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Why Downsizing fails: A Case Study

In 1996 John Kotter from Harvard Business School famously stated that 70% of change programs fail. Twelve years later in 2008, McKinsey surveyed 3199 executives and showed that nothing had changed with the fail rate holding at an obstinate 70%. More recently in 2013, Towers Watson reported that despite the sophisticated change management advice available, only 25% of transformation projects are successful.

The reasons identified for such dominant fail rates range from failing to ‘prepare managers as effective change leaders’ and ‘management behaviour not supporting change’ to neglecting the remaining staff and managers calling the change process complete too early.  Regardless of the study, the causality is centred around the people side of change.

As a career coaching firm, this link between organisational success and the human factor is not a surprise. However, we want to understand the financial cost of the human variable so we gathered the published research and ran a case study on a typical downsizing scenario.

CASE STUDY
In this example, a 100 headcount business is making 10 roles redundant. Using validated research we identified the direct cost, indirect cost and opportunity cost that can be expected in this scenario.  We then looked at the difference between the average outcomes compared to an ‘effective separation’ process to assess the predicted financial impact of a professionally run project.

KEY FINDINGS

• The real cost of redundancy is 6 times the direct cost;
• The cost savings of an effective separation process are $54K saved per exiting employee;
• ROI for professional outplacement is 12 times the investment.

CALCULATING THE COST
When assessing the cost of making roles redundant, most businesses calculate the direct cost of the redundancy payout and the legal fees involved.  However, very few consider the indirect cost or the opportunity cost.

For a complete breakdown of each calculation and cited references.

DIRECT COSTS                   [severance package and legal fees]
$19,208 per redundancy based on average tenure, average salary plus average legal costs.

Direct costs are $192,080 for 10 redundancies.

INDIRECT COSTS               [absenteeism, turnover and productivity]
Indirect costs are caused by changes in the behaviour and output of remaining staff after role redundancy.  Engagement, job satisfaction, commitment and productivity are all impacted.

In this case $370,035 can be attributed to absenteeism; $239,301 to unwanted turnover and $358,952 to lost productivity based on published averages.

OPPORTUNITY COSTS    [time investment]
$79,688 is the estimated opportunity cost in this case based on management time and lost value creation.

THE REAL COST OF DOWNSIZING
Therefore, the real cost of downsizing in this case is $1.24 million or 6 times the direct cost. While the variables will shift in every live scenario, we can use this as a baseline ratio.  If your business is expecting a downsizing event, the most accessible figure is your direct costs.  You can multiply this figure by 6 to estimate the real cost to your business without intervention.

INVESTMENT IN OUTPLACEMENT
While there are highly credible strategy and change management consultants delivering valuable know how to their clients, a more targeted option in this case is a professional outplacement or ‘Career transition’ firm who are specialists in staff separation and post-change engagement.

More specifically, these firms

• support impacted employees with their next career move;
• advise the organisation on effective separation process and communication;
• support remaining staff and managers to adapt and reboot their career with the company.

The rationale for providing outplacement can be divided into three arguments:
MORAL                              “It’s the right thing to do”
BRAND                              “We need to protect our brand / reputation”; and
FINANCIAL                       “Managing this well will protect our balance sheet”.

While all three play a role in the success of a downsizing project, this business case focused on the financial perspective.

In this case, a typical investment in an outplacement program is $39,900 or 3% of the total cost of redundancy. This combines career transition coaching programs [$30,000 @ $3,000 per person] and change workshops for remaining staff and managers [$9,900].

THE COST SAVINGS OF EFFECTIVE SEPARATION
With expert advice and professional support, an outplacement provider facilitates an effective separation process. While the event will always be challenging, the right support ensures that all staff are treated with dignity and respect.  As a preventative measure, the experience of outplacement specialists also allows the business to avoid errors that they would have otherwise made.

Aberdeen Group [2011] demonstrate that companies who provide outplacement services experience a ‘highly engaged’ staff percentage of 60%, compared to 33% for firms who don’t provide outplacement. They also detailed the case of a financial services organisation who engaged an outplacement provider to assist with their their separation process. 50% of remaining staff were ‘highly engaged’ after the event, compared to an industry average engagement rate of 35%.

Building on this and using our example, here are the conservative business expectations of an effective separation process.

VARIABLE	AVERAGE	EFFECTIVE SEPARATION
ABSENTEEISM	Absenteeism rises 2.5 times	Absenteeism rises 1.5 times
PRODUCTIVITY	Productivity drops 20%	Productivity drops 10%
	Productivity is impacted for 3 months
TURNOVER	4 examples of unwanted turnover	2 examples of unwanted turnover
COST OF REDUNDANCY	$1,240,052	$695,110
		COST SAVING $544,942 [$54,494 per employee]

Even an effective process will not eliminate all of the negative impacts of change and uncertainty, however these are mitigated by managing this well.  Above and beyond the moral and branding implications, you can conservatively expect to save $54,494 per impacted employee through effective separation.

With an outplacement investment of $3,990 per person, the net saving per impacted employee is $50,504. This represents a return on investment [ROI] of over 12 times the outplacement expense.


LITIGATION RISK
Additionally, this case study does not include the substantial cost of potential litigation which is estimated to be between $13,500 [Productivity Commission, 2015] to over $1 million per employee. In our experience, professional outplacement support migrates the litigation risk to zero with not a single client taking this action.

CONCLUSION
We know that the vast majority of transformation programs fail and the cause relates to the way that people are managed and engaged. In this case, an investment in effective downsizing is not only a fraction of the overall business cost, it also represents clear ROI in cost savings.

CEO CHECKLIST
Here are the practical steps that the research and our own business case identify for the CEO facing a downsizing event:

• Factor in support for the remaining organisation at the start of the project;
• Engage an end to end outplacement partner to assist with the preparation, the event and the post change environment;
• Focus on effective training and coaching for people managers in the remaining organisation – this is your front line;
• Expect a shift in engagement, yet listen and respond to staff needs;
• Treat everyone with dignity, professionalism and respect. Sounds basic however some formal processes work against these principles.

Downsizing will always be challenging, however these fundamentals will give your business the best opportunity to survive and thrive.

Christopher Paterson

Managing director at ALCHEMY Career Management

Christopher Paterson is the managing director of ALCHEMY Career Management, a firm of coaches and organizational psychologists who support individuals and organizations around the world with executive coaching, career transition, Wellness@Work™ and change management programs.

The World's Crystal Ball - A look into the future

 A GLIMPSE INTO WHAT THE FUTURE HOLDS FOR US. 
 

In 1998, Kodak had 170,000 employees and sold 85% of all photo paper worldwide.

Within just a few years, their business model disappeared and they went bankrupt.

What happened to Kodak will happen in a lot of industries in the next 10 year - and most people don't see it coming. Did you think in 1998 that 3 years later you would never take pictures on paper film again? Yet digital cameras were invented in 1975. The first ones only had 10,000 pixels, but followed Moore's law. So as with all exponential technologies, it was a disappointment for a long time, before it became way superior and got mainstream in only a few short years. It will now happen with Artificial Intelligence, health, autonomous and electric cars, education, 3D printing, agriculture and jobs. Welcome to the 4th Industrial Revolution. Welcome to the Exponential Age.

Software will disrupt most traditional industries in the next 5-10 years.

Uber is just a software tool, they don't own any cars, and are now the biggest taxi company in the world. Airbnb is now the biggest hotel company in the world, although they don't own any properties.

Artificial Intelligence: Computers become exponentially better in understanding the world. This year, a computer beat the best Go player in the world, 10 years earlier than expected. In the US, young lawyers already don't get jobs. Because of IBM Watson, you can get legal advice (so far for more or less basic stuff) within seconds, with 90% accuracy compared with 70% accuracy when done by humans. So if you study law, stop immediately. There will be 90% less lawyers in the future, only specialists will remain.

Watson already helps nurses diagnosing cancer, 4 time more accurate than human nurses. Facebook now has a pattern recognition software that can recognize faces better than humans. In 2030, computers will become more intelligent than humans.

Autonomous cars: In 2018 the first self driving cars will appear for the public. Around 2020, the complete industry will start to be disrupted. You don't want to own a car anymore. You will call a car with your phone, it will show up at your location and drive you to your destination. You will not need to park it, you only pay for the driven distance and can be productive while driving. Our kids will never get a driver's licence and will never own a car. It will change the cities, because we will need 90-95% less cars for that. We can transform former parking space into parks. 1,2 million people die each year in car accidents worldwide. We now have one accident every 100,000km, with autonomous driving that will drop to one accident in 10 million km. That will save a million lives each year.

Most car companies might become bankrupt. Traditional car companies try the evolutionary approach and just build a better car, while tech companies (Tesla, Apple, Google) will do the revolutionary approach and build a computer on wheels. I spoke to a lot of engineers from Volkswagen and Audi; they are completely terrified of Tesla.

Insurance companies will have massive trouble because without accidents, the insurance will become 100x cheaper. Their car insurance business model will disappear.

Real estate will change. Because if you can work while you commute, people will move further away to live in a more beautiful neighborhood.

Electric cars will become mainstream until 2020. Cities will be less noisy because all cars will run on electric. Electricity will become incredibly cheap and clean: Solar production has been on an exponential curve for 30 years, but you can only now see the impact. Last year, more solar energy was installed worldwide than fossil. The price for solar will drop so much that all coal companies will be out of business by 2025.

With cheap electricity comes cheap and abundant water. Desalination now only needs 2kWh per cubic meter. We don't have scarce water in most places, we only have scarce drinking water. Imagine what will be possible if anyone can have as much clean water as he wants, for nearly no cost.

Health: The Tricorder X price will be announced this year. There will be companies who will build a medical device (called the "Tricorder" from Star Trek) that works with you phone, which takes your retina scan, you blood sample and you breath into it. It then analyses 54 biomarkers that will identify nearly any disease. It will be cheap, so in a few years everyone on this planet will have access to world class medicine, nearly for free.

3D printing: The price of the cheapest 3D printer came down from 18,000$ to 400$ within 10 years. In the same time, it became 100 times faster. All major shoe companies started 3D printing shoes. Spare airplane parts are already 3D printed in remote airports. The space station now has a printer that eliminates the need for the large amount of spare parts they used to have in the past.

At the end of this year, new smart phones will have 3D scanning possibilities. You can then 3D scan your feet and print your perfect shoe at home. In China, they already 3D printed a complete 6-storey office building. By 2027, 10% of everything that's being produced will be 3D printed.

Business opportunities: If you think of a niche you want to go in, ask yourself: "in the future, do you think we will have that?" and if the answer is yes, how can you make that happen sooner? If it doesn't work with your phone, forget the idea. And any idea designed for success in the 20th century is doomed in to failure in the 21st century.

Work: 70-80% of jobs will disappear in the next 20 years. There will be a lot of new jobs, but it is not clear if there will be enough new jobs in such a small time.

Agriculture: There will be a 100$ agricultural robot in the future. Farmers in 3rd world countries can then become managers of their field instead of working all days on heir fields. Aeroponics will need much less water. The first petri dish produced veal is now available and will be cheaper than cow produced veal in 2018. Right now, 30% of all agricultural surfaces is used for cows. Imagine if we don't need that space anymore. There are several startups who will bring insect protein to the market shortly. It contains more protein than meat. It will be labeled as "alternative protein source" (because most people still reject the idea of eating insects).

There is an app called "moodies" which can already tell in which mood you are. Until 2020 there will be apps that can tell by your facial expressions if you are lying. Imagine a political debate where it's being displayed when they are telling the truth and when not.

Bitcoin will become mainstream this year and might even become the default reserve currency.

Longevity: Right now, the average life span increases by 3 months per year. Four years ago, the life span used to be 79 years, now it's 80 years. The increase itself is increasing and by 2036, there will be more that one year increase per year. So we all might live for a long long time, probably way more than 100.

Education: The cheapest smart phones are already at 10$ in Africa and Asia. Until 2020, 70% of all humans will own a smart phone. That means, everyone has the same access to world class education. Every child can use Khan academy for everything a child learns at school in First World countries. We have already released our software in Indonesia and will release it in Arabic, Suaheli and Chinese this Summer, because I see an enormous potential. We will give the English app for free, so that children in Africa can become fluent in English within half a year.

Sweeping CPG Study Finds Magazines Deliver Biggest Bang for Buck, Digital Video Lags

Multi-Year Nielsen Catalina Study Compares Returns Across Media With Some Surprising Results

By Jack Neff. Published on June 14, 2016.

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Nielsen Catalina Solutions comparison of average increase in dollar sales by media in study across 1,400 CPG campaigns. Credit: Nielsen Catalina Solutions

What medium delivers the biggest bang for the buck? A new study provides a definitive answer, at least for packaged goods, and it's probably not the one anyone expected.

Magazines deliver by far the best return on ad spending when compared to TV, digital display and video, mobile and cross-media campaigns, according to a study set to be presented today by Nielsen Catalina Solutions at the Advertising Research Foundation Audience Measurement 2016 Conference in New York. The medium delivering the lowest return in the study is digital video, arguably the hottest for CPG marketers and for much of the marketing world.

The study appears to be unprecedented in scope in terms of looking at norms for return on ad spending (ROAS) across multiple media -- albeit only for CPG. The conclusions are drawn from analysis of 1,400 research projects spanning more than a decade across 450 brands.

The projects have been commissioned since 2004 by a variety of media companies and brands, but unlike most such research wasn't backed by a single sponsor or industry. Nielsen Catalina is using the term ROAS rather than the more commonly used return on investment (ROI) to help indicate that the results measure only incremental sales impact per dollar of advertising spent, not profit impact.

Magazines delivered ROAS of $3.94 per dollar of media spent. Digital video delivered only $1.53. Other media explored in the study -- TV, digital display, mobile and cross-media campaigns -- were in the middle, clustered around $2.50 per dollar of media spending.

Leslie Wood, chief research officer, Nielsen Catalina Solutions Credit: Advertising Research Foundation

Nielsen Catalina Chief Research Officer Leslie Wood was quick to point out that the differences between magazines and digital video were all about pricing. Magazines had the lowest cost per thousand impressions (CPM) in the study, and digital video the highest. Magazine audiences in the study were bolstered by inclusion of secondary audiences -- the pass-along readership that occurs everywhere from doctors' offices to friends' homes.

"Everybody wants to be in digital video," Ms. Wood said. "There is very little inventory, so the price is high. It's the reverse in magazines, which are undervalued in the marketplace.
 

When Nielsen Catalina looked at incremental sales per household reached, performance of all the media was more closely clustered. Magazines produced 26 cents of incremental revenue per household reached vs. 23 cents for digital video. TV came out on top at 33 cents.

Digital display had the lowest sales lift per household reached at 19 cents and the lowest sales lift per thousand people reached at $16.95. But it was average in ROAS because it had the lowest cost. The study covered mainly premium inventory and little or none was bought programmatically.

That cost data for all media came directly from either media companies or brands, so it reflects actual spending, not estimates, Ms. Wood said.

Increase in sales per household in Nielsen Catalina Solutions study. Credit: Nielsen Catalina Solutions

In terms of sales impact per thousand consumers reached, mobile fared best. But that was based on the relatively low reach of mobile -- which on average reached only 2% of consumers in the study -- so it had almost none of the diminishing returns that come from reaching the same people multiple times, like other media, Ms. Wood said.

Nielsen Catalina bases its research on audience-measurement panels of Nielsen and other partners with sales data from shopper loyalty programs collected by Catalina -- matching the same households to measure what media they saw and what they bought.

The study only covers CPG, and deeper analysis suggests media effectiveness may differ for other categories, because it even differs within CPG categories and brands. Big, high-market-share brands purchased frequently had the highest returns on media spending. Brands with smaller market shares or purchased infrequently had lower returns.

Some of the online display studies compiled for the research date to 2004, while measurement of other media types is more recent, with online video since 2007, TV since 2008, magazines since 2011 and cross-media studies since 2013.

To test whether effectiveness of TV, magazines or digital media had changed over time, Nielsen also compared media year by year -- meaning it looked at studies across all media only for 2013, 2014 and 2015 -- and found no meaningful trends in effectiveness, Ms. Wood said. Overall ROAS is lower in the NCS database since 2011, but that has to do more with the composition of brands and media types in the studies -- for example more small brands and more campaigns with digital video dragging down the average -- than with decline in overall media effectiveness, she said.

The study had no way of looking at the impact of creative effectiveness separately from media placement. But NCS did look at impact of different creative types, with ads featuring promotional appeals or coupons generally delivering higher returns than other types of ads.

Ms. Wood expects lively debate as various media groups look to turn the findings to their advantage. The data may suggest that magazines are undervalued and digital video overvalued. But will marketers defy trends by shifting funds back from one of the hottest media of recent years to one that's seen steady declines?

"If what I do changes behavior, I'd be thrilled," Ms. Wood said. "That's certainly the takeaway, that there are opportunities here to be looked at."

Much of the money that's been chasing digital video and driving up its CPMs has been driven by the search to find millennial and Gen Z audiences that have gotten harder to reach with conventional TV or magazines. But regardless of the demographics, the Nielsen Catalina data suggest there's plenty of sales impact to be had from older media.

One of the more surprising findings to Ms. Wood was the resilience of TV.

"What's interesting to me is that this happens at the scale that these media have," she said. TV has "dramatically higher reach" than the other media, averaging 57% of audiences in the Nielsen Catalina study vs. an average of 35% for campaigns overall and less than 10% for digital media, including only 2% for mobile. "Reach is expensive," Ms. Wood said. "So it's interesting that no matter how high its reach is, linear TV does a tremendous job of driving sales."

The study is in line with findings from another study released earlier this year by IRI and backed by Turner Broadcasting across 62 CPG brands representing $3 billion in annual media spending. IRI found TV return on investment has remained steady the past five years, despite challenges facing the medium, and that it generally was better than digital. As with Nielsen Catalina, IRI found big brands with high household penetration got by far the best return.

Increase in sales per thousand impressions in Nielsen Catalina Solutions study. Credit: Nielsen Catalina Solutions

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