Merits of Downsizing Seen as Business Myth

During the 1960s, a favorite description of a well-managed, prosperous corporation was ''fat and happy.'' Today the equivalent buzz phrase is ''lean and mean.''

That shift in imagery could partly explain the continued eagerness of many corporate executives to ''downsize'' - despite the findings of numerous academic studies that massive layoffs mostly don't improve company performance.

Bosses ''must be cautious of turning to downsizing before considering other alternatives,'' says Patricia Norman, a doctoral student at the business school at the University of North Carolina at Chapel Hill who has studied the issue.

Downsizing apparently has peaked. Nonetheless, it continues at a rapid pace. Layoffs through July of this year amounted to 235,500, down from 319,000 for the same period last year, according to a count of major company downsizings kept by Challenger Gray & Christmas Inc., an outplacement firm.

''What is so paradoxical is that [the prolonged wave of downsizing] has taken place precisely in a period of expansion,'' says John Challenger, vice president of the Chicago-based firm.

Moreover, since 1989 business profits have soared to historically high levels. The increase in 1994 would have provided companies $120 billion above 1952-79 average profit rates, a sum that if given to employees, would have raised hourly compensation by 4 percent, estimate Dean Baker and Lawrence Mishel of the Economic Policy Institute.

In the past, corporations usually made major personnel cuts only when forced to by poor financial conditions. Executives argue that they must downsize to improve competitiveness and responsiveness to change, especially in a global market, and to provide a better return on company equity.

But David Osborne suspects that ideological and other nonrational factors are influencing company executives. A doctoral student at Southern Illinois University at Carbondale, Mr. Osborne conducted a computerized search of business publications that company executives read and found the ''lean and mean'' phrase used more than 500 times in five years.

''It has acquired legitimacy because it has been mentioned so often,'' he says. ''It is built into the popular culture, deriving its imagery from the physical-fitness movement.''

Osborne figures other popular phrases - such as ''no pain, no gain'' and ''flatten down'' - have been transferred from the gym to the office by executives making layoff decisions.

Another psychological factor behind ''business myths'' about downsizing, he says, is the desire of executives to be ''heroes'' to stockholders and other owners of corporations.

But the academic evidence indicates executives rarely do their companies any favors by putting large numbers of employees on the chopping block. Ms. Norman, for example, studied 109 companies that had downsized intentionally (rather than out of absolute financial necessity) between 1986 and 1989. He found in most cases no increased performance, as measured by return on equity, even two years after the downsizing was completed. Even companies making structural and/or strategic changes in conjunction with work-force reductions, usually saw no gain.

Firms, however, that restricted cuts to white-collar jobs did show a significant improvement in performance over two years, Norman reported at a recent Academy of Management meeting.

The summer issue of California Management Review includes an article indicating that downsizing disrupts a company's capacity to innovate by damaging ''entrepreneurial networking'' within the firm. Employees have fewer avenues to gather support and resources, note the authors, Deborah Dougherty of McGill University in Montreal, and Edward Bowman at the Wharton School at the University of Pennsylvania in Philadelphia.

Another study by Vincent Barker III and colleagues at the University of Wisconsin at Milwaukee compared 34 matched pairs of firms engaged in downsizing. One group experienced a turnaround after a period of decline, and the second group continued to falter. But there was no evidence that turnaround firms downsized sooner or to a greater extent than those still faltering.

''When companies run into problems, they downsize as a matter of course,'' Mr. Barker says, ''no reluctance to pull the trigger - and maybe there ought to be.''

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