Downsizing can streamline corporate decision-making by reducing layers of management and bureaucracy, leading to faster response times and increased agility in market positioning . However, these improvements may come with drawbacks such as reduced employee morale, loss of institutional knowledge, and increased stress among remaining employees, potentially leading to burnout and decreased long-term productivity . Moreover, the violation of psychological contracts with employees can reduce trust and increase resistance to future organizational changes .

During the 1980s, downsizing was primarily used by weak companies facing demand erosion or severe competition, and it was not widely adopted . By the early 1990s, a broader range of companies, including strong firms like GE and GM, implemented downsizing to optimize resources and increase efficiency post-mergers and acquisitions . By the late 1990s and early 21st century, downsizing was driven by economic recession, global competition, and technological changes, becoming more prevalent globally and extending to developing countries . Moreover, the period saw a shift towards strategic alliances, lean manufacturing, outsourcing, and offering flexible work arrangements to mitigate downsizing impacts .

The resurgence of downsizing in the late 1990s and early 21st century, particularly in developing countries, was driven by a worldwide economic recession, increased global competition, the slump in the IT industry, and dynamic changes in technologies. Additionally, the rise in the availability of a temporary employee base contributed to this trend . Companies also aimed to reduce operational costs, right-size resources, and demonstrate proactive adjustments to changing business needs .

Short-term economic effects of downsizing often include cost reductions and possibly increased stock prices, due to decreased payroll expenses and operational efficiencies . However, long-term performance effects are mixed and not strongly beneficial; productivity loss due to workforce disruption, increased training costs for new or temporary employees, and diminished organizational reputation may offset initial financial savings . Ultimately, while downsizing might achieve short-term financial relief, it does not consistently enhance long-term profitability or valuation .

Survivors of downsizing often experience significant psychological stress, marked by increased workload, job insecurity, and mistrust of management, resulting in low morale and high stress levels . This 'downsizing syndrome' can lead to feelings of frustration, anger, depression, envy, and guilt, which negatively impact workplace atmosphere and employee relationships . Such a climate can reduce collective commitment to organizational goals, hinder cooperation, and erode company culture, potentially impairing long-term organizational success .

In the early 1990s, companies initiated downsizing primarily to eliminate the duplication of work post-mergers and acquisitions, optimize resources, cut costs, and increase productivity by removing unnecessary intermediary channels . By the late 1990s, the reasons for downsizing evolved to include responding to worldwide economic recession, increased global competition, the slump in the IT industry, dynamic technological changes, and the availability of a temporary employee base .

Flexible work arrangements can mitigate negative downsizing impacts by offering employees greater autonomy and work-life balance, thereby reducing stress and increasing job satisfaction . These arrangements can help maintain morale among remaining employees, encouraging retention and loyalty . However, potential challenges include adjusting management styles to accommodate remote or flexible work, ensuring productivity and accountability outside traditional office settings, and maintaining effective communication and team cohesion .

Downsizing impacts workforce quality by creating uneven employee distribution across divisions, thus overloading survivors and reducing productivity and quality levels. Companies often face increased costs due to overtime and employment of temporary workers, while productivity suffers during periods of training contingent employees . This loss of experienced workers results in significant knowledge gaps and operational inefficiencies .

Downsizing techniques include both voluntary and involuntary methods. Voluntary methods comprise attrition, where the workforce naturally reduces due to retirement, death, or resignation; voluntary retirement offers, encouraging early retirements with pension benefits; and buyout benefits, offering lump-sum payments for voluntary exit . Involuntary methods involve layoffs, defined as separation not reflecting discredit on the employee, and leave without pay, where employees take unpaid leave but are guaranteed their job upon return .

Downsizing can severely disrupt employee motivation, leading to increased political behaviors, anger, fear, and lowered work commitment, which negatively impacts quality and customer service . It violates the psychological contract, causing cynicism and reduced goodwill among employees . The company's reputation as a good employer suffers, which can lead to longer-term challenges in recruitment and employee retention . Although downsizing may provide short-term cost savings, it does not strongly impact long-term profitability or valuation .