop your way to success. Real growth comes from innovation, not contraction.
Click to tweet

A meta analysis by Alyson House and Piers Steel reveals that downsizing fails to improve financial performance. In fact, it often leads to the opposite—a decline in productivity and a toxic work environment.

Why? Because you can't chop your way to success. Real growth comes from innovation, not contraction.

Survivor syndrome: The silent killer

Let’s talk about the survivors—those lucky enough to keep their jobs. The aftermath of downsizing leaves them demoralized, stressed, and overworked.

Steel and House’s research points out that the so-called "survivor syndrome" leads to a drop in morale and engagement. Employees are constantly looking over their shoulders, wondering if they’re next.

This environment breeds fear, not productivity. Instead of focusing on their work, employees spend their energy worrying about job security.

The result? A workforce that’s disengaged and far less effective.

The hidden cost of cost-cutting

It's a bit paradoxical, but cutting costs isn't cutting as much costs as expected. Companies that downsize often face significant hidden costs—severance packages, loss of institutional knowledge, and the cost of hiring and training new employees when the market stabilizes.

The supposed financial savings are often a mirage, masking the long-term damage done to the company’s culture and operational capability. But since this is harder to show in numbers, cutting people looks like the more powerful thing to do.

So, what to do instead?

A more powerful (and human) alternative

Companies should focus on employee engagement rather than cutting heads. It pays off. Big time.

When we acquire a company, we don't cut costs by firing people. Instead, we reinvent the way a company works.

We ditch the stuff that doesn't work:

We introduce the stuff that does work:

In the 50+ companies that went through this transformation, the results (achieved in the two years after transformation) speak for themselves:

Benefits of transformation graph

What's not to like?

The numbers don't lie

Downsizing is a short-term fix that ignores the root problems. A corporate illusion.

Steel and House’s meta-analysis is clear: downsizing doesn’t translate to better financial performance.

Instead, it often leads to a downward spiral of reduced productivity, lower morale, and a damaged reputation. Firms that prioritize employee well-being and innovation over cost-cutting are the ones that ultimately succeed.

Rather than wielding the ax, leaders should be investing in their workforce. It's really that simple.

The future belongs to those who dare to build, not those who hastily tear down.

If you want to discover the powerful transformation approach that drives the above-mentioned remarkable gains, join our upcoming Masterclass for an in-depth exploration of this human-centric method to elevate your business success. More info here.

Written by Pim de Morree
Pim de Morree
As co-founder of Corporate Rebels I focus on: researching, writing, speaking, and building our company.
Read more
Jun 23, 2024
Badass CEOs Leading Radical Change
Kimberley de Haas Written by Kimberley de Haas
Changing the world of work as we know it sounds idealistic. Too good to be true, really. And yet, there’s a movement arising, doing just…
Read more about Badass CEOs Leading Radical Change
Apr 14, 2024
Recording: How We Buy Companies And Transform Them Into A Force For Good
Pim de Morree Written by Pim de Morree
Buying companies and transforming them into a force for good. That's what we do with our company Krisos. Last week, we organized a webinar…
Read more about Recording: How We Buy Companies And Transform Them Into A Force For Good
Mar 24, 2024
From Acquisition to Impact: How We're Turning The Company We Bought into a Force for Good
Pim de Morree Written by Pim de Morree
A few weeks ago, I spent two days in Seville (Spain). We invited several 'new ways of working' enthusiasts over to witness the ongoing…
Read more about From Acquisition to Impact: How We're Turning The Company We Bought into a Force for Good
Feb 25, 2024
5 Steps (and 9 Experiments) for a Successful Transition to a Self-Managing Organization
Joost Minnaar Written by Joost Minnaar
Recently I wrote about the importance of transforming the Self in a successful transition to a self-managing organization. However, this…
Read more about 5 Steps (and 9 Experiments) for a Successful Transition to a Self-Managing Organization
Jan 21, 2024
The Importance of Transforming the Self in Change Management
Joost Minnaar Written by Joost Minnaar
To create a progressive workplace, you need to change your organization and yourself. But most people focus on the organizational part and…
Read more about The Importance of Transforming the Self in Change Management
Nov 05, 2023
Becoming Bossless: An Update On The Radical Transformation Of Our First Acquisition
Pim de Morree Written by Pim de Morree
In addition to Corporate Rebels, we run a private equity firm named Krisos. While Corporate Rebels focuses on research, sharing, and…
Read more about Becoming Bossless: An Update On The Radical Transformation Of Our First Acquisition
Read all articles

Download: Free Guide

Unlock our in-depth guide on trends, tools, and best practices from over 150 pioneering organizations.

Subscribe below and receive it directly in your inbox.

    We respect your privacy. Unsubscribe at any time.