Downsizing is a popular response to commercial pressures on a company, If they want to improve the look of their balance sheet quickly, they reduce their payroll costs. But all too often, downsizing leads to dumbsizing.
However when the people you lose hold most of your organisational knowledge (which often happens when you cut higher paid jobs), you lend up with a leaner, meaner and dumber organisation.
This is known as dumbsizing.
This article contains a couple of good examples of dumbsizing, including this one
Circuit City downsized 3400 of its highest paid (and probably most effective) sales associates in an attempt to gain sustainable cost reductions. The remaining smaller, less skilled sales force provided competitors such as Best Buy with an opportunity to gain market share. Once in this spiral, Circuit City could not prevent the hemorrhage of clients and revenues. The company filed for bankruptcy in 2008 and finally ceased trading in 2009.
Employee downsizing, when applied indiscriminately, runs the risk of undermining sustainable competitive advantage through deteriorating quality, productivity and effectiveness as a result of knowledge loss. In many cases, the only way for the companies to recover is to hire back the people they fired at a premium cost, as in this example.
Charles Schwab Corp. provides us with a crisis-induced reaction in the aftermath of the dot-com crisis at the beginning of the new millennium. After two rounds of employee downsizing, the company offered a US$7500 bonus for any previously downsized employee rehired by the firm within 18 months of the layoffs..... A survey by the American Management Association (AMA) revealed that about one-third of companies that lay people off subsequently rehire some of them as contractors because they still need their skills.
The problem comes when organisations look only at the cost of the people, and not at the value of the knowledge resources they hold. Downsizing is not considered in the light of the organisational knowledge management strategy (assuming they have one), the risk of critical knowledge loss is not considered and managed, and core capability declines as a result.
The company becomes dumb and dumber, and (like the Circuit City example above) may become no longer viable.