Tyler Cowen had an interesting post the other day with all sorts of data on downsizing. I got interested in downsizing a few years ago when I was working on participatory management - i.e., the various ways in which employees participate in corporate governance. In my article, Privately Ordered Participatory Management: An Organizational Failures Analysis, I advanced a "new hypothesis" about the relationship between downsizing, restructurings, and employee involvement:
These examples appeared to call for a new hypothesis in which restructuring and participatory management are complementary rather than competing adaptations to the irreversibility syndrome. Restructurings can have strongly negative morale effects, especially when the restructuring includes a significant down-sizing of the workforce. Retained workers frequently experience a survivor’s syndrome, whose symptoms include risk aversion, demoralization, loss of commitment, and high stress levels. This phenomenon appears to be one reason that the expected economic benefits of a restructuring often fail to materialize. Here is where the emphasis on group cohesion in the participatory management literature comes into play. By building team spirit, participatory management helps off-set the negative morale effects associated with a restructuring.
Restructurings can also disrupt internal information flows. The most obvious effect of the layoffs associated with a down-sizing restructuring is the loss of the departed workers’ expertise and knowledge, but their more subtle effect is to break up the informal mechanisms by which managers and workers bypass hierarchy. One party (or both) to an informal bypass may be laid off. Lost trust and enhanced risk aversion may result in a communication breakdown even if both parties remain with the firm. Once severed, these informal links are slow to heal. Informal relationships of the sort at issue here typically develop around social interactions such as company sporting events, outings, car pools, and break rooms. By one estimate, a strong internal organization can take three to seven years to evolve. In the low morale post-restructuring environment, the longer estimate seems perfectly plausible.
Participatory management’s information gathering and transmission effects provide a systematic way of replacing and reestablishing the informal mechanisms damaged by a major down-sizing. By bringing together employees from various areas of the plant or firm, a quality of work life program or quality circle may facilitate reestablishment of the “grapevine” within the firm. Until then, the information-extracting function of such programs replaces the disrupted informal communication channels.
A final speculation is that managers bold enough to embark on a major down-sizing may also be bold enough to try shaking up the workplace by introducing participatory management. Hence, although it initially seemed counter-intuitive, I now suspect that participatory management and restructuring may go hand-in-hand. Indeed, there is some evidence of a correlation between the economic success of down-sizing restructuring and the introduction of participatory management.
