Workforce Reduction (Downsizing)


The term workforce reduction refers to a corporate effort to lower costs through the termination of a relatively large number of employees.  The need for a reduction in workforce can be driven by internal as well as external factors.


Also known as downsizing and rightsizing, corporations typically embark on a workforce reduction effort to increase earnings.  The term is normally associated with a wide-reaching program that ultimately results in the termination of a relatively large number of the company's employees.  The perceived need to downsize an organization is usually driven by a number of factors, including:

  • Poor management decisions that allowed the number of employees in an organization to grow beyond the demand for their services.
  • Economic conditions, such as a recession, that results in a decline in the demand for the company's products or services.
  • Customer dissatisfaction with product quality or the reputation of a company, resulting in a decrease in sales.

The first step in a rightsizing effort is usually a bottom-up assessment of workload in various areas.  This assessment can result in the elimination of entire divisions, or a decision to close a specific operating plant.  Ultimately, a new organization will be designed that has significantly fewer employees.

Companies also have the option of lowering costs by instituting a hiring freeze, reducing overtime, and lowering salaries.  The workforce reduction process can also be made more palatable by providing employees with career counseling, outplacement services, exit incentives, or severance pay.

Related Terms

dismissal compensation, dislocated worker, exit incentives, severance pay, employee lending agreement