Organizational downsizing: a review of literature for planning and research.
Subject: Health care industry (Management)
Health care industry (Research)
Downsizing (Management) (Research)
Authors: Davis, Jullet A.
Savage, Grant
Stewart, R. Thomas
Pub Date: 05/01/2003
Publication: Name: Journal of Healthcare Management Publisher: American College of Healthcare Executives Audience: Trade Format: Magazine/Journal Subject: Business; Health care industry Copyright: COPYRIGHT 2003 American College of Healthcare Executives ISSN: 1096-9012
Issue: Date: May-June, 2003 Source Volume: 48 Source Issue: 3
Topic: Event Code: 310 Science & research; 200 Management dynamics; 280 Personnel administration Computer Subject: Company business management; Health care industry
Product: SIC Code: 8000 HEALTH SERVICES
Geographic: Geographic Scope: United States Geographic Code: 1USA United States
Accession Number: 102656708
Full Text: EXECUTIVE SUMMARY

The use of downsizing as management's strategic response to environmental and institutional changes is prevalent in all U.S. industries, including healthcare. The popular and research literature is inundated with reports on companies undergoing various stages of restructuring, which often include one or more staff reductions. This article provides a review of downsizing literature published from 1985 to 2002. Although the findings and conclusions of these articles are generally inconsistent, the prevailing opinion is that for downsizing to be successful, effective planning must occur long before, during, and after downsizing. Additionally, a downsizing plan should be included in the strategic management plan of all organizations, regardless of whether they plan to downsize or not. By including such a plan, the organization will be better prepared to begin the staff-reduction process should it be forced to do so in response to environmental changes. Finally, providing ample support and protection for staff is key to the organization's recovery and growth. The lessons provided in this literature review should assist healthcare managers in deciding how to plan and structure potential staff reductions.

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A television commercial for the online career network Monster.com features children expressing the unspoken feelings some employees have about organizational downsizing. One child captures one such negative view as she says, "I want to be laid off on a whim." This statement succinctly reflects the beliefs of the public given the seemingly impulsive nature of organizational downsizing. Confirming this image of spontaneous staff reduction is the increasing number of companies that use layoffs as a strategic method and the increasing number of studies that indicate little or no long-term benefits to the organization. Without substantive evidence of the financial or competitive advantages of downsizing, onlookers may assume that the process is a knee-jerk reaction to either internal or external pressures (Fisher and White 2000).

The continued use of downsizing as a strategy makes it worthy of a study. To date, no one has chronicled the history and use of downsizing within the healthcare industry. The purpose of this article is to provide a literature review of downsizing in healthcare organizations. Attention is paid to literature that is focused on providing a framework for conceptualizing this salient trend.

For many businesses, including those in healthcare, downsizing means the loss of employees, positions, departments, or product lines. Its goal is to cut waste; improve profitability (Gertz and Baptista 1995); increase productivity (McKinley, Sanchez, and Schick 1995); and enhance local, national, or international competitiveness (Cameron 1994). To use today's vernacular, companies seek to be "leaner and meaner." Facilities that are struggling financially may undergo one or more stages of downsizing to regain or retain competitiveness. This process, however, is riddled with problems. The facility may experience loss of institutional expertise and memory (Fisher and White 2000), an increase in personnel problems such as absenteeism and lowered morale (Kivimaki et al. 2000; Laabs 1999), and greater potential for decreased quality (Murphy and Murphy 1996).

To refocus attention toward the anticipated goal, downsizing is often called different names such as productivity improvement, right sizing, cost reduction (Cash 1993), growth in reverse (Cascio 1995), restructuring, or reengineering, to name a few (see Cameron 1994 for an exhaustive list). For the purposes of this article, downsizing is defined as a reduction in personnel through position elimination (Cascio 1993). In this article, we present theories explaining why organizations use downsizing and highlight the shortcomings of these theories for prescribing action. We also explore industry trends and offer some practical explanations of why downsizing continues to be viewed as a viable strategic option.

THEORETICAL PERSPECTIVES

To meet environmental demands, the organization may make changes to its structure, strategy, and products and services. Population ecology (Hannan and Freeman 1977) and institutional theories (DiMaggio and Powell 1983) provide alternative perspectives on organizational change. The former theory emphasizes the significance of environmental pressures, highlighting how these pressures affect survival. The latter theory underscores the importance of maintaining legitimacy by meeting societal or industrial expectations.

Population Ecology Theory

Population ecology theory examines organizational change from an evolutionary perspective (Hannan and Freeman 1977, 1989). According to this viewpoint, the external environment determines the optimal characteristics of the population of organizations. To survive in their environment, organizations must adapt to the constraints. The adaptation process may force organizations to decrease their size or product and service mix. Population ecology theory posits that rampant downsizing in an industry occurs when the environment imposes an optimal form for organizations--that is, when the population is undergoing metamorphosis. By meeting the demands of the environment through downsizing, an organization increases its chances of survival.

Institutional Theory

DiMaggio and Powell (1983) offer an institutional perspective for why an organization may choose to downsize. Institutional theory views downsizing as one response to environmental uncertainty. The organization chooses this strategy because it provides a semblance of control. When executives are unable to predict the environment, they are more likely to make adjustments that may be similar or identical to the actions of other organizations. An important nuance of this theory is that imitation can occur among organizations without any credible evidence of a causal link between improved performance and downsizing. From this theoretical perspective, downsizing serves as a legitimating strategy and buffers organizations against further chaos associated with uncertainty.

Although managers may not explicitly view downsizing from a particular theoretical perspective, they create implicit assumptions among other organizations whenever they use this strategy. Hence, executives may choose this strategy because the trade literature, professional associations, and executive training programs suggest that it can result in performance improvements when an organization is a certain size.

DOWNSIZING IN OTHER U.S. INDUSTRIES

Studies have noted the lack of conclusive evidence supporting long-term benefits of downsizing (Bally, Bartelsman, and Haltiwanger 1994; Cascio 1995; Dougherty and Bowman 1995; Lewin and Johnston 2000). In fact, many of the anecdotal reports (Byrne 1994; Chandler and Bums 1994; Godfrey 1994) and empirical studies highlight the negative effects of downsizing on surviving employees (Armstrong-Strassen 1998), productivity, and profitability (Madrick 1995; Rubach 1995).

Downsizing has occurred in almost all U.S. industries. On one hand, approximately 80 million new jobs have been created since 1982; on the other hand, almost 40 million jobs have been eliminated (Merrifield 2000). With U.S. economic growth uneven and uncertain, we can expect to see a renewal of downsizing throughout many industrial sectors. For example, in December 1999, Eastman Chemical Company laid off 1,150 employees (Brister 2000), a move that was part of an overall downsizing project by its parent company, Eastman Kodak, to decrease global staffing by 20,000 (Elkin 1998). During 2001 to 2002, various companies resorted to mass layoffs, including Boeing Company, which cut 2,900 positions; BAE Systems, which eliminated 1,700 jobs; Isuzu Motors, which let go of 3,300 employees; IBM, which downsized 1,180 people (The Daily Deal 2001); VF Corporation, which reduced 13,000 jobs; Sears, which closed 4,900 positions (Florian 2001); and American Airlines, American Eagle, and TWA, which slashed 19,000 jobs collectively (Glynn 2002). By the end of 2001, Fortune 500 companies reported cumulative layoffs of 1,040,466 positions (Florian 2002a); by April 2002, more layoffs were reported, adding 255,260 lost jobs to the already staggering numbers (Florian 2002b).

DOWNSIZING IN THE HEALTHCARE INDUSTRY

During most of the twentieth century, U.S. firms were focused primarily on growth. From the 1950s to the 1980s, the large multidivisional organization was a common design (Heenan 1989). Following this business trend, hospitals became medical centers that provide a variety of inpatient and outpatient services. However, beginning in the mid-1970s and accentuated by the passage of the prospective payment system (PPS) in 1982, health services organizations (HSOs) faced environmental and technological changes that influenced assumptions about the relationship of size and efficiency.

Because human resources account for approximately 41 percent of expenses in service industries (Sunderland 1999), decreasing personnel costs through downsizing offers substantial savings. The use of downsizing as a strategy has been deafly established in trade and academic journals, but empirical studies about this topic are relatively sparse. The lack of empirical support for the effectiveness and success of restructuring efforts may have serious consequences. As Burke (2001) noted, the efforts to introduce major changes without evidence of their value to patients and the healthcare system might result in more damage than improvements. This sentiment is echoed in the work done by Aiken, Clarke, and Sloane (2001). They state that the healthcare system is subjecting seriously ill patients to the "unknown consequences of organizational reforms" without sufficiently evaluating their adoption (Aiken, Clarke, and Sloan 2001, 438).

Table 1 presents a list of various studies, which were identified after a search of the National Library of Medicine database using the medical subject headings, "hospital restructuring" and "personnel downsizing." The search was limited to articles published between 1985 and 2002. Although the articles in Table 1 highlight useful information, they do not address the broader question of why facilities are downsizing.

Table 2 presents studies that focus on the relationship of staff reductions to organizational closure and costs. This article focuses on these studies because they are not only empirically based, their methodologies also allow for discussion.

As an Antecedent to Closure

Lee and Alexander's (1999) longitudinal study of the rate of closures of community hospitals between 1981 and 1994 reported that downsizing coupled with a change in leadership precipitated hospital closure. As a strategy, downsizing seems to produce better results if implemented when the HSO is least in flux. In other words, downsizing may be detrimental when it is used in conjunction with other knowledge-disrupting events such as leadership changes.

As a Cost-Control Method

Given increasing competition, low unemployment, and continuing pressures to increase profitability, HSOs are continually seeking ways to control costs (Greising 1998). As noted earlier, human resources account for at least 41 percent of expenses and present the best target for cost savings. In their study of downsizing among rural hospitals, Mick and Wise (1996) did not find any support for a positive relationship between downsizing and financial performance. They attributed this finding to poor planning prior to the downsizing. Conversely, Woodard, Fottler, and Kilpatrick (1999) studied the restructuring process of an academic medical center from planning to implementation and found that revenues increased following the downsizing. Thus, further research may be necessary to distinguish between the long-term and short-term impact of downsizing among HSOs.

Bazzoli and colleagues (2002) examined 153 hospital mergers occurring between 1989 and 1996. The results of this study showed that substantial reductions in part-time and full-time nursing staff occurred after a merger, regardless of the type of services offered by each of the hospitals. The study consulted the American Hospital Association's annual survey to determine whether downsizing was systemic within the industry or had become a post-merger strategy. Bazzoli and colleagues concluded that staff reductions were more likely to reflect merger strategies rather than industry-wide elimination of nursing positions.

Mathews and Duran (1999) examined the impact of downsizing on a single hospital, which underwent five separate staff reductions between 1994 and 1998. The purpose behind each reduction was to decrease costs, and each reduction targeted different staffing levels (e.g., upper management, middle management, product line staff, etc.). The study found that although costs decreased, the decrease did not meet the expected rate. Furthermore, Mathews and Duran observed that productivity increased following the early staff cuts of 1994 and 1995, but productivity was unaffected following latter cuts. Although this study offers insight on the downsizing process, its generalizability is limited. Hence, the outcomes experienced by this hospital may or may not be experienced by other facilities.

Iverson and Pullman (2000) sought to determine the factors that predicted voluntary and involuntary turnover within a hospital in Australia. The study measured the relationship of both types of turnover with demographic, sociological, and six economic variables. Iverson and Pullman found that although certain demographic and sociological variables had significant and differing relationships with voluntary and involuntary turnover, absenteeism was the only economic variable negatively related to involuntary turnover. However, like the Mathews and Duran (1999) research, this study also lacks generalizability.

Effects of Downsizing

Armstrong-Stassen, Cameron, and Horsburgh (1996) studied nurses' satisfaction in three hospitals in Ontario, Canada, in 1991 and 1992. The 1991 study was performed at a time when the hospitals were experiencing a nursing shortage, and the 1992 study measured satisfaction after staff restructuring. The results of these studies showed that overall job satisfaction remained relatively unaffected. However, the nurses did report less satisfaction with certain aspects of their job and work environment, including job security, treatment of laid-off nurses, and supervision. This study emphasizes the necessity for effective communication before and during the downsizing process to mitigate the perceptions that the HSO violated its psychological contract with its employees.

In another study by Armstrong-Stassen, Cameron, and Horsburgh (2001), the reactions of nurses who had been transferred from one hospital unit to another were examined. The data collected in 1995, before some nurses were transferred, indicated no significant differences among the nurses on outcome variables such as organizational support, job satisfaction, and organizational identification. However, the data collected in 1997, after some nurses were transferred, suggested that those who were moved to another unit perceived significantly less coworker and organizational support, trust, and overall satisfaction than those who remained on their original unit.

Wagar (2001) conducted a study to explore the results of permanent workforce reductions. Specifically, the study examined the effects of the reductions on performance and employee satisfaction. Wagar's findings suggest that reductions in workforce resulted in a decrease in workplace performance (based on responses from union management), but the findings were inconclusive (based on responses from the employer). Additionally, permanent reductions resulted in an increase in the number of grievances filed, absenteeism, conflict, poorer supervisor-union employee relations, and lower overall employee satisfaction.

The manner in which the organization downsizes has been shown to tentatively mitigate the negative outcomes usually associated with workforce reductions (Rondeau and Wagar 2001b). The findings of the Rondeau and Wagar study suggest that the size of the reductions was less significant than the manner in which the HSOs dealt with employees during the process. In other words, those HSOs that considered their employees in the process (e.g., providing long periods of notification, allowing employee input) were able to decrease negative outcomes such as dissatisfaction.

Moore (2001) employed three hospitals in his study to learn nurses' reactions to the restructuring process and to assess the impact of restructuring on nurses' well-being. The results of this study suggest that the level of restructuring has a significant effect on the level of nurse stress. The manifestations of stress included feelings of burnout, lower professional self-efficacy, and intentions to leave the organization. However, these feelings were mediated by the perception of social support and by positive coping styles, specifically by viewing the restructuring as a challenge to be mastered. This study also suggests that participation in the restructuring process mediated the manifestations of stress.

In summary, the findings of these quantitative studies suggest that organizations do not always achieve the anticipated outcomes following staff and service reductions. However, the small number of empirical studies limits our ability to understand the full impact of downsizing or its relationship with organizational goals and outcomes. The presence of numerous anecdotal reports does allow us to offer several suggestions on why HSOs engage in this practice. The next section presents some of the lessons we learned from organizations that successfully achieved their goals following facility downsizing.

LESSONS LEARNED

The studies presented in this article revealed that when HSOs view downsizing as a useful part of the organizational life cycle, it can be used to refine the organizations' strategic focus. Most importantly, the studies indicated that protecting the surviving employees should be an integral part of the downsizing process and is necessary for the organization's long-term success.

Refining Strategic Focus

According to Kilpatrick (1988), downsizing is a natural response to the dynamism of the healthcare environment. For example, before 1983 very few rural hospitals reported staff decreases; by 1988, however, 15.1 percent of the 797 rural hospitals cited in a study by Mick and Wise (1996) reported some form of downsizing. Changes in Medicare reimbursement brought about by the Balanced Budget Act of 1997 resulted in a loss of 15,700 jobs in Massachusetts and are expected to reduce 22,900 more positions in the area by 2005 (Massachusetts Hospital Association 2000). Clearly, downsizing is associated with environmental changes. When used to respond to the constant flux in healthcare, downsizing becomes a component of the life cycle.

Downsizing before an environmental jolt can allow an HSO to choose how the cut will be made and can free up organizational resources, which may provide a buffer for the organization in the event of future jolts or crises (Gee 2000). Planned downsizing can also result in improved efficiency because the HSO may be able to focus on improving core competencies and niche activities (Bruton, Keels, and Shook 1996; Johnson 1997). Core competencies are activities in which the HSO excels and by which the HSO maintains market share and competitive advantage. This is an important outcome, as HSOs compete on the basis of service offerings. Although the general perception in healthcare is that bigger is better, the actual key to gaining competitive advantage in service industries may be the organization's ability to acquire skilled staff and release those who do not meet performance standards (Charan and Colvin 2001).

In contrast, reacting in response to a crisis (such as a drop in stock prices or decreased access to capital) may result in the HSO making across-the-board cuts. Such cuts, as Leatt and colleagues (1997) portend, will often penalize the most efficient units of the organization, thus decreasing its competitive advantage. Additionally, cutting in response to suggestions from market analysts or bond insurers may further establish an unhealthy cycle of downsizing, rehiring, and further downsizing that may leave the HSO in a constant state of flux.

Downsizing needs to be selective to avoid harming core competencies and businesses. The process should seek to maintain healthy staff and protect against low morale and productivity losses (Cascio 1995; Collins and Noble 1992). The goals should be both to legally discharge staff whose performance does not meet standards and to eliminate departments that do not contribute to core business functions. By cutting employees who are low performers, the likelihood of employee morale being hurt decreases. At the same time, cutting non-core services allows an organization to retain its core competencies and to outsource non-core tasks (Lewin and Johnston 2000). Such cuts are easy to justify and reduce the apprehension of the remaining employees.

Another component of selective cutting is making the process inclusive by soliciting staff input. Detroit Medical Center provides an example of the benefits of soliciting input from staff to determine which non-core activities and staff to cut (Hudson 1997). The CEO of the medical center recognized that the first step to implementing a systemwide downsizing was to eliminate the majority of the center's 16 boards. Although presenting this idea to the boards was a difficult task, it was nonetheless successful. The board members agreed that the organization needed streamlining, so the number of boards was decreased to three. Similarly, realizing that restructuring and downsizing were necessary to ensure survival, Lehigh Valley Hospital and Health Network in Allentown, Pennsylvania, chose to involve its staff in the process from start to completion (Nordhaus-Bike 1997). Employees submitted more than 1,000 suggestions on how the network could cut costs, suggestions that were projected to result in a $75 million savings over five years. Although the network did employ staff reductions, only 29 people out of 3,600 lost their jobs and 55 vacant positions were eliminated.

The results reported in Hudson's study are similar to those reported by Collins and Noble in their 1992 study of Kitchener-Waterloo Hospital, a regional acute care hospital in Ontario, Canada. Facing budget constraints, the administration of the hospital determined that streamlining was necessary. The lesson the hospital learned from its experience is that although downsizing is painful, it can be effective if clear and candid communication to staff is ensured and if it is included as part of the overall strategic plan. As a result of the hospital's effective planning, the staff reductions were achieved through attrition and yielded an annual savings of $2 million.

Leatt and colleagues (1997) suggest that across-the-board cuts, although politically acceptable, may not be in the best interest of the HSO because the HSO may lose valuable staff. Adequate planning can ensure that downsizing cuts are consistent with the strategic goals of the organization and that sufficient focus is given to maintaining and improving efficiency. For example, Health One Corporation in Minnesota focused on extensive planning before and during its downsizing. This planning effort resulted in the organization successfully achieving its goals while more than 90 percent of its 1,500 laid-off employees found positions in other facilities in less than 30 days (Leatt et al. 1997).

These positive conclusions are generally supported by Walston, Urden, and Sullivan (2001), who for six years focused their research on reengineering in hospitals. Their research results show that the promises of reengineering (e.g., improved efficiency, better financial performance, etc.) often did not result in better performance. Consistent with Leatt and colleagues' findings, Walston, Urden, and Sullivan concluded that reengineering can succeed if sustained over a long period of time as part of an overall strategic plan.

Protecting Staff

Regardless of the benefits of downsizing or the need for it, strategies are necessary to protect remaining staff. The prevailing opinion is that for downsizing to be effective and strategically beneficial, an implementation plan must be in place (Clark and Koonce 1995; Moore 1994). Without some sort of plan, determining who should be discharged and what effects downsizing will have on the HSO is difficult (Kilpatrick 1988).

The plan can act as a natural defense, protecting employees within the technical core from unnecessary or crippling assault. Riverside Community Hospital in California offers an example of the benefits of protecting staff (Sherer 1997). Immediately following a facilitywide downsizing, the hospital implemented open forums to increase management and staff communication and to provide an environment in which management could address staff issues. Had the hospital not focused on employee morale, the entire downsizing process would not have been as successful. Furthermore, given the connection between staff and patient satisfaction (Miller 1999), efforts to maintain staff satisfaction after layoffs should ensure that patient satisfaction does not suffer.

Arndt and Duchemin (1993) reported on the use of informal support activities as another staff-protection method at Queen Elizabeth Hospital in Toronto, Ontario, Canada. These activities were designed as information exchanges that benefit staff and protect patients from hearing rumors from staff. In addition, management facilitated workshops that were intended to educate staff on the downsizing process. The process was successful, and Arndt and Duchemin support its use by other facilities.

The downsizing plan should be part of the personnel policy manual. It should provide details about how employees will be chosen for dismissal and should foster a sense of equity (Kilpatrick 1988). Although opinions differ on the length of time employees should have from announcement to actual termination, the HSO should provide outplacement support services (Moore 1994). (A study by Hershey [1972] found that having advanced knowledge of the pending layoffs does not adversely affect productivity or morale.) Providing support for discharged employees will help them move from shock and anger toward acceptance and a focus on their future.

The plan should also include treatment of the survivors--those who remain with the HSO (Armstrong-Stassen, Cameron, and Horsburgh, 1996, 2001; Kilpatrick 1988). Addressing survivors' concerns and fears early is important, as survivors may feel guilty because they have jobs and they may lose trust and confidence in management. Furthermore, they may sabotage the organization by decreasing productivity (Ciancio 2000). Particularly damaging for HSOs is if quality of care suffers as a result of the actions of unmotivated, surviving clinical staff. Reestablishing trust and loyalty and improving morale are vital for the HSO. Management should have frequent meetings with surviving staff and include them in the rebuilding process. According to Clark and Koonce (1995), effective survivor programs will focus on employee empowerment and reestablishing loyalty.

When everyone understands that downsizing will help the HSO to achieve its goals (e.g., profitability, service improvements, etc.) and that these goals will benefit all, the chance for downsizing success improves. Allowing employees and various levels of management to be a part of the process may help the HSO obtain information on where cuts should be made, thus ensuring that those who remain are the productive members of the staff.

CONCLUSION

Given the mixed evidence regarding the long-term benefits of downsizing, further empirical studies are needed to assess if and when downsizing is beneficial. The current quantitative and qualitative studies seem to indicate this overarching conclusion: for staff reductions to be effective, long-term and structured planning must be in place. Because good staff morale is critical, an effective downsizing plan will provide resources for dismissed staff and remaining staff. By helping staff to adjust to the changes, HSOs may realize some of the expected benefits of this process.

Future studies should investigate the types of downsizing practices that improve organizational survival and prosperity. Furthermore, given HSOs' use of downsizing to respond to the Balanced Budget Act of 1997, further empirical studies are needed to determine how HSO managers currently use downsizing. It is important to determine the differential effect of using downsizing as a quick fix versus using it as part of the strategic process to control and redirect growth.

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Ihlenfeld, J. T. 2000. "Misconceptions Regarding Restructuring of Registered Nurse Positions in Western New York and Southern Ontario." Hospital Topics 78 (1): 23-26.

Iverson, R., and J. Pullman. 2000. "Determinants of Voluntary Turnover and Layoffs in an Environment of Repeated Downsizing Following a Merger: An Event History Analysis." Journal of Management 26 (5): 977-1004.

Jackson, M., and R. Massanari. 2000. "Reengineering and Infection Control Programs: Commentary and a Case Study." American Journal of Infection Control 28 (1): 44-50.

Johnson, D. 1997. "Paying for the (Alleged) Sins of Columbia." Health Care Strategic Management 15 (10): 2-3.

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Kilpatrick, A. 1988. "Humanizing the Downsizing Process in Hospitals and Other Health Care Organizations." Journal of Health and Human Resources Administration 10 (4): 336-50.

Kivimaki, M., J. Vahtera, J. Pentti, and J. Ferrie. 2000. "Factors Underlying the Effect of Organizational Downsizing on Health of Employees: Longitudinal Cohort Study." British Medical Journal 320 (7240): 971-75.

Kovner, C. 2001. "The Impact of Staffing and the Organization of Work on Patient Outcomes and Health Care Workers in Health Care Organizations." The Joint Commission Journal on Quality Improvement 27 (9): 458-68.

Laabs, J. 1999. "Has Downsizing Missed Its Mark?" Workforce 78 (4): 30-38.

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PRACTITIONER APPLICATION

Robert C. Chapman, FACHE, president and CEO, Eastern Health System, Inc., Birmingham, Alabama

The current economic environment of healthcare and the economy in general tells us the next few years will continue to be difficult. Escalating operating costs of labor, drugs, supplies, and so forth; workforce shortages in certain critical patient care professions; inadequate reimbursement rates for Medicare and Medicaid; increasing number of uninsured; advancements in technology; and growing consumer expectations place extreme pressures on hospitals, healthcare organizations, and healthcare managers to increase market share and revenues and to reduce costs. Actions to improve operational efficiencies and effectiveness are essential to improve and preserve the organization's financial strength for future growth and long-term survival.

As a response to both external and internal pressures, hospitals and healthcare organizations either have developed or are planning to develop a performance improvement plan as an integral part of their strategic plan. Such a plan addresses core business strategies, market share and revenue enhancements, supply and workforce cost reductions, and capital needs. One strategy for addressing the cost of human resources is organizational downsizing or rightsizing. Even though downsizing has its pros and cons, many executives believe that integrating this strategy in the overall performance improvement plan is essential in healthcare today.

This article provides an excellent review of literature on downsizing over the last 17 years. Although inconclusive regarding downsizing benefits, this review provides much value to a hospital, healthcare organization, and healthcare manager planning and implementing downsizing as a strategy for performance improvement. The article refers to the growing healthcare trend of using downsizing as a strategy and explains the trend's purpose, effects, risks, and success factors. Some potential risks addressed include hindrance of strategic objectives, reduced employee productivity and satisfaction, and loss of good performers and organizational knowledge.

The article noted that the manner in which an organization downsizes is critical in reducing the negative outcome generally associated with workforce reductions. Some of the ways to encourage positive feelings about this strategy include (1) demonstrating the value of the strategy by continuously integrating it into the organization's overall strategic plan; (2) developing a sound, long-term implementation plan that includes measures to protect remaining staff, to involve employees in the process, to improve communication between management and staff, to include the strategy permanently in the personnel policy manual, and to ensure adequate severance and outplacement services; and (3) being selective to avoid harming core competencies and business by concentrating on administrative and nonpatient care support costs and processes.

In the past, downsizing was generally a last resort and was a result of strategic planning failure. Although the downsizing strategy has potential risks, it can be very valuable today if integrated into the organization's performance improvement and strategic plan.

For more information on this article, please contact Dr. Davis at jdavis@cba.ua.edu

Jullet A. Davis, Ph.D., assistant professor, Management and Marketing Department, The University of Alabama, Tuscaloosa; Grant Savage, Ph.D., professor, Management and Marketing Department, The University of Alabama; and R. Thomas Stewart, doctoral candidate, Management and Marketing Department, The University of Alabama
TABLE 1
General Downsizing Studies

Author                                       Summary

Pre- and Post-Downsizing Advice

Arndt and Duchemin            Focuses on the needs of stakeholders
(1993)                        following service cuts and describes
                              informal activities and workshops
                              instituted to provide support for
                              staff and protect patient service

Baumann, O'Brien-Pallas,      Highlights the lack of uniform approaches
Deber, Donner, Semogas,       to downsizing and discovers that most
and Silverman (1996)          downsizing exercises were implemented
                              from the top

Collins and Noble (1992)      Offers advice and a case study on
                              downsizing; Kitchener-Waterloo Hospital
                              achieved cost savings by methods other
                              than layoffs

Holland (1998)                Finds that productivity could be
                              increased by instituting goals for staff,
                              information technology, and outsourcing

Jackson and Massanari         Offers advice on dealing with cost-
(2000)                        containment challenges, including layoffs

Kilpatrick (1988)             Discusses stages of organizational crisis
                              and effects of termination

Leatt, Baker, Halverson,      Provides framework for analyzing
and Aird (1997)               downsizing and reengineering and explores
                              consequences of cost-reduction strategies

Lineweaver, Battle,           Provides staff-development advice
Schilling, and Nail (1999)

Mahoney (1990)                Gives advice on improving efficiency
                              using restructuring and downsizing

Montgomery and Johnson        Emphasizes the importance of knowing the
(1996)                        full ramifications of staff reductions

Rondeau and Wagar             Studies 285 Canadian acute care
(2001a)                       hospitals; it suggests that in the
                              absence of significant organizational
                              restructuring, downsizing can result in
                              compromised performance due to lack of
                              slack resources

Rosenstein (2000)             Reports that VHA West's executive
                              integrated hospital report card shows
                              that significant savings can be achieved
                              through benchmarking labor costs and
                              productivity and that significant
                              savings in material and supply costs
                              can be achieved through competitive
                              contracting and standardization

Taylor and Kleiner (1998)     Follows the experience of six
                              organizations undergoing mergers and
                              layoffs

Umiker (1999)                 Points out that downsizing can be
                              detrimental unless coupled with
                              compassionate measures

Woodard, Fottler, and         Finds that revenues increased
Kilpatrick (1999)             following the staff reduction and
                              organizational restructuring

Survivor Issues

Aiken, Sochalski, and         Discovers that in spite of downsizing,
Anderson (1996)               job availability for nurses remains
                              high

Armstrong-Strassen (1998)     Examines the impact of downsizing on
                              survivors by gender and position

Blythe, Baumann, and          Explores restructuring and "survivor
Giovanetti (2001)             syndrome" among nurses

Brockner, Davy, and Carter    Studies manipulated layoffs conducted
(1985)                        on undergraduates; it suggests that
                              quantity of task performance was higher
                              after dismissal of fellow employee and
                              that self-esteem was a moderator for
                              increased productivity only in those
                              with low self-esteem

Brockner, Grover, Reed,       Uses experiment and field study to show
DeWitt, and O'Malley          that employees reacted more negatively
(1987)                        when they perceived inadequate
                              compensation for laid-off employee
                              (experiment) and lower commitment to
                              organization (field study)

Burke and Greenglass          Indicates that nurses changing units
(2000a; 2000b; 2001)          experienced greater stress, more
                              negative outcomes, and poorer
                              psychological well-being

Davidson, Folcarelli,         Reports that downsizing contributes
Crawford, Duprat, and         to a decrease in nurses' job
Clifford (1997)               satisfaction

Havlovic, Bouthillette, and   Discusses survivors' report that they
Van der Wal (1998)            experienced lower job satisfaction with
                              new jobs following the layoff

Ihlenfeld (2000)              Observes a lack of communication,
                              changed job responsibility, and
                              increased job frustration and
                              insecurity among nurses after
                              downsizing

Keuter, Byrne, Voell, and     Examines the relationship between
Larson (2000)                 nurse satisfaction and facility
                              changes

Kivimfiki, Vahtera, Pentti,   Indicates that downsizing was
and Ferrie (2000)             associated with increased levels of
                              work demands and job insecurity and
                              decreased levels of skill discretion
                              and participation

Mesch, McGrew,                Suggests that coping strategies seem
Pescosolido, and Haugh        to alleviate initial stress but sees
(1999)                        a greater likelihood of workers
                              encountering conflict in their next
                              job

Miller, Flynn, and Umadac     Suggests using an educational program
(1998)                        to prepare staff for post-layoff
                              changes

Valent (2001)                 Focuses on the impact and response of
                              staff and patients to layoffs and
                              closures

Young and Brown (1998)        Highlights the prevalence of
                              downsizing and the importance of
                              communication

Management Issues

Acorn and Crawford            Surveys 200 first-line nurse managers
(1996)                        and highlights their roles during
                              layoffs

Cascio (1993)                 Shows that surviving employees become
                              narrow minded, self-absorbed, and risk
                              averse

Collins and Noble (1992)      Lays out lessons to be learned from
                              downsizing to minimize effects

Fisher and White (2000)       Finds that only 41 percent of downsized
                              companies report productivity increases
                              and only 37 percent have realized
                              long-term gains in shareholder value;
                              also observes that downsizing may
                              adversely affect learning capacity

Freeman (1999)                Indicates that when downsizing drives
                              organizational redesign, there is less
                              participation and less effort is exerted
                              to change; but when redesign drives
                              downsizing, there is increased
                              participation, more communication, and
                              greater systematic analysis

Lee and Alexander (1999)      Narrates the case of a staff reduction
                              and the loss of the CEO, which preceded
                              hospital closure

McKinley, Zhao, and Rust      Presents a sociocognitive model of
(2000)                        downsizing that presents the schema and
                              institutionalization of the concept
                              among managers

Murray (1999)                 Examines satisfaction of nurses who were
                              laid off from hospitals and now work in
                              home care

Shanahan, Brownell, and       Discusses downsizing, budget cuts, and
Roos (1999)                   bed closures positively associated with
                              hospital charges

Preventing Staff Cuts

Auerbach, Rock, Goldstein,    Presents ways to prevent staff
Kaminsky, and Heft-           reductions
Laporte (2000)

Ritter-Teitel (2002)          Features reconceptualization of nursing
                              practices into multidisciplinary teams
                              as means to combat cost containment

Patient and Quality-of-Care Issues

Brownell, Roos, and           Studies access and quality of care
Burchill (1999)               unaffected by bed closures and
                              downsizing

Etienne and Langenberg        Suggests a model for maintaining
(1996)                        quality care in light of facility
                              downsizing

Flannery, Hanson, Penk,       Reports on an increase in assaults on
Pastva, Navon, and            staff by patients during facility
Flannery (1997)               downsizing

Kovner (2001)                 Discusses relationships between
                              staffing and health of healthcare
                              workers and patient outcomes

Miller (1998)                 Offers suggestion on how to maintain
                              quality I.V. services during staff cuts

Mullner and Rydman            Suggests that PPS under Medicare would
(1990)                        lead facilities to concentrate on
                              providing outpatient services, such as CT
                              scans and physical therapy, as a means to
                              protect against closure

Murphy and Murphy             Reports that hospitals using across-the-
(1996)                        board cuts to reduce workforce by 4
                              percent could lead to a 200 percent
                              increase in the likelihood to experience
                              statistically significantly higher
                              mortality rates

Robertson and Dowd            Indicates that impact of staffing
(1996)                        practices may negatively affect quality

Robertson and Hassan          Observes that staffing levels, often
(1999)                        sacrificed during layoffs, are
                              positively associated with quality

TABLE 2
Empirical Studies Exploring the Use of Downsizing

Author                                      Summary

Cost Control

Bazzoli, LoSasso, Arnould,   Examines hospital mergers between 1989
and Shalowitz (2002)         and 1996 and concludes that reductions
                             in nursing staff have become a major
                             merger strategy

Iverson and Pullman          Finds that different factors contributed
(2000)                       to voluntary and involuntary turnover
                             within the study hospital

Mathews and Duran            Studies downsizing across five time
(1999)                       periods and finds that overall costs
                             increased after two of the events

Mick and Wise (1996)         Reports no support for a positive
                             relationship between downsizing and
                             financial performance

Effects of Downsizing

Aiken, Clarke, and Sloane    Hypothesizes that increased nurses'
(2001)                       workloads and nonpatient responsibilities
                             accompanied by a deteriorating work
                             environment may have adverse effects on
                             patients

Armstrong-Stassen,           Shows that downsizing affected nurses'
Cameron, and Horsburgh       satisfaction with career future, hospital
(1996)                       identification, supervision, and coworkers

Armstrong-Stassen,           Suggests that nurses transferred to other
Cameron, and Horsburgh       units because of amalgamation or other
(2001)                       restructuring measures perceived less
                             organizational and coworker support and
                             were generally less satisfied in their
                             position than the nontransferred nurses

Moore (2001)                 Concludes that the level of restructuring
                             had a significant effect on the levels of
                             nurses' stress

Rondeau and Wagar            Studies Canadian acute and chronic care
(2001b)                      facilities and suggests that the size of
                             workforce reductions is less significant
                             than the manner in which workforce
                             restructuring is carried out, it also
                             observes that a proactive approach
                             mitigates loss of organizational
                             identity, job dissatisfaction, and
                             efficiency

Wagar (2001)                 Indicates a strong, negative relationship
                             between employee satisfaction and
                             workforce reduction and opines that
                             downsizing may be related to increased
                             grievances, higher absenteeism, and
                             poorer supervisor-union member relations

Walston, Urden, and          Discovers that the promises of healthcare
Sullivan (2001)              facility restructuring do not necessarily
                             translate into improved performance and
                             that reengineering should be part of a
                             long-term strategic plan
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