dures that alter established—and comfortable—ways of working. For others, there is the more palpable uncertainty about job secu- rity and company identity. Cumulative Effects of Stress The stress of an event is determined by the amount of change it im- plies, not necessarily whether the change will be beneficial or detri- mental. Marriages and births can be as stressful as divorces and deaths (Holmes & Rahe, 1968). Each event disrupts the status quo, entangles family and friends, and requires that people adapt to new circumstances. Many times, employees perceive resizings as offer- ing both costs and benefits. A reduction in force may be painful but may also lay the foundation for organizational renewal. A divesti- ture may disrupt current work patterns but also send a business unit to a corporate parent with a better strategic fit and deeper pockets for long-term investment. Thus, even positive changes induce stress. This point is important to consider because the effects of stress are cumulative. A series of small, seemingly innocuous changes can add up to a large and significant change in a person’s eyes. A situation becomes stress inducing when it taxes a per- son’s ability to cope effectively. Unsure of why change is occurring and how it may affect them—and unable to voice their concerns or control their fate—employees’ accustomed ways of coping with stress are exaggerated. It is commonplace in organizations engaged in a transition to see people handle stress through the fight-or- flight reaction. Interviews conducted with employees during or soon after resizings are laced with seething indictments of man- agerial ineptness and examples of strained working relationships across groups. By contrast, lethargy, detachment, and other signs of withdrawal can be found among white-collar professionals whose work keeps them out of political power circuits. Fight-or-flight reactions should be expected during and after a resizing, but they can be costly. Angry managers cannot work for the common good because they are itching for a fight and will poi- son the attitudes of their subordinates. Professionals who remain in body but not spirit after the resizing cannot be counted on to contribute fully to fact finding or decision making, but they will surely gripe openly about the resulting decisions. THE REALITIES OF RESIZING 21 TEAMFLY Team-Fly ® 22 RESIZING THE ORGANIZATION Stress also takes a toll on well-being. Increased drug and alco- hol abuse is common among workers surviving a transition. In one company we were consulting for during a resizing, Valium was the number one prescription drug purchased by employees each of the six months following initial layoffs. Frequently, calls to em- ployee assistance programs skyrocket, and it is common to hear re- ports of a variety of psychosomatic reactions to stress (for example, trouble falling asleep at night, headaches and back pain, smoking again after having kicked the habit, and increased tension and con- flict at home and on the job). Rates of illness and absenteeism swell at workplaces in transi- tion, and there are plenty of numbers to document the human and financial cost of resizing. At a Fortune 500 firm we studied, inci- dents of high blood pressure among employees rose from 11 per- cent in the year preceding a resizing to 22 percent in the year following its announcement. In a study conducted by Northwest- ern National Life Insurance, 65 percent of employees surveyed re- ported that they suffered from exhaustion, insomnia, or other stress-related problems; one-third revealed they were close to burnout. Stress saps between $100 and $300 billion annually from the U.S. economy in the form of lost workdays and health care costs related to illnesses like exhaustion, depression, and heart at- tacks (“Economy Creates More Stress,” 1992). The Saturation Effect Organizations may operate within a context of ongoing change, continuous improvement, and radical transformation, but people can handle only so much disruption to their accustomed norms (De Meuse & McDaris, 1994). We may be in the Internet age with tremendous technological advances, but the human machine has a breaking point. Over time, people’s threshold for dealing with stress, uncertainty, and disorientation is met. Their ability to cope with ongoing change is impaired, resulting in detrimental atti- tudes, maladaptive behaviors, disappointing performances, and the many other unintended consequences of resizing (Pfeffer, 1998). A resizing rarely occurs in isolation. Rather, it is part of an on- going series of real and perceived events that contribute to the cu- mulative stress experience. Consider a Silicon Valley high-tech firm’s history over a two-year period. After rumors of impending change and watching events occurring at other companies in their industry, the firm attempted minor belt-tightening measures to deal with the softening economy and poor financial results. Then the company made a more radical move with a major restructur- ing of operating units and, for the first time in its history, offered employees a voluntary early retirement program. These activities were followed by the divestiture of a business unit and the consol- idation of manufacturing operations, forcing the closing of a plant. With financial results still slumping, the company resorted to an involuntary reduction in force. As characterized in Figure 1.1, each of these events resulted in the experience of cumulative stress. By the time the involuntary re- duction in force was announced, many employees had become numbed by the dizzying course of events. The workforce suffered an intellectual and emotional paralysis brought on by their satu- rated coping capacity. They were psychologically worn out, unable to take on the responsibilities involved in meeting new challenges, and unwilling to give a good fight. Shortly after the involuntary reduction in force, the company’s leadership team saw a genuine potential for financial growth, or- ganizational success, and individual reward. These executives an- ticipated that after a long and difficult struggle, victory in an important battle was awaiting at the top of the next hill. They saw THE REALITIES OF RESIZING 23 Source: Adapted from Marks (1994, p. 77). Figure 1.1. The Saturation Effect. Stress Rumors and Vicarious Events Poor Economic Results Restructuring Voluntary Reduction in Force Divestiture of Business Unit Plant Closing Involuntary Reduction in Force Time Coping Threshold 24 RESIZING THE ORGANIZATION the goal and confidently rallied their troops on the mission at hand. The cry came to charge up the hill and take the prize. However, the troops were neither ready nor willing to charge up the hill. Rather than focus on the opportunity ahead of them, the employees were unable to let go of the pain behind them. Their vision of the target was obscured by the emotional residue of anger, distrust, and de- pression built up over years of false promises and unmet expecta- tions. Their self-esteem battered and their faith in the organization broken, the troops lacked confidence that they could take the hill. Most significant, they did not see how any personal gain would re- sult from taking the hill. Instead, they fixated on memories of their fallen comrades—the casualties of layoffs and closings and the “walking wounded” whose careers were sidetracked. Adaptation and Organizational Resizing To understand why living through a reduction in force, closing, or divestiture—as either a victim or a survivor—can be so debilitating to everyone, it is important to consider the process of psychologi- cal adaptation to change and transition. A change can be of two types: continuous change and transformational change. The dis- tinction is based on the extent to which the change requires psy- chological adaptation. Two Levels of Change Continuous change is a path to a known state, with orderly, incre- mental, and continuous steps. Moving a meeting from a 10:30 A.M. to a 10:00 A.M. starting time is an example of a continuous change. It may cause some disruption and require some adaptation; atten- dees may have to leave other meetings earlier or reschedule con- ference calls. Nevertheless, the discrete nature of continuous change lets people know exactly what to expect and allows them to get on with their lives. A transformational change, by comparison, is a path to an un- known state—something that involves many simultaneous and in- teractive changes. Adopting new ways of thinking, organizing, or conducting activities are examples of this type of deeper, more meaningful, and lasting change. Transformational change poses a break from the past. It involves death and rebirth; existing prac- tices and routines must be abandoned and new ones discovered and developed. A corporate cultural change—perhaps getting peo- ple to stop avoiding risk and start embracing the idea of learning from mistakes—is an example of a transformational change. A re- sizing that prompts a reassessment of deep-seeded perceptions and expectations (for example, “My employer respects and fairly treats all people” or “Hard work is rewarded here with job security”) also is a transformational change. Letting Go of the Old and Accepting the New For transformational change to occur, a person literally has to let go of the old before accepting the new. People have to abandon old attitudes or behaviors before adopting new ones (Bridges, 1980; Lewin, 1947). This helps explain why transformational change is a much more difficult psychological process than is con- tinuous change. Perhaps the classic example of a transformational change is adapting to the death of a loved one. People who expe- rience the loss of a family member, dear friend, or important col- league do not wake up the next day and get on with their lives. They grieve the loss of their loved one and struggle with accepting new realities. Some people take weeks to go through this natural and normal process, others take months, and still others take years. Some individuals never reach the stage of acceptance. Unlike a continuous change, in which they know exactly what to expect, mourners encounter tremendous uncertainty and insecurity re- garding their future. How will they go on living without their loved one? Who will they turn to for support? What will they do when they need assistance normally provided by the deceased? All of this is much more trying on a person’s well-being than simply getting to a meeting half an hour earlier. Ironically, CEOs who resize their companies have had time to let go of the old before accepting the new. Consider the case of the divestiture of a business unit; it takes months to plan a deal, search and select a buyer, and gain government approval for the sale. Dur- ing this time, executives can come to terms with the fact that the old is being abandoned (“I will no longer be running the largest company in our industry” or “The company I founded in my THE REALITIES OF RESIZING 25 26 RESIZING THE ORGANIZATION garage will never abandon its good performers”) and contend with new realities (“I am on the path to getting our firm back on sound financial footing” or “Our employees will no longer be weighed down by a money-losing division”). Most individuals, business executives among them, ignore or deny the discontinuous nature of transformational change. That is, they ignore or deny the need to let go of the old before accept- ing the new. As organizational consultant William Bridges puts it, beginnings start with endings. You do not start the new until you end the old. This takes time, effort, and patience. Bridges (1980) highlights three distinct stages of this transformational process: (1) letting go of the old, (2) dealing with the neutral zone, and (3) ac- cepting the new. During the first stage, letting go, the individual comes to see that the status quo no longer is appropriate for achieving what he or she desires. For example, a person in the midst of an involuntary reduction in force would have to abandon attitudes such as “this is a secure place to work.” The second stage, the neutral zone, is an ambiguous place in which the old is over but the new has yet to be achieved. That is, you are no longer what you were but not yet what you want to become. The employee will have to take some time to learn by trial and error what behaviors get rewarded in the chang- ing organization. It is truly a difficult period. Many of our clients dub this the “twilight zone”: it is dark, scary, and unclear as to what lies ahead. Finally, a new status quo emerges during the third stage of accepting the new. People who make it to this stage realize deep, meaningful, and lasting change. The employee not only accepts new attitudes about how tenable job security is in today’s work en- vironment, but also adopts behavioral changes such as networking with recruiters from other firms on a regular basis. Employees grow more comfortable with the new reality; externally they are more at ease, and internally they modify their self-image and develop a new sense of self-worth. Once employees figure out and accept new realities, they make sense out of their new world and grow more comfortable with it. Obviously, adapting to transformational change is much more psy- chologically taxing and is a much longer process than is adapting to continuous change. Even when change is for the better, people have to cope with uncertainty and the loss of familiar methods and routines. Transformational change implies the loss of the status quo, and that loss must be dealt with before people can fully move on in their work lives. Unintended Business Consequences of Resizing The costs of layoffs, closings, and divestitures have been measured in financial as well as human terms. The Laborforce 2000 study of downsizing and restructuring found that most companies surveyed experienced undesirable business consequences. Many companies were not prepared to handle the work that remained after a re- duction in force and underestimated the costs required to cover tasks that had been performed by former employees. Some 41 per- cent of the companies that resized reported a greater need to re- train remaining workers. This finding implies that costs were experienced as a result of taking people off their regular jobs and training them to do additional jobs. One-third of the companies increased the use of temporary workers and consultants, often at a cost higher than the expense of previous employees; a similar number increased the use of overtime. One in every four firms contracted out an entire function (Marks, 1993). In addition, health care costs incurred by organizations rise for both victims and survivors of resizings. It is easy to see how health care costs can increase for transition casualties. The psychological trauma of losing one’s position triggers psychosomatic ailments. Moreover, early retirees have more time on their hands and, as a re- sult, more time to visit a health care provider and ring up expenses. Not so obvious—but equally costly—are increased health care costs for the survivors, who also are subjected to the psychosomatic ef- fects of intense stress on the job. A study of Boeing employees found that individuals who experienced a high degree of emotional stress on the job were more than twice as likely to file back injury claims than other employees (Gaines, 1993). Working harder to cover the tasks of others also results in a higher accident rate. One study of 177 companies found that although the average workforce was cut by only 13 percent over a fifteen-month period, fully one- third of the firms reported an increase in workers’ compensation claims. One in five companies said their workers’ compensation costs increased between 50 and 100 percent (“A Study of Worker,” 1992). THE REALITIES OF RESIZING 27 28 RESIZING THE ORGANIZATION In yet another study, a team of English researchers investigated the physical and emotional health of 764 employees whose organiza- tions were downsizing. They found that employees in work groups experiencing job cuts were more than twice as likely to take sick leave as employees in a cohort work group (Kivimaki, Vahtera, Pentti, & Ferrie, 2000). If survivors perceive there may be another wave of layoffs, they likely will get the annual physical or dental work they have been putting off for the past several years. As for the impact of resizing on productivity, an American Man- agement Association study found that companies that had resized were as likely to report a decline in productivity as an increase. Fewer than half of the resized firms increased profits after the cuts were made, and one-quarter of them reported a decline in oper- ating profits. In testimony before the Joint Economic Committee of Congress, the study’s director concluded, “The after-effects of downsizing are problematic at best and raise the question as to whether the cure is worse than the disease” (Lesly & Light, 1992). There is a more subtle unintended business consequence of resizing. Recent authors contend that such activities disrupt or damage an organization’s ability to learn and adapt to the chang- ing environment because the informal communication networks are adversely affected (Fisher & White, 2000; Lei & Hitt, 1995). Ob- viously, there is a loss of corporate memory and organizational her- itage as long-term employees are terminated. Unless they are carefully managed, many of the more skilled and valuable em- ployees will choose to leave. Consequently, the overall knowledge base in an organization unwittingly can be lowered. No matter what the economic justification, an organization that chooses to resize as opposed to taking other steps (such as shorter workweeks, forced use of vacation times, or reductions in executive compensation) suffers the stigma of being perceived as a firm that is willing to cast its people aside in the search for prof- its. There is no doubt that prospective future employees regard a firm like Hewlett-Packard, which historically has been regarded as one of the best places to work in the high-technology industry, less favorably after it engages in involuntary reductions in force than before ever considering such an action. Moreover, there is no doubt that surviving employees at other plants and offices shud- der, feeling less secure and less satisfied with their employers when General Motors announces plant closings. And there is no doubt that future employees who will be acquired by Vivendi as the dy- namic firm continues to grow will recall how the French company divested thousands of employees as it picked through acquired Sea- grams, retaining the entertainment holdings while casting aside the core spirits and wine business. Ironically, it was the Spirits and Wine Division that generated profits enabling Seagrams to acquire its entertainment units. The unintended impact of resizing spreads beyond employee ranks and into the perceptions and behaviors of customers as well (Bastien et al., 1996). Customers fret when they hear that a com- pany with which they are doing business is about to lay off employ- ees, close an operation, or sell a unit. They know that employees will be distracted from work, productivity will plummet, and qual- ity will suffer. In fact, many manufacturing firms have gotten to the point where they automatically line up secondary sources when they learn a supplier is anticipating or engaging in a resizing. And when customers have had prior experiences with resizing firms—whether they are large industrial firms receiving raw materials of poor qual- ity or individual consumers fed up with waiting in long lines at a fi- nancial institution—they will take their business elsewhere. Resizing often is a sound and sensible strategy. We are not de- bating or questioning that point. Rather, our intent is to examine the various ways in which resizing has a direct and indirect impact on organizations and their stakeholders. Our goal is to identify the methods that can be used to minimize the unintended conse- quences while maximizing the opportunities to use resizing as a stimulus to build a new and better organization for the long haul. The Healthy Side of Organizational Resizing Certainly, organizations need to right-size by eliminating unnec- essary work, shedding underperforming or nonessential units, and responding to economic, legal, technological, regulatory, and con- sumer changes. If organizations did not change, they would not re- main competitive. Organizational leaders, however, must come to terms with the fact that the way in which they resize their opera- tions affects employee motivation, team performance, and orga- nizational effectiveness. THE REALITIES OF RESIZING 29 30 RESIZING THE ORGANIZATION Resizing does not imply that organizations are malevolent in their actions. In many cases, layoffs, closings, and divestitures are prudent business moves that enhance competitiveness and surviv- ability in the constantly changing business environment. The elim- ination of jobs at CNN following the AOL Time Warner merger, United Airlines’ closing of money-losing stations as firms slashed travel budgets in 2001, and Vivendi’s divestiture of a liquor busi- ness that was outside its managerial expertise are the kinds of steps that have to be taken to increase the likelihood that the firms, and their many remaining employees, will endure and prosper over the long term. Resizing can be beneficial for organizations and their people. Companies wallowing in red ink are wise to eliminate a portion— be it 5, 10, or even 20 percent—of the workforce to strengthen the survivability of the vast majority of employees. A serious assessment of workforce apportionment and strategic business mix is an inte- gral component of the organizational introspection needed to re- balance and reposition a firm and its resources to take better advantage of emerging market trends and technological changes. Transitions also can spark organizational regeneration. A CEO or business unit leader with the right mix of visionary and charis- matic leadership skills can rally employees around the notion that the transition is not only a necessary response to business realities, but an opportunity to improve how work is approached and con- ducted in the organization. Resizing holds the potential to un- freeze the organization and its people, providing a rare chance to change corporate culture dramatically and reinforce a new way of doing things. A middle manager or supervisor can use the un- frozen state as an opportunity to strengthen teamwork, increase ef- fectiveness, and identify and correct impediments to productivity in his or her work group. Individuals can experience a personal form of renewal as a re- sult of company resizing. Although many employees remain mired in maladaptive responses to the stress and uncertainty of a down- sizing or divestiture, others come to recognize that in crisis there is opportunity (Bardwick, 1995). One senior executive who had lost his job in a major organizational restructuring revealed, “When shrubs are transplanted, there is new growth and new life. I know, because it happened to me.” Searching out ways to gain from the . Threshold 24 RESIZING THE ORGANIZATION the goal and confidently rallied their troops on the mission at hand. The cry came to charge up the hill and take the prize. However, the troops were neither ready. to charge up the hill. Rather than focus on the opportunity ahead of them, the employees were unable to let go of the pain behind them. Their vision of the target was obscured by the emotional. unmet expecta- tions. Their self-esteem battered and their faith in the organization broken, the troops lacked confidence that they could take the hill. Most significant, they did not see how any