Downsizing in a Learning Organization Are There Hidden Costs: Are there Hidden Costs?

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Downsizing a Learning Organization and its costs

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  • Downsizing in a Learning Organization: Are There Hidden Costs?Author(s): Susan Reynolds Fisher and Margaret A. WhiteSource: The Academy of Management Review, Vol. 25, No. 1 (Jan., 2000), pp. 244-251Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/259273Accessed: 17/10/2008 10:23

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  • 6 Academy of Management Review 2000, Vol. 25, No. 1, 244-251.

    NOTE

    DOWNSIZING IN A LEARNING ORGANIZATION: ARE THERE HIDDEN COSTS?

    SUSAN REYNOLDS FISHER Barry University

    MARGARET A. WHITE Oklahoma State University

    Business practice has been at odds with organizational theory: whereas one mana- gerial "fashion"-downsizing-involves divestiture of human assets, another- learning-advocates investment in human assets. We use a social network frame to consider the impact of downsizing on organizational learning and propose that the effects can be viewed as a nonlinear function of learning network size. From this perspective the potential damage to a firm's learning capacity is greater than head- count ratios imply.

    During the past decade, management theo- rists have proposed that investment in organi- zational learning capacity is the key to compet- ing successfully in the global marketplace (Nonaka, 1991; Prahalad & Hamel, 1990; Senge, 1990). At the same time, managers continue to use downsizing-and other forms of restructur- ing-to improve productivity and gain the favor of Wall Street (Ellis, 1998). Are these two organ- izational trends compatible? Can an organiza- tion that has invested in building its learning capacity as a strategic resource elect to imple- ment across-the-board personnel reductions without risk to its learning investment? In this note we examine the relationship between downsizing and organizational learning by us- ing a social network frame to consider potential damage to learning and memory networks.

    DOWNSIZING IN PRACTICE Although downsizing once was viewed as an

    indicator of organizational decline, it now has shed that stigma and gained strategic legiti- macy as a reorganization strategy (McKinley, Sanchez, & Schick, 1995). Despite evidence showing that many downsized companies have

    failed to achieve their intended goals, downsiz- ing continues to be used, even in the best of economic conditions. Among the companies an- nouncing major workforce reductions in the fi- nal months of 1998 were Kodak, Woolworth, Citi- corp, International Paper, Fruit of the Loom, Montgomery Ward, and Levi Strauss (Ellis, 1998). Annual surveys conducted by the American Management Association show that only 41 per- cent of downsizing companies have reported productivity increases, and only 37 percent have realized any long-term gains in shareholder value (Koretz, 1998). Clearly, downsizing is a tac- tic that is popular and enduring but not always productive or valuable.

    Freeman and Cameron (1993) have defined downsizing as an intentional reduction in per- sonnel intended to improve the efficiency or ef- fectiveness of the firm. These authors suggest that downsizing often fails because broad- based personnel reductions inadvertently cause dramatic changes in the deep-seated, informal organizational structure when only incremental changes were intended. One reason for this is that downsizing necessarily impacts work pro- cesses and structure. Even when downsizing is implemented without the intention of major re- structuring, the net result is fewer employees left to do the same amount of work. To counter- act this imbalance, firms often take restructur- ing actions, to avoid potential negative conse-

    We acknowledge the extremely helpful comments from Rockie Lee DeWitt, Carrie R. Leana, and three anonymous AMR reviewers.

    244

  • 2000 Fisher and White 245

    quences such as overload and burnout (Brockner, 1988; O'Neill & Lenn, 1995). Downsiz- ing, therefore, generally results in some mea- sure of restructuring.

    In a study of downsizing in the U.S. automo- bile industry, Cameron, Freeman, and Mishra (1991) found widespread implementation errors. Most of the companies in the study experienced deteriorating levels of quality, productivity, and effectiveness as a result of using "nonpriori- tized" implementation tactics that did not allow for "prediction of who would be eliminated, how many would be gone, or which talents and skills would be lost" (1991: 61). A case reported by Cascio further illustrates this point: in a Fortune 100 company a $9 per hour bookkeeper was downsized only to be hired back as a consultant at $42 per hour after management realized that "it lost valuable institutional memory" in the process (1993: 99). This was an example of an individual employee holding an important "chunk" of learned expertise critical to the suc- cess of the organization.

    Many organizational scholars view organiza- tional learning and memory as social phenom- ena manifested at the group and organizational levels, as well as within the individual (Argyris & Schon, 1978; Walsh & Ungson 1991; Weick, 1979). When the social complexities of the organ- ization are considered, it becomes evident that nonprioritized downsizing has the potential to inflict previously undetected damage on the learning and memory capacity of organizations, and that the size of this risk is more difficult to estimate than the loss of individual expertise.

    The common practice of expressing the mag- nitude of downsizing as a percentage based on the ratio of employees removed to total work- force size is based on a view of the organization as an aggregate of individuals. From this per- spective, the loss of an individual in downsizing is directly related to the quantity and value of the information held in that individual's mem- ory and not retained elsewhere in the organiza- tion. A different picture presents itself when the organization is viewed as a collection of net- works in which the interrelationships among in- dividuals generate learning. Because a single employee has multiple interrelationships, the elimination of an individual in downsizing can damage the organization's learning capacity to a greater extent than implied by a linear head- count ratio. This hidden risk to organizations is

    serious and calls for the attention of organiza- tional scholars and practitioners.

    In the following discussion we demonstrate that organizational learning can be generated by social networks, and we use a simple exam- ple to estimate the magnitude of damage that can result from the removal of an individual from a learning network. This estimate indicates that the damage potential of downsizing to or- ganizational learning far exceeds that implied by linear head-count ratios.

    ORGANIZATIONAL LEARNING AS A SOCIAL NETWORK PHENOMENON

    The literature and research on organizational learning are so fragmented that there is no widely accepted model or theory (Fiol & Lyles; 1985; Glynn, Lant, & Milliken, 1994; Huber, 1991; Shrivastava, 1983). Therefore, we draw from sev- eral extant theories to offer the following opera- tional definition of organizational learning.

    Organizational learning is a reflective process, played out by members at all levels of the organization, that in- volves the collection of information from both the external and internal environments. This information is fil- tered through a collective sensemak- ing process, vwhich results in shared interpretations that can be used to in- stigate actions resulting in enduring changes to the organization's behav- ior and theories-in-use.

    This definition is based on a cognitive, social network view of organizational learning. We as- sume that the organization is a social entity or "cooperative system" (Barnard, 1938), in which individual actors interrelate to produce a collec- tive consciousness that is something more than a simple aggregation of the attributes of indi- vidual members (Durkheim, 1938; Weick & Rob- erts, 1993). From this perspective, organizational learning is viewed as "emergent from interper- sonal and/or behavioral connections" and mod- eled "in terms of the organizational connections that constitute a learning network rather than as information transfer from one individual mind to another" (Glynn et al., 1994: 56).

    The definition also incorporates Daft and Weick's (1984) concept of organizational learn- ing as composed of information gathering and

  • 246 Academy of Management Review January

    interpretative systems. Learning organizations collect and process informati