Downsizing in a Learning Organization: Are There Hidden Costs?

Author(s): Susan Reynolds Fisher and Margaret A. White

Source: The Academy of Management Review, Vol. 25, No. 1 (Jan., 2000), pp. 244-251
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6 Academy of Management Review

2000, Vol. 25, No. 1, 244-251.

NOTE
DOWNSIZINGIN A LEARNINGORGANIZATION:
ARE THEREHIDDENCOSTS?
SUSAN REYNOLDS FISHER
Barry University
MARGARET A. WHITE
Oklahoma State University
Business practice has been at odds with organizational theory: whereas one manadivestiture of human assets, anothergerial "fashion"-downsizing-involves
learning-advocates
investment in human assets. We use a social network frame to
consider the impact of downsizing on organizational learning and propose that the
effects can be viewed as a nonlinear function of learning network size. From this
perspective the potential damage to a firm's learning capacity is greater than headcount ratios imply.

During the past decade, management theorists have proposed that investment in organizational learning capacity is the key to competing successfully
in the global marketplace
(Nonaka, 1991; Prahalad & Hamel, 1990; Senge,
1990). At the same time, managers continue to
use downsizing-and
other forms of restructuring-to improve productivity and gain the favor
of Wall Street (Ellis, 1998). Are these two organizational trends compatible? Can an organization that has invested in building its learning
capacity as a strategic resource elect to implement across-the-board
personnel reductions
without risk to its learning investment? In this
note we examine the relationship
between
downsizing and organizational learning by using a social network frame to consider potential
damage to learning and memory networks.

failed to achieve their intended goals, downsizing continues to be used, even in the best of
economic conditions. Among the companies announcing major workforce reductions in the final months of 1998 were Kodak, Woolworth, Citicorp, International Paper, Fruit of the Loom,
Montgomery Ward, and Levi Strauss (Ellis, 1998).
Annual surveys conducted by the American
Management Association show that only 41 percent of downsizing companies have reported
productivity increases, and only 37 percent have
realized any long-term gains in shareholder
value (Koretz, 1998). Clearly, downsizing is a tactic that is popular and enduring but not always
productive or valuable.
Freeman and Cameron (1993) have defined
downsizing as an intentional reduction in personnel intended to improve the efficiency or effectiveness of the firm. These authors suggest
that downsizing
often fails because broadbased personnel reductions inadvertently cause
dramatic changes in the deep-seated, informal
organizational structure when only incremental
changes were intended. One reason for this is
that downsizing necessarily impacts work processes and structure. Even when downsizing is
implemented without the intention of major restructuring, the net result is fewer employees
left to do the same amount of work. To counteract this imbalance, firms often take restructuring actions, to avoid potential negative conse-

DOWNSIZINGIN PRACTICE
Although downsizing once was viewed as an
indicator of organizational decline, it now has
shed that stigma and gained strategic legitimacy as a reorganization strategy (McKinley,
Sanchez, & Schick, 1995). Despite evidence
showing that many downsized companies have

We acknowledge the extremely helpful comments from

Rockie Lee DeWitt, Carrie R. Leana, and three anonymous
AMR reviewers.
244

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Fisher and White

such as overload
quences
and burnout
(Brockner, 1988; O'Neill & Lenn, 1995). Downsizing, therefore, generally results in some measure of restructuring.
In a study of downsizing in the U.S. automobile industry, Cameron, Freeman, and Mishra
(1991) found widespread implementation errors.
Most of the companies in the study experienced
deteriorating levels of quality, productivity, and
effectiveness as a result of using "nonprioritized" implementation tactics that did not allow
for "prediction of who would be eliminated, how
many would be gone, or which talents and skills
would be lost" (1991: 61). A case reported by
Cascio further illustrates this point: in a Fortune
100 company a $9 per hour bookkeeper was
downsized only to be hired back as a consultant
at $42 per hour after management realized that
"it lost valuable institutional memory" in the
process (1993: 99). This was an example of an
individual
employee
holding an important
"chunk" of learned expertise critical to the success of the organization.
Many organizational scholars view organizational learning and memory as social phenomena manifested at the group and organizational
levels, as well as within the individual (Argyris
& Schon, 1978; Walsh & Ungson 1991; Weick,
1979). When the social complexities of the organization are considered, it becomes evident that
nonprioritized downsizing has the potential to
inflict previously undetected damage on the
learning and memory capacity of organizations,
and that the size of this risk is more difficult to
estimate than the loss of individual expertise.
The common practice of expressing the magnitude of downsizing as a percentage based on
the ratio of employees removed to total workforce size is based on a view of the organization
as an aggregate of individuals. From this perspective, the loss of an individual in downsizing
is directly related to the quantity and value of
the information held in that individual's memory and not retained elsewhere in the organization. A different picture presents itself when the
organization is viewed as a collection of networks in which the interrelationships among individuals generate learning. Because a single
employee has multiple interrelationships,
the
elimination of an individual in downsizing can
damage the organization's learning capacity to
a greater extent than implied by a linear headcount ratio. This hidden risk to organizations is

245

serious and calls for the attention of organizational scholars and practitioners.
In the following discussion we demonstrate
that organizational learning can be generated
by social networks, and we use a simple example to estimate the magnitude of damage that
can result from the removal of an individual
from a learning network. This estimate indicates
that the damage potential of downsizing to organizational learning far exceeds that implied
by linear head-count ratios.

ORGANIZATIONAL
LEARNINGAS A SOCIAL
NETWORKPHENOMENON
The literature and research on organizational
learning are so fragmented that there is no
widely accepted model or theory (Fiol & Lyles;
1985; Glynn, Lant, & Milliken, 1994; Huber, 1991;
Shrivastava, 1983). Therefore, we draw from several extant theories to offer the following operational definition of organizational learning.
Organizational learning is a reflective
process, played out by members at all
levels of the organization, that involves the collection of information
from both the external and internal
environments. This information is filtered through a collective sensemaking process, vwhich results in shared
interpretations that can be used to instigate actions resulting in enduring
changes to the organization's behavior and theories-in-use.
This definition is based on a cognitive, social
network view of organizational learning. We assume that the organization is a social entity or
"cooperative system" (Barnard, 1938), in which
individual actors interrelate to produce a collective consciousness that is something more than
a simple aggregation of the attributes of individual members (Durkheim, 1938; Weick & Roberts, 1993). From this perspective, organizational
learning is viewed as "emergent from interpersonal and/or behavioral connections" and modeled "in terms of the organizational connections
that constitute a learning network rather than as
information transfer from one individual mind to
another" (Glynn et al., 1994: 56).
The definition also incorporates Daft and
Weick's (1984) concept of organizational learning as composed of information gathering and

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interpretative systems. Learning organizations

collect and process information from both external and internal organizational environments
and accumulate it as knowledge. This knowlthe firm's "memory"
edge base constitutes
&
(Walsh
Ungson, 1991; Weick, 1979), which is
held in the firm's files, records, procedures, and
policies, as well as in its culture (Kotter & Heskett, 1992), theories-in-use
(Argyris & Schon,
1996), and "communities-of-practice" (Brown &
Duguid, 1991).
One of the barriers to understanding the organizational learning process has been the difficulty in bridging the gap between what is
known about learning at the individual level
and collective learning (Fiol & Lyles, 1985; Hedberg, 1981). Weick's (1995) four-level framework
is particularly useful for understanding the levels of organizational learning. He identifies the
first level as that of the individual, or intrasubjective meaning. The second, intersubjective,
level is where information is interpreted and
shared meaning developed among individuals
and groups. The third, generic, level is where
the resulting knowledge is stored and preserved
over time, and the fourth, extrasubjective, level
includes macro phenomena, such as organizational culture and institutional artifacts.
Argyris and Schon (1978) have long held that
the knowledge developed through organizational learning is represented by the firm's theoriesin-use (generic level), which can only be understood by observing the patterns of interrelating
behavior among organizational members (intersubjective level). It is this interpretive engine at
the intersubjective level of the organization that
is the most vulnerable to the effects of downsizing.

THEIMPACTOF DOWNSIZINGON LEARNING

When organizational learning is viewed as an
aggregate of individual information processes,
individual memories represent essential pieces
of the organizational memory, and the loss of a
significant individual memory "chunk" can create a hole in the organizational memory that
damages ongoing processes. This is supported
by the anecdotal accounts of problems resulting
from eliminating
the wrong people during
downsizing, such as the bookkeeper described
earlier.
In contrast, when we assume that learning is
generated at the intersubjective level, we infer a

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social network frame. From the social network

perspective, learning is "'situated' within an interactive context," rather than in either the
minds of individuals or the organization, and is
subject to "system interaction effects" that are
"not located in individual learning entities or
"nodes' (i.e., individuals or organizations), but in
the connections between nodes" (Glynn et al.,
1994: 57). Social network thinking fits our definition of organizational learning with its focus on
shared interpretation. "The basic building block
of social network analysis is the relationship.
That is, the focus is on the link, or lack of a link,
rather than the actors" (Brass, 1995: 43). When a
social network frame is applied to the effects of
downsizing on organizational learning, we begin to see the magnitude of the potential risk to
learning.
Picture, for example, an organizational unit of
five individuals who interrelate on a regular
basis in the production of organizational output.
This unit is comparable to a network organized
around workf low, in that its members are linked
by "channels of communication and resource
exchange used in getting things done" (Ibarra,
1992). Although it may be a formal workgroup
documented by an organization chart, it more
likely has emerged on an informal basis (Brown
& Duguid, 1991) and consists of members with
different core responsibilities
who interrelate
with one another periodically to accomplish
subtasks of their main responsibility. Although
intermittent, these acts of interrelating embody
learning-by-doing and modifications based on
memory. In addition, each member may share
separate interrelationships on other tasks with
one or more members of the same network. For
example, all five members may be responsible
for interrelating on an annual project, while
three of the members work together on a
monthly project and four members interrelate on
a periodic basis on yet another activity. There
are a total of twenty-six possible subgroups embedded in this network of five that could (according to our definition) be the source of valuable organizational learning.
Now consider the effects of downsizing on this
network and its subgroups. If the organization
took action to reduce "head count" by 20 percent,
one individual would be lost to this network.
Remember, however, that this individual is a
potential member of fifteen subgroups out of the
twenty-six possible subgroups in this network of

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Fisher and White

five. If each of these fifteen subgroups acts to

generate learning, then the loss of one individual represents the potential loss of 57.6 percent
(15 . 26) of the learning capacity in this network
of five. These are nonlinear effects that intensify
dramatically as the size of the network grows. In
a network of twenty members, removing one
individual corresponds to a 5 percent reduction
in head count, but could result in a loss of up to
50 percent of the learning capacity in that network.
We acknowledge that this is a simplistic application of social network theory, and these
calculations represent a worst case scenario.
This scenario is based on the assumption that
all possible subgroups retain valuable, unique
learning capacity and that the loss of any individual will completely disable learning in every
subgroup he or she belongs to. This scenario is
very unlikely. However, given the disparity between magnitude of damage implied by headcount ratio (20 percent to 5 percent) and the maximum potential
damage based on loss of
learning networks (57.6 percent to 50 percent), it
is clear that, even at some point less than worst
case, the head-count ratio may be dangerously
misleading. The key to this disparity is that
head-count ratios are based on an aggregate
view of the organization
and focus on the
"nodes" or individual members, whereas the social network perspective considers the relational linkages in the intersubjective organizational network as the source of learning
capacity.
Burt's (1992) theory of structural holes offers
more insight into how the structure of learning
networks may impact the magnitude of learning
loss. Burt proposes that networks with relatively
weak linkage density but with heterogeneous,
rather than redundant, relationships are more
"efficient" than dense networks in which every
member shares similar links with all other
members. This logic suggests that removal of
individuals in dense networks with many redundant linkages would not necessarily impact organizational learning capacity in a significant
way. However, Burt also suggests that some individuals may be more strategically
linked
within the organization
than others. Those
whose relationships span structural holes and
account for a unique link between otherwise
unlinked clusters in a network can be critical to
the learning function. Removal of the individual

247

who accounts for such a strategic link among

diverse clusters would disconnect the clusters
from one another and inflict damage to organizational learning capacity far exceeding that
calculated in the example presented.
It is important to understand that both headcount ratios and network linkage calculations
are, at best, extremely coarse-grained estimates
of the impact of downsizing on organizations.
There is a need to consider the unique quality of
an individual-whether
based on network links
or individual knowledge and skill-when
contemplating such action. Neither head-count ratios nor our network linkage calculations reflect
these individual-level
differences.
Clearly,
firms should not attend only to network links
and disregard individual contributions. Individuals (nodes) as well as interrelationships (links)
can be repositories of valuable learning capacity. Our point is that the focus, to date, has been
entirely on the loss of individuals to the organization, and the organizational impact of downsizing has been estimated by aggregation of
individual-level data via head-count ratios.
It is well known that global organizational
phenomenon cannot always be described accurately by aggregating
individual-level
data
(Rousseau, 1985). When one considers the multiple relationships generated by one individual, it
is clear that, even in networks that do not conform to all of our assumptions, restructuring that
involves significant reductions in personnel
may inadvertently inflict damage on learning
networks that is nonlinear. Although linear
head-count ratios may correspond to the loss of
individual memory "chunks" to the organization,
such percentages understate the potential damage to the organizational learning capacity. The
following proposition summarizes this point.
Proposition: The magnitude of the potential damage to organizational
learning
capacity
resulting
from
downsizing is a nonlinear function
that results in a progressively greater
percent of capacity lost per individual
as the size of the operative learning
networks embedded in the organization increases.
In terms of Freeman and Cameron's (1993)
model of downsizing, the organization may inadvertently be causing dramatic changes in the
deep-seated informal organizational structure,

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when only incremental changes were intended.

Brown and Duguid echo this warning: "The reorganization of the workplace into canonical
groups can wittingly or unwittingly disrupt
these highly functional noncanonical-and
therefore often invisible-communities"
(1991:49).
Two studies lend support to this position.
Keller (1989) found that restructuring at General
Motors destroyed informal networks that were
critical to formal operational networks. After the
reorganization, "the whole organization had to
go fishing for that informal infrastructure. It
should have been managed along with the management of the formal structure" (1989: 119). In
another study Lei and Hitt (1995) related outsourcing to organizational
learning damage.
Outsourcing is a form of restructuring that often
involves personnel reduction when it is used to
replace a function that was once provided internally. In these cases it can have a similar damaging effect on organizational learning: "Outsourcing can erode the firm's potential for
organizational
learning and development of
new technologies" (1995: 836).

IMPLICATIONS
FOR THELEARNING
ORGANIZATION
Downsizing is a high-risk strategy in a learning organization. Managers aiming to neutralize
this risk must focus on the management of social networks and consider the dynamic interplay between and alignment of formal and informal structures (Ibarra, 1992). Top managers
seeking the competitive advantage of organizational learning capacity must consider critical
intersubjective networks when implementing
any restructuring involving movement of or reduction in personnel.
It is possible, however, that the risk we have
described is not generalizable to all types of
organizations. In tightly coupled, bureaucratic
organizations
with deeply embedded formal
structures and generic scripts, influence networks tend to mirror the formal structure (Ibarra,
1992). "The social network will overlap more
closely with the formally prescribed structure in
a mechanistic organization than in an organic
organization" (Brass, 1995: 54). In such cases generic control dominates, and intersubjectivity
becomes secondary (Weick, 1995). Organizational learning and memory in such organizations are formalized at the generic level in con-

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crete policies, structures, and routines, and

informal structures correspond closely with formal
hierarchy and functional workgroups. This makes
network connections highly visible and limits
the risk of unintentional downsizing damage.
Conversely, organizations in turbulent industries with heavy reliance on innovation have a
higher stake in organizational learning (Prahalad & Hamel, 1990). The loosely coupled nature of such organizations, with their relatively
flat formal structures and dependence on the
creativity that is generated at the intersubjective level, makes them highly vulnerable to the
hidden damage of downsizing. Organic organizations such as these have been found to contain networks high in density and connectivity
(Brass, 1995), and critical activities in such organizations "are frequently initiated, organized,
and implemented outside the domain of formal
approval processes" (Ibarra, 1992: 176). These
network-dependent organizations are at greatest risk of unexpected learning damage when
removing or moving personnel.
We must also recognize the threat of rigidity
(Leonard-Barton, 1992) and the need for "unlearning" (Bettis & Prahalad, 1995; Hedberg,
1981). It is possible that even in highly efficient
learning networks, routine can lead to parochialism and "groupthink" (Janis, 1972), or dramatic
environmental shifts (Schumpeter, 1950) may
suddenly require completely new organizational mindsets. In such cases, reduction or rearrangement of personnel may lead to improved
performance by quickly eradicating the dominance of memory-based knowledge and routine.
If the organization is successful in overcoming
the negative effects of such radical change and
establishes an environment conducive to network reconstruction, such action may also open
opportunities for creation of new network connections and new learning. March (1991) has
asserted that organizations should constantly
access the balance of "exploitation" of accumulated knowledge
and "exploration"" of new
ideas. Knowledge of learning networks should
aid managers in maintaining such a balance.

RESEARCHIMPLICATIONS
Our proposition points to several directions
for further research. First, we need to establish a
frame for making selecting-out decisions in a
way that considers their structural impact on

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Fisher and White

networks. Although the research

learning
stream on staffing and selection is rich, there is
no parallel body of research on the decision
criteria and the processes for effectively selecting employees out of an organization during
downsizing (Collarelli & Beehr, 1993). This is a
critical gap, because selecting out inherently
determines the ultimate composition of the new,
smaller workforce (Snow & Snell, 1993). To date,
decisions
selecting-out
largely have been
driven by considerations of legal liability (Lado
& Wilson, 1994).
Prioritized selecting-out decisions require systematic methods for tracking network connections on a continuing basis. The literature on
social network analysis is rich, and advances in
computer technology are making the mapping
of social networks more accessible to both practitioners and scholars. Social network scholars,
such as Krackhardt (Krackhardt & Hanson, 1993)
and Stephenson (as discussed in Hildebrand,
1998), are facilitating the transmission of these
theories and methods to the workplace, and reports are now surfacing that corporations are
successfully using this mapping technology to
identify barriers to communication and pockets
of innovation in their organizations (Hildebrand,
1998). These same tools could also be used to
study the potential impact of removing specific
individuals in the process of downsizing or restructuring. Maps of connectivity can help managers identify key intersubjective relationships
that should be preserved or those that will require repair after downsizing. Alternatively,
when personnel reduction is targeted at breaking dysfunctional routines and unfreezing detrimental rigidities (Bettis & Prahalad, 1995;March,
1991), these maps can help managers identify
individuals or networks that create barriers to
organizational learning and performance.
Managers also need information on what to
look for prior to making selecting-out decisions.
We offer three suggestions.
First, based on
Burt's (1992) theory of structural holes, it is critical to identify those individuals who represent a
singular link between otherwise unlinked network clusters. This link should be preserved or
replaced to limit network disruption and learning loss. Conversely, this may be the one link to
eliminate in a "therapeutic" action intended to
break dysfunctional ties.
Second, the assumption that learning is most
critical in loosely coupled, organic organiza-

tions can be extended to organizational subdivisions. Firms often manage their creative components differently from their line components
in order to foster innovation in such areas as
research and design, while promoting efficiency
in production (Daft, 1995). Our argument suggests that mapping hidden learning networks is
more critical in those divisions where creativity
and generative learning are prime resources.
Although learning networks may be important
in production areas, these networks are more
likely to parallel the formal organizational
structure in these subdivisions and, thus, be
transparent.
Third, upward communication is critical to
mapping hidden networks in loosely coupled
organizations or subdivisions. The knowledge of
network location, membership, and function lies
with the network members, rather than management. Social network research offers a wealth of
methods useful in collecting such information
from organizational members (e.g., Burkhardt,
1994; Burt, 1997; Feld, 1997).
Finally, researchers should use social network measures to map changes in the informal
organization networks before and after downsizing and restructuring (Courtright, Fairhurst, &
Rogers, 1989; Krackhardt, 1990). If future studies
are designed to incorporate these methodologies, the relationship between downsizing and
informal network changes may be compared to
short- and long-term organizational
performance. Such research might explain why downsizing has failed to deliver expected improvements in productivity.

SUMMARY
In this note we have asserted that downsizing-or any restructuring that involves broadbased personnel reduction or movement-may
seriously damage the learning capacity of organizations. Using the social network perspective, we have illuminated the magnitude of potential learning capacity loss resulting from the
deletion of one individual from an organizational network and have demonstrated that, because it is a nonlinear function, this loss is likely
to be far greater than that indicated by linear
head-count ratios. The magnitude of the potential risk makes it critical for managers to analyze the impact of downsizing and restructuring
on learning networks-both
formal and infor-

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implementing these strategies. Bemal-before

cause both organizational learning and restructuring can lead to better competitive position, it
is imperative to understand how these activities
are related to avoid inadvertently damaging
one while pursuing the other.

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Susan Reynolds Fisher is an assistant professor of education at Barry University in

Florida and a doctoral candidate at Oklahoma State University. She is currently
conducting a longitudinal study of radical change in the Orange County Public
Schools and developing a multilevel theory of organizational performance.
Margaret A. White is an associate professor of management and associate dean of
Undergraduate Programs and Administration at Oklahoma State University. She
received her Ph.D. from Texas A&M University. Her research interests include the
complexity of change in organizations, as well as organizational learning and wisdom.