In today’s volatile environment Industries are compelled to downsize to meet the costs. While facing economic downturn organizations must carefully asses all its options and consider the feasibility at all fronts. While the pain of downsizing can’t be avoided entirely, but it can definitely be mitigated. So, how can companies soften their blow ensuring goodwill of employees and safeguarding its reputation in tandem?
Factors that lead to downsize
Amongst the factors that lead to rightsizing, the prominent one is acute uncertainty in the economic environment.
“Today businesses are operating in the environment of uncertainty around the world. This is the new normal. We’ve all had long stable careers in the past where redundancy and right sizing were seen as rare exceptions but today it is not so. The term rightsizing at present is used more in the sense of downsizing than upsizing. Two reasons for that- first, business conditions have changed rapidly. There is immense pressure on management to maintain costs. They look at reducing cost at all fronts including people cost. Second reason is mergers and acquisitions where synergies are to be gained between the companies at cost front. They look for areas where redundancies could be identified,” explains Sankar Ramamurthy, writer and former executive director at a Big Four firm in India.
HR has a very significant role to play even in the legal process. Law historically in India has been pro-employee. It has been set up and geared in the manner to protect employees. The business environment has changed drastically. Most companies want to have the flexibility of being able to bring in and take out people based on fairly commercial reasons. Law unfortunately has not been conducive to that sort of environment. The large part of the law was created sixty years back when Independence was gained. The social structure and industrial structure in India was very different then. There were largely factories that aimed to protect employees from being exploited. Therefore, most of the law was created to put certain steps in place to ensure that employers dealt with employees in a reasonable way.
“Today most common form of termination is resignation. People prefer to resign than being terminated as they consider it a social stigma. Problem lies in communicating as companies are not able to communicate their intent properly rather it turns out to be coercion for resignation. In India organizations do not follow LIFO method. The concept of ‘LIFO’ means ‘last in first out’. According to which companies can let go off employees who came in last. For example – If an organization has 40 people who perform similar roles and wants 20 amongst them to exit, then typically companies would try to retain their top performers and let go off others. But that is not what law permits. One cannot take that distinction fundamentally and base one’s decision on performance merely. Organizations need to go through the process and that poses huge challenge for them. Also, in India we don’t have concept of ‘at will employment” which means you can terminate only when you have reasonable cause to do so. While terminating, one need to be mindful of what law requires; companies need to give notice as well as adequate compensation,” avers Ajay Raghvan, Partner Labour & Employment at Trilegal
Downsizing by SME
With several constraints in the SME (small medium enterprise) segment, it is necessary to think of practical ways to downsize. “Many SMEs may not have experienced HR team who can handle such situation. So the onus falls on Chief Executive or Promoters who are advised to take on the process emphatically. A good thing about SME sector is that they do not unnecessarily burden themselves with whole heap of permanent employees. Many of them have the ability to quickly change their business model and to move into variable cost-model of employment like contract, fixed term contract or flexible working arrangement and the like. These are some of the things which are in favor of the SMEs and this can be adopted by large companies also. Instead of asking employees to quit, they can be asked to work half -day and be paid accordingly. This can be communicated openly to an employee that due to financial constraints company is not able to afford them on full-time basis. This turn out to be win-win situation for both employees and company effectively,” says Sankar Ramamurthy.
(The article is based out of SME virtual conference on ‘Tailoring the Rightsize’ during SME week )