This story was written by the ILO Newsroom For official ILO statements and speeches, please visit our “Statements and Speeches” section.

Socially sensitive enterprise restructuring: swimming together or sinking separately

How can an enterprise restructure with maximum economic benefits and minimum costs to workers and society? It is often believed that downsizing has a positive impact on the performance of the company and the so-called "survivors". According to a new ILO publication, this is not always true in practice. Alternative options should be considered and if downsizing is necessary, it should be carried out in a socially sensitive way.

Article | 12 October 2005

GENEVA (ILO on line) - The employees of an international internet company were asked to meet with all colleagues in a conference room. There, a flipchart provided the names of those who had been dismissed, a total of 12 out of 32. Returning to their desks, employees found their files blocked, their e-mail accounts cancelled, and their phones disconnected.

"Some real-world approaches to displacement are actually quite shocking," comments Nikolai Rogovsky, Senior Specialist of the Management and Corporate Citizenship Program of the ILO and editor of the new publication. "Of course, these are extreme examples. The words Socially Sensitive Enterprise Restructuring (SSER) are now part of management literature and practice, but establishing and realizing a well-managed restructuring plan still remains a very difficult exercise."

Full of examples and case studies featuring good practice, the book demonstrates how many companies around the world have managed restructuring in a socially sensitive manner with global success. South African Breweries (SAB), one of the top five breweries in the world with interests in beverages, hotels and gaming, is one of them.

A tight market and increased competition forced SAB to lay off workers in the 1990s. While looking for employment alternatives for its retrenched workers, SAB found a partner in the Food and Allied Workers' Union (FAWU). Together with FAWU, SAB attended a workshop organized by the ILO in 1996 and, in the aftermath, founded the "Noah project". The idea was to develop small, new enterprises for former SAB workers.

Noah established centres in cities or towns in South Africa where dismissed SAB workers receive administrative, business and psychological support on a voluntary basis. So far, more than 160 new companies have evolved of these centres. Moreover, SAB has recently founded a business incubator, which will nurture 20 businesses. Other incubators, together with government and labour organizations, have been established and have already given birth to more than 100 new companies.

The example of SAB shows that labour-management relations are an extremely powerful factor contributing to both economic and social success in restructuring. "Restructuring goes smoothly if it is based on a joint agreement between employers and workers, and, in some cases the government", explains Rogovsky. "Although building up good working relationships between management and employee representatives or trade unions may be a long process, it is surely worth making the effort."

ZEIM Group, one of a few survivors of the Russian instrument building industry, is another good example. Working closely with the enterprise's trade union, ZEIM succeeded in gradually restructuring from a vertically integrated production system into a network of independent business units. Through judicious business development schemes, the company is now converted into a flexible semi-horizontal business system including 37 semi- and fully independent successful business units.

With the support of the ILO, the company set up a centre to assist displaced workers in finding new employment or starting private businesses, making use of the facilities and credits provided by the mother company. The company also invested heavily in training and re-skilling of managers and workers. As a result the total number of employees remained the same and has recently started to grow.

Restructuring for corporate success

Most downsizing exercises in recent years have failed to produce the improvements expected, mainly because the long-term costs were often higher than the short-term savings. According to the ILO study, the expected benefits of workforce reductions were not realized in over half the cases studied.

"The source of hidden costs that frequently escapes management's attention is the poor morale of survivors, caused by increased stress and its effect on work behaviour and attitudes", explains Rogovsky. "More than half of 1,468 downsized companies surveyed by the Society for Human Resource Management in the United States reported that employee productivity either stayed the same or deteriorated after the lay-offs. Another study estimated that the cost attributable to staff turnover was 1.5 to 2.5 times the annual salary and benefits cost for each employee leaving."

The study mentions other risk factors in the restructuring process, including absenteeism and sick leave, loss of key talent, decreased creativity and risk taking, poor external image of the company, and increased legal and administrative costs. As 'survivors' try to learn the jobs of the displaced employees while still doing their own jobs, they become increasingly stressed and overworked. Rogovsky refers to the case of an automobile worker in charge of ordering steel: "After he left, an order was placed for the wrong kind of steel. This resulted in a US$2 million loss for the company in down time, rework and repair."

According to Rogovsky, reducing the workforce is about managing human beings: "As the Swiss writer Max Frisch said, 'we asked for workers, and we got people'. The best way to avoid downsizing is to adopt a long-term policy that anticipates crisis, and to develop human resource management in order to contribute to the employability of workers. This will generate a better social climate, favour economic growth and peaceful labour relations, to the advantage of both the enterprise and its environment."

The study also refers to ILO Conventions on termination of employment (No. 158), equal remuneration (No. 100) and discrimination (No. 111), and their related Recommendations which can be used as benchmarks for good labour practice, particularly in restructuring processes. ILO activities in the area of socially sensitive enterprise restructuring are carried out along with other ILO projects aimed at the generation of more and better jobs, such as the global projects helping entrepreneurs to start, improve and expand their business.

Note 1 - Restructuring for Corporate Success, A socially sensitive approach, edited by Nikolai Rogovsky, ISBN 92-2-115430-0, International Labour Office, Geneva, 2005.