Downsizing is a cost-saving strategy where companies cut down on their workforce and even shut down some plants, divisions or departments within the company. The goal of downsizing is to increase efficiency and productivity.
Companies are forced to downsize during economic recessions, when there is a slow demand for product or during corporate restructuring. Thus, downsizing is both a voluntary and an involuntary action.
Although companies downsize mainly for positive reasons, there are consequences that result from the process. For instance, loss of morale among employees which will inevitably result in lower productivity, increase stress levels among employees as the workload increases.
Loss of critical staff can reduce innovation and finally high employee turnover as the remaining employees begin to lose trust in the company's management.
Sometimes, these consequences outnumber the gains of downsizing which is why downsizing has been said to increased the likelihood of bankruptcy.