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.

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    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 information from both exter- nal and internal organizational environments and accumulate it as knowledge. This knowl- edge base constitutes the firm's "memory" (Walsh & Ungson, 1991; Weick, 1979), which is held in the firm's files, records, procedures, and policies, as well as in its culture (Kotter & Hes- kett, 1992), theories-in-use (Argyris & Schon, 1996), and "communities-of-practice" (Brown & Duguid, 1991).

    One of the barriers to understanding the or- ganizational learning process has been the dif- ficulty in bridging the gap between what is known about learning at the individual level and collective learning (Fiol & Lyles, 1985; Hed- berg, 1981). Weick's (1995) four-level framework is particularly useful for understanding the lev- els of organizational learning. He identifies the first level as that of the individual, or intrasub- jective meaning. The second, intersubjective, level is where information is interpreted and shared meaning developed among individuals and groups. The third, generic, level is where the resulting knowledge is stored and preserved over time, and the fourth, extrasubjective, level includes macro phenomena, such as organiza- tional culture and institutional artifacts.

    Argyris and Schon (1978) have long held that the knowledge developed through organization- al learning is represented by the firm's theories- in-use (generic level), which can only be under- stood by observing the patterns of interrelating behavior among organizational members (inter- subjective level). It is this interpretive engine at the intersubjective level of the organization that is the most vulnerable to the effects of downsizing.

    THE IMPACT OF DOWNSIZING ON LEARNING When organizational learning is viewed as an

    aggregate of individual information processes, individual memories represent essential pieces of the organizational memory, and the loss of a significant individual memory "chunk" can cre- ate a hole in the organizational memory that damages ongoing processes. This is supported by the anecdotal accounts of problems resulting from eliminating the wrong people during downsizing, such as the bookkeeper described earlier.

    In contrast, when we assume that learning is generated at the intersubjective level, we infer a

    social network frame. From the social network perspective, learning is "'situated' within an in- teractive context," rather than in either the minds of individuals or the organization, and is subject to "system interaction effects" that are "not located in individual learning entities or "nodes' (i.e., individuals or organizations), but in the connections between nodes" (Glynn et al., 1994: 57). Social network thinking fits our defini- tion of organizational learning with its focus on shared interpretation. "The basic building block of social network analysis is the relationship. That is, the focus is on the link, or lack of a link, rather than the actors" (Brass, 1995: 43). When a social network frame is applied to the effects of downsizing on organizational learning, we be- gin to see the magnitude of the potential risk to learning.

    Picture, for example, an organizational unit of five individuals who interrelate on a regular basis in the production of organizational output. This unit is comparable to a network organized around workf low, in that its members are linked by "channels of communication and resource exchange used in getting things done" (Ibarra, 1992). Although it may be a formal workgroup documented by an organization chart, it more likely has emerged on an informal basis (Brown & Duguid, 1991) and consists of members with different core responsibilities who interrelate with one another periodically to accomplish subtasks of their main responsibility. Although intermittent, these acts of interrelating embody learning-by-doing and modifications based on memory. In addition, each member may share separate interrelationships on other tasks with one or more members of the same network. For example, all five members may be responsible for interrelating on an annual project, while three of the members work together on a monthly project and four members interrelate on a periodic basis on yet another activity. There are a total of twenty-six possible subgroups em- bedded in this network of five that could (ac- cording to our definition) be the source of valu- able organizational learning.

    Now consider the effects of downsizing on this network and its subgroups. If the organization took action to reduce "head count" by 20 percent, one individual would be lost to this network. Remember, however, that this individual is a potential member of fifteen subgroups out of the twenty-six possible subgroups in this network of

  • 2000 Fisher and White 247

    five. If each of these fifteen subgroups acts to generate learning, then the loss of one individ- ual represents the potential loss of 57.6 percent (15 . 26) of the learning capacity in this network of five. These are nonlinear effects that intensify dramatically as the size of the network grows. In a network of twenty members, removing one individual corresponds to a 5 percent reduction in head count, but could result in a loss of up to 50 percent of the learning capacity in that net- work.

    We acknowledge that this is a simplistic ap- plication of social network theory, and these calculations represent a worst case scenario. This scenario is based on the assumption that all possible subgroups retain valuable, unique learning capacity and that the loss of any indi- vidual will completely disable learning in every subgroup he or she belongs to. This scenario is very unlikely. However, given the disparity be- tween magnitude of damage implied by head- count ratio (20 percent to 5 percent) and the max- imum potential damage based on loss of learning networks (57.6 percent to 50 percent), it is clear that, even at some point less than worst case, the head-count ratio may be dangerously misleading. The key to this disparity is that head-count ratios are based on an aggregate view of the organization and focus on the "nodes" or individual members, whereas the so- cial network perspective considers the rela- tional linkages in the intersubjective organiza- tional network as the source of learning capacity.

    Burt's (1992) theory of structural holes offers more insight into how the structure of learning networks may impact the magnitude of learning loss. Burt proposes that networks with relatively weak linkage density but with heterogeneous, rather than redundant, relationships are more "efficient" than dense networks in which every member shares similar links with all other members. This logic suggests that removal of individuals in dense networks with many redun- dant linkages would not necessarily impact or- ganizational learning capacity in a significant way. However, Burt also suggests that some in- dividuals may be more strategically linked within the organization than others. Those whose relationships span structural holes and account for a unique link between otherwise unlinked clusters in a network can be critical to the learning function. Removal of the individual

    who accounts for such a strategic link among diverse clusters would disconnect the clusters from one another and inflict damage to organi- zational learning capacity far exceeding that calculated in the example presented.

    It is important to understand that both head- count ratios and network linkage calculations are, at best, extremely coarse-grained estimates of the impact of downsizing on organizations. There is a need to consider the unique quality of an individual-whether based on network links or individual knowledge and skill-when con- templating such action. Neither head-count ra- tios nor our network linkage calculations reflect these individual-level differences. Clearly, firms should not attend only to network links and disregard individual contributions. Individ- uals (nodes) as well as interrelationships (links) can be repositories of valuable learning capac- ity. Our point is that the focus, to date, has been entirely on the loss of individuals to the organi- zation, and the organizational impact of down- sizing has been estimated by aggregation of individual-level data via head-count ratios.

    It is well known that global organizational phenomenon cannot always be described accu- rately by aggregating individual-level data (Rousseau, 1985). When one considers the multi- ple relationships generated by one individual, it is clear that, even in networks that do not con- form to all of our assumptions, restructuring that involves significant reductions in personnel may inadvertently inflict damage on learning networks that is nonlinear. Although linear head-count ratios may correspond to the loss of individual memory "chunks" to the organization, such percentages understate the potential dam- age to the organizational learning capacity. The following proposition summarizes this point.

    Proposition: The magnitude of the po- tential damage to organizational learning capacity resulting from downsizing is a nonlinear function that results in a progressively greater percent of capacity lost per individual as the size of the operative learning networks embedded in the organiza- tion increases.

    In terms of Freeman and Cameron's (1993) model of downsizing, the organization may in- advertently be causing dramatic changes in the deep-seated informal organizational structure,

  • 248 Academy of Management Review January

    when only incremental changes were intended. Brown and Duguid echo this warning: "The re- organization of the workplace into canonical groups can wittingly or unwittingly disrupt these highly functional noncanonical-and therefore often invisible-communities" (1991: 49).

    Two studies lend support to this position. Keller (1989) found that restructuring at General Motors destroyed informal networks that were critical to formal operational networks. After the reorganization, "the whole organization had to go fishing for that informal infrastructure. It should have been managed along with the man- agement of the formal structure" (1989: 119). In another study Lei and Hitt (1995) related out- sourcing to organizational learning damage. Outsourcing is a form of restructuring that often involves personnel reduction when it is used to replace a function that was once provided inter- nally. In these cases it can have a similar dam- aging effect on organizational learning: "Out- sourcing can erode the firm's potential for organizational learning and development of new technologies" (1995: 836).

    IMPLICATIONS FOR THE LEARNING ORGANIZATION

    Downsizing is a high-risk strategy in a learn- ing organization. Managers aiming to neutralize this risk must focus on the management of so- cial networks and consider the dynamic inter- play between and alignment of formal and in- formal structures (Ibarra, 1992). Top managers seeking the competitive advantage of organiza- tional learning capacity must consider critical intersubjective networks when implementing any restructuring involving movement of or re- duction in personnel.

    It is possible, however, that the risk we have described is not generalizable to all types of organizations. In tightly coupled, bureaucratic organizations with deeply embedded formal structures and generic scripts, influence net- works tend to mirror the formal structure (Ibarra, 1992). "The social network will overlap more closely with the formally prescribed structure in a mechanistic organization than in an organic organization" (Brass, 1995: 54). In such cases ge- neric control dominates, and intersubjectivity becomes secondary (Weick, 1995). Organiza- tional learning and memory in such organiza- tions are formalized at the generic level in con-

    crete policies, structures, and routines, and informal structures correspond closely with formal hierarchy and functional workgroups. This makes network connections highly visible and limits the risk of unintentional downsizing damage.

    Conversely, organizations in turbulent indus- tries with heavy reliance on innovation have a higher stake in organizational learning (Pra- halad & Hamel, 1990). The loosely coupled na- ture of such organizations, with their relatively flat formal structures and dependence on the creativity that is generated at the intersubjec- tive level, makes them highly vulnerable to the hidden damage of downsizing. Organic organi- zations such as these have been found to con- tain networks high in density and connectivity (Brass, 1995), and critical activities in such or- ganizations "are frequently initiated, organized, and implemented outside the domain of formal approval processes" (Ibarra, 1992: 176). These network-dependent organizations are at great- est risk of unexpected learning damage when removing or moving personnel.

    We must also recognize the threat of rigidity (Leonard-Barton, 1992) and the need for "un- learning" (Bettis & Prahalad, 1995; Hedberg, 1981). It is possible that even in highly efficient learning networks, routine can lead to parochi- alism and "groupthink" (Janis, 1972), or dramatic environmental shifts (Schumpeter, 1950) may suddenly require completely new organization- al mindsets. In such cases, reduction or rear- rangement of personnel may lead to improved performance by quickly eradicating the domi- nance of memory-based knowledge and routine. If the organization is successful in overcoming the negative effects of such radical change and establishes an environment conducive to net- work reconstruction, such action may also open opportunities for creation of new network con- nections and new learning. March (1991) has asserted that organizations should constantly access the balance of "exploitation" of accumu- lated knowledge and "exploration"" of new ideas. Knowledge of learning networks should aid managers in maintaining such a balance.

    RESEARCH IMPLICATIONS Our proposition points to several directions

    for further research. First, we need to establish a frame for making selecting-out decisions in a way that considers their structural impact on

  • 2000 Fisher and White 249

    learning networks. Although the research stream on staffing and selection is rich, there is no parallel body of research on the decision criteria and the processes for effectively select- ing employees out of an organization during downsizing (Collarelli & Beehr, 1993). This is a critical gap, because selecting out inherently determines the ultimate composition of the new, smaller workforce (Snow & Snell, 1993). To date, selecting-out decisions largely have been driven by considerations of legal liability (Lado & Wilson, 1994).

    Prioritized selecting-out decisions require sys- tematic methods for tracking network connec- tions on a continuing basis. The literature on social network analysis is rich, and advances in computer technology are making the mapping of social networks more accessible to both prac- titioners and scholars. Social network scholars, such as Krackhardt (Krackhardt & Hanson, 1993) and Stephenson (as discussed in Hildebrand, 1998), are facilitating the transmission of these theories and methods to the workplace, and re- ports are now surfacing that corporations are successfully using this mapping technology to identify barriers to communication and pockets of innovation in their organizations (Hildebrand, 1998). These same tools could also be used to study the potential impact of removing specific individuals in the process of downsizing or re- structuring. Maps of connectivity can help man- agers identify key intersubjective relationships that should be preserved or those that will re- quire repair after downsizing. Alternatively, when personnel reduction is targeted at break- ing dysfunctional routines and unfreezing detri- mental rigidities (Bettis & Prahalad, 1995; March, 1991), these maps can help managers identify individuals or networks that create barriers to organizational learning and performance.

    Managers also need information on what to look for prior to making selecting-out decisions. We offer three suggestions. First, based on Burt's (1992) theory of structural holes, it is criti- cal to identify those individuals who represent a singular link between otherwise unlinked net- work clusters. This link should be preserved or replaced to limit network disruption and learn- ing loss. Conversely, this may be the one link to eliminate in a "therapeutic" action intended to break dysfunctional ties.

    Second, the assumption that learning is most critical in loosely coupled, organic organiza-

    tions can be extended to organizational subdi- visions. Firms often manage their creative com- ponents differently from their line components in order to foster innovation in such areas as research and design, while promoting efficiency in production (Daft, 1995). Our argument sug- gests that mapping hidden learning networks is more critical in those divisions where creativity and generative learning are prime resources. Although learning networks may be important in production areas, these networks are more likely to parallel the formal organizational structure in these subdivisions and, thus, be transparent.

    Third, upward communication is critical to mapping hidden networks in loosely coupled organizations or subdivisions. The knowledge of network location, membership, and function lies with the network members, rather than manage- ment. Social network research offers a wealth of methods useful in collecting such information from organizational members (e.g., Burkhardt, 1994; Burt, 1997; Feld, 1997).

    Finally, researchers should use social net- work measures to map changes in the informal organization networks before and after downsiz- ing and restructuring (Courtright, Fairhurst, & Rogers, 1989; Krackhardt, 1990). If future studies are designed to incorporate these methodolo- gies, the relationship between downsizing and informal network changes may be compared to short- and long-term organizational perfor- mance. Such research might explain why down- sizing has failed to deliver expected improve- ments in productivity.

    SUMMARY In this note we have asserted that downsiz-

    ing-or any restructuring that involves broad- based personnel reduction or movement-may seriously damage the learning capacity of or- ganizations. Using the social network perspec- tive, we have illuminated the magnitude of po- tential learning capacity loss resulting from the deletion of one individual from an organization- al network and have demonstrated that, be- cause it is a nonlinear function, this loss is likely to be far greater than that indicated by linear head-count ratios. The magnitude of the poten- tial risk makes it critical for managers to ana- lyze the impact of downsizing and restructuring on learning networks-both formal and infor-

  • 250 Academy of Management Review January

    mal-before implementing these strategies. Be- cause both organizational learning and restruc- turing can lead to better competitive position, it is imperative to understand how these activities are related to avoid inadvertently damaging one while pursuing the other.

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    Susan Reynolds Fisher is an assistant professor of education at Barry University in Florida and a doctoral candidate at Oklahoma State University. She is currently conducting a longitudinal study of radical change in the Orange County Public Schools and developing a multilevel theory of organizational performance.

    Margaret A. White is an associate professor of management and associate dean of Undergraduate Programs and Administration at Oklahoma State University. She received her Ph.D. from Texas A&M University. Her research interests include the complexity of change in organizations, as well as organizational learning and wisdom.

    Article Contentsp. 244p. 245p. 246p. 247p. 248p. 249p. 250p. 251

    Issue Table of ContentsThe Academy of Management Review, Vol. 25, No. 1 (Jan., 2000), pp. 1-270Front Matter [pp. 1 - 153]DialogueThe Structure of Optimal Trust: A Comment and Some Extensions [pp. 10 - 11]

    Special Topic Forum on Organizational Identity and IdentificationOrganizational Identity and Identification: Charting New Waters and Building New Bridges [pp. 13 - 17]Classifying Managerial Responses to Multiple Organizational Identities [pp. 18 - 42]A Stakeholder Approach to Organizational Identity [pp. 43 - 62]Organizational Identity, Image, and Adaptive Instability [pp. 63 - 81]The Impact of Identity Orientation on Individual and Organizational Outcomes in Demographically Diverse Settings [pp. 82 - 101]Organizational Identity and Learning: A Psychodynamic Perspective [pp. 102 - 120]Social Identity and Self-Categorization Processes in Organizational Contexts [pp. 121 - 140]Identity Dialogues [pp. 141 - 152]

    Strategizing throughout the Organization: Managing Role Conflict in Strategic Renewal [pp. 154 - 177]Mechanisms Linking Work and Family: Clarifying the Relationship between Work and Family Constructs [pp. 178 - 199]Legal Readings: Employee Interpretation and Mobilization of Law [pp. 200 - 216]NotesThe Promise of Enterpreneurship as a Field of Research [pp. 217 - 226]A Sociocognitive Interpretation of Organizational Downsizing [pp. 227 - 243]Downsizing in a Learning Organization: Are There Hidden Costs? [pp. 244 - 251]

    Book Reviewsuntitled [pp. 252 - 253]untitled [pp. 254 - 256]untitled [pp. 256 - 259]untitled [pp. 259 - 261]

    Publications Received [pp. 262 - 264]Back Matter [pp. 265 - 270]