Managers Believe Downsizing Is Effective. Research Says: Nope.

The reason I'm addressing the topic today is because it recently came up in a discussion I had around Krisos - another company we created. Through Krisos, we buy traditional companies and transform them into radically progressive ones.

One of our principles is that we do 'no-layoffs' for economic reasons. It's a non-negotiable.

Why? Because it's the right thing to do. That's why.

Oh, and because it builds trust, boosts solidarity, and creates security in a challenging period of transformation.

Want to know how challenging these radical transformations are? Check out the write-up of the ongoing transformation of the company we acquired last year. Read it here.

Unfortunately, a 'no-firing' policy isn't all that common.

The great cost-cutting illusion

In many companies, CEOs love to argue downsizing is a strategic move to "streamline operations" and cut costs.

But here’s the hard truth: it doesn't work.

A meta analysis by Alyson House and Piers Steel reveals that downsizing fails to improve financial performance. In fact, it often leads to the opposite—a decline in productivity and a toxic work environment.

Why? Because you can't chop your way to success. Real growth comes from innovation, not contraction.

Survivor syndrome: The silent killer

Let’s talk about the survivors—those lucky enough to keep their jobs. The aftermath of downsizing leaves them demoralized, stressed, and overworked.

Steel and House’s research points out that the so-called "survivor syndrome" leads to a drop in morale and engagement. Employees are constantly looking over their shoulders, wondering if they’re next.

This environment breeds fear, not productivity. Instead of focusing on their work, employees spend their energy worrying about job security.

The result? A workforce that’s disengaged and far less effective.

The hidden cost of cost-cutting

It's a bit paradoxical, but cutting costs isn't cutting as much costs as expected. Companies that downsize often face significant hidden costs—severance packages, loss of institutional knowledge, and the cost of hiring and training new employees when the market stabilizes.

The supposed financial savings are often a mirage, masking the long-term damage done to the company’s culture and operational capability. But since this is harder to show in numbers, cutting people looks like the more powerful thing to do.

So, what to do instead?

A more powerful (and human) alternative

Companies should focus on employee engagement rather than cutting heads. It pays off. Big time.

When we acquire a company, we don't cut costs by firing people. Instead, we reinvent the way a company works.

We ditch the stuff that doesn't work:

• Functional hierarchy
• Managers (the position, not the people)
• Bureaucracy
• Secrecy

We introduce the stuff that does work:

• Self-managing teams
• Elected team representatives
• Full financial transparency
• A more balanced and fully transparent salary model
• Decentralized decision-making

In the 50+ companies that went through this transformation, the results (achieved in the two years after transformation) speak for themselves:

What's not to like?

The numbers don't lie

Downsizing is a short-term fix that ignores the root problems. A corporate illusion.

Steel and House’s meta-analysis is clear: downsizing doesn’t translate to better financial performance.

Instead, it often leads to a downward spiral of reduced productivity, lower morale, and a damaged reputation. Firms that prioritize employee well-being and innovation over cost-cutting are the ones that ultimately succeed.

Rather than wielding the ax, leaders should be investing in their workforce. It's really that simple.

The future belongs to those who dare to build, not those who hastily tear down.

If you want to discover the powerful transformation approach that drives the above-mentioned remarkable gains, join our upcoming Masterclass for an in-depth exploration of this human-centric method to elevate your business success. More info here.