Innovation is not always harmed by 'downsizing'

What happens to a firm's innovative capacity when it sheds staff (or 'downsizes' to borrow the euphemistic term used in this article)?

by European Business Forum
Last Updated: 23 Jul 2013

Following the frenzied sackings of employees in often bloated companies in the 90s, the received wisdom was that many had gone too far and had lost their 'corporate memory'. While this was no good to those middle-aged employees on the scrap heap of life, it did allow the more humane manager to reassert his preference for hanging on to his people for as long as possible.

Then we entered the dotcom boom and bust in the late 90s and early 2000s during which the 'war for talent' shifted the balance of power back to the prized knowledge worker. More recently, the expansion of the global labour market has moved things in the other direction again, enabling companies to hire cheaper staff in other parts of the world. Note for instance the 100,000s of techies employed by US companies in India, and the subsequent loss of jobs in the same sector in the US.

This article examines an important, but less considered question: given innovation is as important as cost-cutting (more important perhaps), then is the decision to cut numbers an own goal in innovation terms? Unfortunately, this turgid article, which is riddled with indecipherable jargonese, does not make it easy to find an answer to this question. What, for instance, would you make of this sentence: 'Again following Nonaka, this involves four different patterns of interaction: socialisation (tacit to tacit), externalisation (tacit to explicit), combination (explicit to explicit), and internalisation (explicit to tacit)'.  

Its impenetrable language is a missed opportunity as the research mentioned shows that the answer is mixed and this is interesting. In some cases, reducing headcount has a negative impact on innovation and in some cases it is a positive one. For instance, it says, some employees (fearful of being sacked) may 'want to make explicit as much knowledge as possible' through documentation or meetings.

Fear of being 'downsized', therefore, drives 'externalisation' (one of the processes of knowledge creation in which tacit knowledge is made explicit). However, on the negative side, 'downsizing' reduces the 'stock of knowledge' as it replaces experienced workers with fewer less experienced ones. This can damage customer service, product development and break some informal networks that underpinned innovation.

The conclusion is open-ended. The authors say that the reason there are some positive outcomes could be because 'the reduction of the stock of knowledge creates pressure for more knowledge to replace it'. More research, they conclude, is needed if anyone is to establish the precise 'relationship' between the three identified components of innovation: stock of knowledge, creativity of individuals and knowledge-creation process. Managers, therefore, won't get any solid answers here but at least they will be alerted to the fact that there are contradictory consequences to reducing staff on the firm's innovative capability. 

Source: Creative destruction
Anders Richtnér, Stockholm School of Economics, and Pär Åhlström, Chalmers University of Technology
European Business Forum, Issue 27, Winter 2006
Review by Morice Mendoza


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