WHY DOWNSIZING FAILS
21 JUNE 2016
AS SEEN IN CEO WORLD MAGAZINE
In 1996 John Kotter from Harvard Business School famously stated that 70% of change programs fail. Twelve years later in 2008, McKinsey surveyed 3199 executives and showed that nothing had changed with the fail rate holding at an obstinate 70%. More recently in 2013, Towers Watson reported that despite the sophisticated change management advice available, only 25% of transformation projects are successful.
The reasons identified for such dominant fail rates range from failing to ‘prepare managers as effective change leaders’ and ‘management behaviour not supporting change’ to neglecting the remaining staff and managers calling the change process complete too early. Regardless of the study, the causality is centred around the people side of change.
As a career coaching firm, this link between organisational success and the human factor is not a surprise. However, we want to understand the financial cost of the human variable so we gathered the published research and ran a case study on a typical downsizing scenario.
In this example, a 100 headcount business is making 10 roles redundant. Using validated research we identified the direct cost, indirect cost and opportunity cost that can be expected in this scenario. We then looked at the difference between the average outcomes compared to an ‘effective separation’ process to assess the predicted financial impact of a professionally run project.
- The real cost of redundancy is 6 times the direct cost;
- The cost savings of an effective separation process are $54K saved per exiting employee;
- ROI for professional outplacement is 12 times the investment.
CALCULATING THE COST
When assessing the cost of making roles redundant, most businesses calculate the direct cost of the redundancy payout and the legal fees involved. However, very few consider the indirect cost or the opportunity cost.
For a complete breakdown of each calculation and cited references.
DIRECT COSTS [severance package and legal fees]
$19,208 per redundancy based on average tenure, average salary plus average legal costs.
Direct costs are $192,080 for 10 redundancies.
INDIRECT COSTS [absenteeism, turnover and productivity]
Indirect costs are caused by changes in the behaviour and output of remaining staff after role redundancy. Engagement, job satisfaction, commitment and productivity are all impacted.
In this case $370,035 can be attributed to absenteeism; $239,301 to unwanted turnover and $358,952 to lost productivity based on published averages.
OPPORTUNITY COSTS [time investment]
$79,688 is the estimated opportunity cost in this case based on management time and lost value creation.
THE REAL COST OF DOWNSIZING
Therefore, the real cost of downsizing in this case is $1.24 million or 6 times the direct cost. While the variables will shift in every live scenario, we can use this as a baseline ratio. If your business is expecting a downsizing event, the most accessible figure is your direct costs. You can multiply this figure by 6 to estimate the real cost to your business without intervention.
INVESTMENT IN OUTPLACEMENT
While there are highly credible strategy and change management consultants delivering valuable know how to their clients, a more targeted option in this case is a professional outplacement or ‘Career transition’ firm who are specialists in staff separation and post-change engagement.
More specifically, these firms
- support impacted employees with their next career move;
- advise the organisation on effective separation process and communication;
- support remaining staff and managers to adapt and reboot their career with the company.
The rationale for providing outplacement can be divided into three arguments:
MORAL “It’s the right thing to do”
BRAND “We need to protect our brand / reputation”; and
FINANCIAL “Managing this well will protect our balance sheet”.
While all three play a role in the success of a downsizing project, this business case focused on the financial perspective.
In this case, a typical investment in an outplacement program is $39,900 or 3% of the total cost of redundancy. This combines career transition coaching programs [$30,000 @ $3,000 per person] and change workshops for remaining staff and managers [$9,900].
THE COST SAVINGS OF EFFECTIVE SEPARATION
With expert advice and professional support, an outplacement provider facilitates an effective separation process. While the event will always be challenging, the right support ensures that all staff are treated with dignity and respect. As a preventative measure, the experience of outplacement specialists also allows the business to avoid errors that they would have otherwise made.
Aberdeen Group  demonstrate that companies who provide outplacement services experience a ‘highly engaged’ staff percentage of 60%, compared to 33% for firms who don’t provide outplacement. They also detailed the case of a financial services organisation who engaged an outplacement provider to assist with their their separation process. 50% of remaining staff were ‘highly engaged’ after the event, compared to an industry average engagement rate of 35%.
Building on this and using our example, here are the conservative business expectations of an effective separation process.
VARIABLE AVERAGE EFFECTIVE SEPARATION
ABSENTEEISM Absenteeism rises 2.5 times Absenteeism rises 1.5 times
PRODUCTIVITY Productivity drops 20% Productivity drops 10%
Productivity is impacted for 3 months
TURNOVER 4 examples of unwanted turnover 2 examples ofunwanted turnover
COST OF REDUNDANCY $1,240,052 $695,110
COST SAVING $544,942 [$54,494 per employee]
Even an effective process will not eliminate all of the negative impacts of change and uncertainty, however these are mitigated by managing this well. Above and beyond the moral and branding implications, you can conservatively expect to save $54,494 per impacted employee through effective separation.
With an outplacement investment of $3,990 per person, the net saving per impacted employee is $50,504. This represents a return on investment [ROI] of over 12 times the outplacement expense.
Additionally, this case study does not include the substantial cost of potential litigation which is estimated to be between $13,500 [Productivity Commission, 2015] to over $1 million per employee. In our experience, professional outplacement support migrates the litigation risk to zero with not a single client taking this action.
We know that the vast majority of transformation programs fail and the cause relates to the way that people are managed and engaged. In this case, an investment in effective downsizing is not only a fraction of the overall business cost, it also represents clear ROI in cost savings.
Here are the practical steps that the research and our own business case identify for the CEO facing a downsizing event:
- Factor in support for the remaining organisation at the start of the project;
- Engage an end to end outplacement partner to assist with the preparation, the event and the post change environment;
- Focus on effective training and coaching for people managers in the remaining organisation – this is your front line;
- Expect a shift in engagement, yet listen and respond to staff needs;
- Treat everyone with dignity, professionalism and respect. Sounds basic however some formal processes work against these principles.
Downsizing will always be challenging, however these fundamentals will give your business the best opportunity to survive and thrive.