The Hidden Costs of Downsizing?

Managers who think downsizing will boost profitability need to be aware of its potentially damaging long-term effects, according to a new study in the Journal of Service Research (JSR). Mahesh Subramony of Northern Illinois University and Brooks C. Holtom of Georgetown University, who published “The Long-Term Influence of Service Employee Attrition on Customer Outcomes and Profits” on July 24, 2012 in JSR, kindly provided the following commentary about their findings:

How does losing your key staff affect your service brand and future profits?

In our past work with service firms, we have observed that employee turnover can result in a loss of valuable human capital and affect customer service levels. However, we found very little research linking the decline in customer service levels with the erosion of the firm’s brand image or the resultant negative effects on profitability. Moreover, most past studies examined the performance outcomes of either voluntary turnover or downsizing, but not both. We conducted our research to address these gaps in literature.

Our study examined the influence of service employee attrition on customer outcomes and profits using time-lagged data obtained from more than 5000 customers and 1500 full time staff working for 64 business units of a temporary help services (staffing) firm. We found that high levels of attrition—whether through downsizing or voluntary turnover—have a negative impact on customer perceived service brand image (SBI), which predict subsequent declines in unit profitability. Specifically, high voluntary turnover units had significantly lower customer service scores and staff of units that engaged in high levels of downsizing had significantly lower levels of customer orientation or focus. Both customer service and customer orientation levels, in turn, influenced SBI. Further, units that had strong SBIs tended to be more than four times more profitable than units with weaker SBIs. These findings highlight the financial benefits of creating positive SBI in the minds of customers as well as the importance of controlling employee turnover, and improving customer orientation and service delivery levels.

The primary practical implication of this work as it relates to downsizing is to be cognizant of its potential impact. Similar to the delay in observing the positive effect from marketing actions or service enhancements designed to improve satisfaction, the negative effects of downsizing are most likely to be delayed. Thus, while there are obvious financial savings from planned attrition, there may be material long-term financial implications from downsizing that managers may not predict. However, these hidden costs from downsizing and turnover may be significant and therefore important for managers to anticipate.

Read the article in the Journal of Service Research. To learn more about the journal, follow this link.

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