Workforce Reductions: Downsizing Strategies Used in Selected
Organizations (Chapter Report, 03/13/95, GAO/GGD-95-54).

By fiscal year 1999, federal agencies must reduce employment levels by
about 270,000 full-time equivalent positions, or about 12 percent of the
federal civilian workforce, excluding the Postal Service.  To obtain
information that might be of value in carrying out federal downsizing,
GAO contacted 17 companies, five states, and three foreign governments
that had downsized in recent years.  This report presents a compendium
of the approaches these employers used, as described by managers: the
planning involved, the methods used to reduce their workforces, and the
human resources aspects of the downsizing.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-54
     TITLE:  Workforce Reductions: Downsizing Strategies Used in 
             Selected Organizations
      DATE:  03/13/95
   SUBJECT:  Federal downsizing
             Human resources utilization
             Reductions in force
             Personnel management
             Federal employees
             Corporations
             State employees
             Foreign governments
             Labor force
             Retirement benefits
IDENTIFIER:  National Performance Review
             Federal Service Priority Placement Act of 1994
             Florida
             Iowa
             Minnesota
             Oregon
             Texas
             Canada
             Australia
             New Zealand
             
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Cover
================================================================ COVER


Report to Congressional Committees

March 1995

WORKFORCE REDUCTIONS - DOWNSIZING
STRATEGIES USED IN SELECTED
ORGANIZATIONS

GAO/GGD-95-54

Downsizing Strategies

(966600)


Abbreviations
=============================================================== ABBREV

  NPR - National Performance Review
  OPM - Office of Personnel Management
  RIF - reduction in force

Letter
=============================================================== LETTER


B-259181

March 13, 1995

The Honorable William V.  Roth, Jr.
Chairman
The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

The Honorable Ted Stevens
Chairman
The Honorable David H.  Pryor
Ranking Minority Member
Subcommittee on Post Office and Civil Service
Committee on Governmental Affairs
United States Senate

The Honorable William F.  Clinger, Jr.
Chairman
The Honorable Cardiss Collins
Ranking Minority Member
Committee on Government Reform
 and Oversight
House of Representatives

The Honorable John L.  Mica
Chairman
The Honorable James P.  Moran
Ranking Minority Member
Subcommittee on Civil Service
Committee on Government Reform and Oversight
House of Representatives

The March 31, 1994, enactment of the Federal Workforce Restructuring
Act of 1994 presents significant human resource management challenges
to federal agencies as they formulate strategies for complying with
the statute's requirement that federal employment levels be reduced
by 272,900 full-time equivalent positions during fiscal years 1994
through 1999.  The statute was enacted in response to a
recommendation by the National Performance Review--endorsed by the
President--that federal employment levels be reduced.  Other
administration actions were announced in early 1995 that are aimed at
additional staff reductions. 

This report provides information on how 17 private companies, 5
states, and 3 foreign governments planned for and carried out their
downsizings.  The employers were generally selected because they were
reputed to have downsized successfully.  The information should be
helpful to congressional and executive branch decisionmakers in
determining how to implement the mandated reductions in federal
employment. 

We are addressing this report to you in your capacities as Chairmen
and Ranking Minority Members of committees that have jurisdiction
over federal employment matters.  We are also sending copies of this
report to the heads of all departments and agencies of the federal
government and other interested parties. 

The major contributors to this report are listed in the appendix. 
Please contact me on (202) 512-5074 if you have questions concerning
this report. 

Nancy Kingsbury
Director, Federal Human Resource
 Management Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

During fiscal years 1994 through 1999, federal agencies must reduce
employment levels by 272,900 full-time equivalent positions, or
approximately 12 percent of the civilian nonpostal executive branch
workforce.  This requirement was incorporated into law by the Federal
Workforce Restructuring Act of 1994.\1

How can agencies ensure that they will be able to accomplish their
missions with significantly fewer employees?  What strategies will
best accomplish the statute's objectives?  How can employment levels
be reduced in a manner that will effectively deal with employees who
remain, as well as those who leave?  Finding answers to these and
other questions may be a daunting challenge for congressional and
executive decisionmakers as the downsizing progresses. 

To obtain information that might be of value in carrying out federal
downsizing, GAO contacted 17 private companies, 5 states, and 3
foreign governments, which had downsized in recent years.  This
report presents a compendium of the approaches these employers used,
as described by management officials:  the planning involved, the
methods used to reduce their workforces, and the human resources
aspects of the downsizing activities. 


--------------------
\1 P.L.  103-226, 108 Stat.  111 (1994). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

President Clinton came into office with a pledge to reduce the
federal workforce by 100,000 employees.  Subsequently, the National
Performance Review (NPR) recommended that the federal workforce be
reduced by 252,000 positions, primarily in supervisory, auditing,
accounting, budgeting, personnel, and procurement functions.  In
accepting the President's proposal that the workforce reductions
recommended by the NPR be implemented, Congress increased the
reduction to 272,900 positions and authorized agencies to offer
separation incentives of up to $25,000 to federal employees who
agreed to resign or retire.  Other administration actions were
announced in early 1995 that are aimed at additional staff
reductions. 

Many organizations in the private and public sectors have
considerable experience with downsizing, and the governments of a
number of foreign countries have reduced their workforces as well. 
Some of these employment reductions amounted to as much as 40 to 50
percent, often spread over a number of years.  However, employment
reductions of the magnitude contemplated are unusual in the federal
government. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

In general, the private companies in GAO's review said their
decisions to downsize were the result of corporate restructuring
actions designed to make work processes more efficient and/or
eliminate less profitable and unnecessary functions.  Reducing
employment was seldom the initial objective.  Rather, it was a
consequence of eliminating unnecessary work.  Officials of many of
the companies stressed the importance of identifying needed
structural changes and other revisions to traditional methods of
operation before deciding whether and where workforce cuts may be
appropriate.  In contrast, downsizings by the states in GAO's review
were generally undertaken as cost-cutting measures without
consideration of work requirements.  Although GAO did not identify
detailed reasons for the downsizings in the countries it reviewed,
their downsizings were generally characterized as the result of
desires to streamline government and make the public sector more
efficient. 

Once their decisions to downsize had been made, 15 of the 25
organizations said they found it important to plan how the reductions
would be carried out to retain a viable workforce when the reductions
were completed.  Those organizations that said they did not properly
plan their downsizings acknowledged that they cut needed employees,
suffered skills imbalances, and were often forced to rehire or
replace employees who had been separated. 

The organizations said they generally found that attrition and hiring
freezes, while useful tools, were not always effective ways to
achieve significant short-term reductions in the workforce.  Thus,
most of the organizations used monetary incentives to encourage "at
risk" employees to resign or retire if they could not be redeployed
to other jobs.  Many offered separation incentives more generous than
the incentives included in the federal government's "buyout"
legislation, including early retirement without penalties, credit of
additional years of service in retirement benefit determinations, and
lump-sum severance payments of up to a year's salary.  However, the
organizations that had downsized several times over the years tended
to reduce the separation incentives offered in successive
downsizings.  The organizations generally resorted to involuntary
separations only after other tools such as attrition, hiring freezes,
redeployments, and separation incentive programs did not achieve
their employment reduction goals.  Where possible, involuntary
separations were managed by using various criteria to target
specifically those parts of the workforce that were in keeping with
the efficiency, profitability, span of control, or other
restructuring goals of the organizations. 

A concern GAO found among the organizations was the need to assist
employees--both those at risk of losing their jobs and those who were
ultimately retained--in coping with the personal disruptions caused
by workforce reductions.  The organizations found that frequent and
open communications with their employees on all aspects of the
downsizing were essential, along with programs to help affected
employees through counseling, outplacement assistance, and
retraining. 


   GAO'S ANALYSIS
---------------------------------------------------------- Chapter 0:4


      IMPORTANCE OF PLANNING IN
      DOWNSIZING DECISIONMAKING
-------------------------------------------------------- Chapter 0:4.1

While not all of the organizations claimed to have done so, most (11
companies, 3 states, and 1 country) said that planning before
initiating or carrying out downsizing activities was essential.  The
private companies said that decisions to downsize were the result of
company restructurings based on strategic planning designed to shape
and guide the companies' future directions.  Most of the companies
said they examined their functions and work processes to see if they
should be revised or continued.  Thirteen organizations also
emphasized the importance of workforce planning procedures to
determine the types and numbers of employees they would need in the
restructured organization.  An official in one company pointed out
that simply reducing staff does not make the work they were doing go
away, but with proper planning downsizing can be targeted to specific
skills the organization no longer needs in its revised structure. 

Restructuring based on strategic planning was generally not the
impetus for the downsizings in the government organizations GAO
visited.  The state downsizings resulted primarily from budgetary
considerations.  For example, officials of one state said that it
downsized because it had to fund retroactive salary increases ordered
in a court decision.  Another state reduced the number of employees
after passage of a referendum limiting property taxes.  An official
of this state said the downsizing meant the state ended up doing less
with less.  Documentation from the three countries generally
characterized the countries' downsizings as the result of declining
economic conditions and changing attitudes toward government
services. 

Regardless of the reasons for their downsizings, the organizations
generally believed workforce planning to be essential in identifying
positions to be eliminated and pinpointing specific employees for
potential separation.  For example, one company believed work that
added value to the organization was the ultimate test of an
employee's worth and evaluated the cost and value added to the final
product of all its positions in determining whether employees in the
positions would be retained or separated.  Another company identified
excess employees by reviewing work functions that appeared to be
redundant or unnecessary for future operations. 

In organizations where officials said planning did not occur or was
not effectively implemented, difficulties arose in the downsizings. 
Officials in one company told GAO they recognized the importance of
workforce planning in downsizing decisions when the company lost
needed staff because it did not plan for skills retention.  An
official in another company observed that if an organization simply
reduces the number of its employees without changing its work
processes, staffing growth will recur eventually. 

A number of factors may place constraints on organizations'
downsizing strategies.  This was particularly true for the
governmental organizations, which were constrained by public
sentiment, budget limitations, legislative mandates to maintain
certain programs, and personnel laws. 


      APPROACHES TO REDUCING
      WORKFORCE SIZE
-------------------------------------------------------- Chapter 0:4.2

Few of the organizations said they relied solely on attrition and/or
hiring freezes to achieve significant workforce reductions.  As
officials in one organization explained, attrition is often not
sufficient to reduce employment levels in the short term.  Moreover,
using attrition as a sole downsizing tool can result in skills
imbalances in an organization's workforce because the employees who
leave are not necessarily those the organization determined to be
excess. 

Once the organizations had identified the employees who were to be
separated, they used a variety of approaches to accomplish their
downsizing plans.  Officials of about half of the
organizations--including private companies, states, and
countries--said they sought to redeploy affected employees to fill
needed positions in other parts of the organization.  Often, these
organizations encouraged redeployment to other locations by paying
travel and relocation costs and other allowances.  In some cases, the
organizations found that retraining at-risk employees for other
positions was an effective means of avoiding employee separations and
cost-effective for the organization. 

Most of the organizations offered affected employees monetary
incentives to leave voluntarily.  Seventeen of the 25 organizations
allowed employees to retire early.  In some of these organizations,
officials said early retirement penalties were waived, and the
organizations often credited employees with additional years of
service and/or added years to their ages so they could either qualify
for retirement or receive enhanced benefit amounts, or both. 
Officials of three organizations said they supplemented early
retirees' pensions until they were eligible for social security. 

Lump-sum cash payments were often a feature of separation incentive
programs.  The amounts were usually based on the organizations'
severance pay formulas--generally 1 or 2 weeks' pay for each year of
service to a maximum of a year's salary.  These payments were
available to employees who resigned or retired. 

Other, but less common, separation incentives included continuation
of insurance benefits for specified periods, paid college tuition and
other training programs, and new business start-up assistance. 

Officials of 18 of the organizations said they had downsized a number
of times over the years.  Of these, eight said their separation
incentive packages tended to be less generous in successive
downsizings.  For example, one company discontinued offering its
social security "bridge" payments\2 for early retirees, and a state
discontinued its paying amounts of up to $5,000 for early retirees'
health insurance costs. 

When redeployment and voluntary separation programs did not achieve
the employment reductions needed to meet efficiency, profitability,
span of control, or other restructuring goals, the organizations said
they instituted, or planned to institute, involuntary separations as
a final downsizing tool.  Various criteria, including key skills and
expertise, tenure, and/or performance, were used to determine which
employees would be involuntarily separated. 


--------------------
\2 Bridge payments are the equivalent of retirees' eventual social
security benefits.  Typically, these benefits are paid until
employees become eligible for social security. 


      CONSIDERATION OF EMPLOYEES'
      PERSONAL CONCERNS IN
      DOWNSIZINGS
-------------------------------------------------------- Chapter 0:4.3

Officials of 21 of the organizations GAO reviewed said part of their
restructuring and downsizing activities emphasized the "people
issues" involved.  They said they recognized that employees are
apprehensive and concerned about how they will be affected when their
employers restructure or cut employment levels. 

Many of these officials emphasized the importance of communicating
with employees during downsizing.  Among the communication methods
the various organizations used were staff meetings, employee
newsletters, video presentations, and face-to-face discussions
between employees and management.  Officials in one company pointed
out that a primary benefit of open communication between management
and employees was helping to avoid distrust and morale problems. 
They said they made every effort not to appear as if they were
withholding any information from employees. 

Officials of these 21 organizations said they devised programs to
assist employees who lost their jobs during downsizing.  They
provided, for example, employee and family counseling, job placement
services, relocation assistance, and training for other careers. 
They also said they often found it important to address the morale
and productivity of the "survivors" of downsizing by helping them
deal with concerns brought about by the workplace changes. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is making no recommendations in this report. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO did not seek overall comments from the companies and states that
participated in its review because of their numbers, and because GAO
did not identify them when describing their restructuring and
downsizing practices.  GAO did, however, selectively verify the
accuracy of the specific examples used in the report text. 

GAO provided relevant sections of this report to officials of the
Australian, Canadian, and New Zealand governments.  Australia and
Canada provided technical comments, which GAO incorporated where
appropriate. 


INTRODUCTION
============================================================ Chapter 1

The federal government faces significant challenges in structuring
and maintaining a workforce of the appropriate size and necessary
skills to accomplish the missions of the myriad of programs federal
agencies are expected to carry out.  Effective program administration
requires quality employees in the right numbers and with the right
skills mix.  If the government has more employees than it needs, the
taxpayers do not receive full value from what they pay for government
services.  On the other hand, having too few employees can lead to
inefficiencies as well, including program delays, expensive overtime
and contracting costs, or simply not accomplishing the work required
to achieve a program's objectives. 

The federal government is in the early stages of implementing a
mandated reduction in the number of its employees.  As required by
legislation enacted in March 1994,\1 the executive branch must become
smaller by the equivalent of 272,900 full-time positions during
fiscal years 1994 through 1999.\2 This requirement resulted from a
report by the National Performance Review (NPR), endorsed by the
President, which maintained that the government had too many
employees.\3 The NPR concluded that federal employment levels should
be reduced by eliminating supervisory and management positions and
cutting the number of employees in "management control" positions
such as auditing, accounting, budgeting, personnel, and procurement. 

To avoid or minimize the need for involuntary separations, the
downsizing legislation authorized agencies to offer separation
incentives to employees in any occupation in any location who agreed
to resign or retire.  The incentive is to be paid in a lump sum and
is equal to the lesser of $25,000 or the amount equivalent to the
severance pay\4 allowance an employee has earned. 

Although employment reductions of the magnitude contemplated are
unusual in the federal government, a number of other employers have
considerable experience with downsizing.  For example, large computer
manufacturers and automobile and telecommunications companies have
reduced their workforces since the late 1980s, and some state and
foreign governments have downsized as well.  The downsizings varied
in size and duration, but employment reductions of as much as 40 to
50 percent spread over a number of years occurred in some of these
organizations.  According to media accounts, some companies were able
to improve their competitive positions through their downsizings, but
others were not. 


--------------------
\1 The Federal Workforce Restructuring Act of 1994, P.L.  103-226,
March 30, 1994. 

\2 In early 1995, the President announced additional restructuring
plans at five agencies that could result in additional staff
reductions. 

\3 Creating a Government That Works Better and Costs Less.  Report of
the National Performance Review, Vice President Al Gore (Sept.  7,
1993). 

\4 Severance pay is normally paid to employees who lose their jobs
through no fault of their own.  It is computed on the basis of 1
week's salary for each year of the first 10 years of service and 2
weeks' salary for each year of service greater than 10 years (basic
allowance).  An additional 10 percent of the basic allowance is paid
for each year an employee is over age 40.  Total severance pay cannot
exceed 1 year's salary at the level received immediately before
separation.  To illustrate, a 50-year-old employee with 18 years of
service would have severance pay equal to a full year's salary. 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:1

The objective of this report is to provide a compendium of the
approaches used by selected companies, states, and foreign
governments in downsizing their workforces.  Specifically, the report
provides information on the planning involved; the approaches used to
reduce the workforce; and the human resource aspects of the
downsizing efforts. 

The companies and states in our review were identified through
searches of available literature on downsizing and discussions with
downsizing experts and consultants.\5 This research identified
companies and states that were reputed to have successfully met their
downsizing goals.  Of these, the following 22 organizations agreed to
participate: 


--------------------
\5 These included authors of books and other publications on
downsizing, representatives of organizations that have studied
downsizing such as the Commonwealth Fund, the Rockefeller Institute,
the Humphrey Institute, and the Committee for Economic Development. 


      COMPANIES
-------------------------------------------------------- Chapter 1:1.1

  -- AT&T

  -- Black & Decker

  -- DuPont

  -- Eastman Kodak

  -- General Electric

  -- General Motors

  -- Grumman

  -- Hewlett-Packard

  -- Honeywell

  -- IBM

  -- Johnson & Johnson

  -- K-Mart

  -- Minnesota Mining and Manufacturing

  -- Motorola

  -- Sears

  -- Xerox

  -- A large insurance company\6


--------------------
\6 This company agreed to cooperate in the review with the
understanding that its name would not appear anywhere in our report. 


      STATES
-------------------------------------------------------- Chapter 1:1.2

  -- Florida

  -- Iowa

  -- Minnesota

  -- Oregon

  -- Texas

We interviewed officials and obtained documents pertinent to their
downsizings from each of the 22 organizations. 

In addition to the companies and states, we obtained information on
downsizing by three foreign governments--Australia, Canada, and New
Zealand.  We selected the foreign governments because they had
downsized in the recent past, and their cultures and government
activities were relatively similar to that of the United States. 
Because of the similarity, we believed their experiences might
provide relevant insights for federal decisionmakers.  We obtained
documents from these governments about their downsizings and,
whenever possible, interviewed officials from the governments.  We
were unable to interview some cognizant officials from the
governments of Australia and New Zealand.  Therefore, our discussions
of these countries' downsizing experiences are primarily based on
policy documents the governments provided us. 

Because organizational restructuring involved sensitive,
competition-driven business decisions, some of the private companies
asked that we not identify them when discussing their specific
strategies in our report.  We therefore chose to omit all company
names elsewhere in the report, and with the exception of one company
that did not want to be identified in any manner, to simply list the
companies in this chapter.  We also decided to omit the states' names
elsewhere in the report because we did not name the companies. 

Company officials were also often reluctant to provide us information
on issues involving certain business decisions, which they considered
to be proprietary or part of business strategies.  For example, we
could not obtain cost figures for private-sector separation
incentives.  We also could not obtain specific strategic or workforce
plans for these organizations.  Further, we were unable to arrange
discussions with unions or other employee representatives in 15 of
the 17 companies.  Consequently, the views of the degree of success
of restructuring and downsizing in the companies often represent only
those of the management officials we interviewed.  Where we had
relevant competing views, we included them in the report. 

We did our work between May 1993 and August 1994 in accordance with
generally accepted government auditing standards. 

This report provides information on organizations' downsizing
strategies and is intended to show lessons learned and practices
followed by management of the organizations.  We did not seek
comments from the companies and states that participated in our
review because of their numbers, and because we did not identify them
when we described their restructuring and downsizing practices. 
However, we did selectively verify the accuracy of the specific
examples used in the report text. 

We provided relevant sections of the report to officials of the
governments of Australia, Canada, and New Zealand.  We received
technical comments from Australia and Canada, which we incorporated
where appropriate. 


PLANNING WAS CONSIDERED AN
ESSENTIAL FIRST STEP
============================================================ Chapter 2

Fifteen of the 25 organizations in our review indicated the
importance of planning before initiating downsizing or other changes
to an organization's structure.  We were told that strategic
planning--a disciplined effort to produce fundamental decisions and
actions that shape and guide what an organization is, what it does,
and why it does it--is an essential first step that should be taken
before any decisions on the appropriate size and composition of the
workforce are attempted.  Most of the organizations found that
workforce planning, whereby care is taken to ensure that employees
with the skills and training needed to accomplish the organization's
work are retained, was an important component of successful
downsizing. 

Some organizations in our review acknowledged that insufficient
strategic and/or workforce planning had hindered their downsizing
efforts.  These organizations said they experienced skills imbalances
when their downsizings were completed and had to rehire some of the
employees they separated or hire new employees who had to be trained. 

Further, officials indicated that factors such as legislation and
agreements with employee unions sometimes limited the manner in which
organizations carried out their downsizing.  For example, one company
determined that it was prohibited by law from excluding
retirement-eligible employees from its separation incentive program. 


   STRATEGIC PLANNING GENERALLY
   IDENTIFIED WORK TO BE
   ELIMINATED OR REDESIGNED
---------------------------------------------------------- Chapter 2:1

In general, the private companies said that decisions to downsize
occurred as the result of restructuring activities intended to
eliminate less profitable and unnecessary functions and/or make work
processes more efficient.  Thus, the initial focus was on changing
the future work of the company, not on reducing employment.  On the
other hand, the states' downsizings were typically undertaken to cut
costs by reducing the number of their employees. 

We were unable to identify specific reasons for the downsizings in
the three countries.  However, documents provided by the countries
generally characterized their downsizings to be the result of
declining economic conditions and changing attitudes toward
government services.  In a separate report on the deficit reduction
strategies followed by a number of foreign governments, we noted that
desires to streamline government and make the public sector more
efficient were common themes across the countries studied.\1


--------------------
\1 Deficit Reduction:  Experiences of Other Nations (GAO/AIMD-95-30,
Dec.  13, 1994). 


      ELIMINATING WORK
-------------------------------------------------------- Chapter 2:1.1

In one company, officials said the decision to restructure was
basically a response to anticipated changes in its primary industry
segment, threats to market share from rising competition, and
opportunities to automate certain manufacturing processes.  Company
officials said that, despite the fact that the century-old firm had
never posted a loss and earnings per share had grown an average of
about 13 percent over the previous 10 years, a restructuring effort
was launched to gain better control over operating costs, eliminate
redundant services, and reduce excess capacity. 

Officials explained that the company did not establish specific
financial or staffing goals for the restructuring.  Instead, it
analyzed the potential outcomes of several restructuring approaches
and then decided if the potential outcomes were desirable.  For
example, it studied the likely ramifications of closing a particular
production plant.  The study demonstrated that closing the plant
would be advantageous because the closing costs could be recovered in
a relatively short period.  Officials said the company also looked
into the possibility of consolidating administrative functions by
assigning teams of employees to study the various functions carried
out in their units.  The study included examining everything from how
overhead services influenced costs to how they met their business
needs.  These analyses demonstrated that functions could be
eliminated and positions abolished.  A company official told us that
one lesson the company learned from these efforts was that an
organization must allocate sufficient time to devise a good
restructuring plan. 

In another company, officials said that industry decline, reduced
profits, rising competition, and increased automation and
technological upgrades during the 1980s convinced management that a
restructuring was needed.  Officials said the company had an
extremely hierarchical structure, tremendous overhead, and archaic
pay systems.  According to these officials, a basic objective in
restructuring the company was to reduce the number of employee levels
from the top to the bottom of the organization to four:  the
Chairman, the head of a business, the first-line supervisor, and the
first-line employee.  To facilitate reorganization decisions, the
company analyzed each of its component businesses to compare the
components' cost and competitiveness as well as their efficiency and
effectiveness.  As a result, the company reduced its staffing levels,
and 45 business units were reorganized into 12 units, all of which
reported directly to the chief executive officer. 

Another company in our review decided to restructure its operations
as a result of reduced profitability and increased competition. 
Company officials told us they had earlier sought to improve these
conditions by across-the-board personnel cuts in an attempt to
control costs and increase efficiency and productivity.  However, the
officials said these early cuts were not sufficiently tied to a
larger strategy and only exacerbated the company's problems because
simply reducing staff did not make the work they were doing go away. 
The officials said across-the-board cuts did not take into account an
organization's structure and workflow.  They said the company's more
recent planning efforts were more strategic--involving analyses of
the distribution of employees and resources to determine where to cut
and where to consolidate.  They said the strategic approaches
resulted in downsizing being targeted to specific skills. 

Further, officials said this company began to take a more strategic
look at how it should be structured and developed a "three Rs"
approach to determining its future direction:  "Resize, Reshape, and
Rethink." Resizing depended on workforce planning efforts to focus on
cutting staff.  The reshaping effort involved an analysis by
management of the value added by each functional area (design,
production, and sales) in the organization and comparing the
company's practices with the best organizations in the world. 
Rethinking focused on manufacturing design. 


      REDESIGNING WORK PROCESSES
-------------------------------------------------------- Chapter 2:1.2

Officials of 11 of the private companies in our review said that
redesigning work processes to eliminate unnecessary and duplicative
work was the primary objective of their restructuring efforts. 

Officials from one company pointed out that head-count reductions
without changing the work itself can be appealing in terms of speed,
visibility, measurability, and demonstrable results.  However, they
cautioned that such reductions are also costly, indiscriminate, and
inconsistent with accomplishing a continuing productive work flow
with fewer staff.  Eventually, they said, organizations have to
address their work processes. 

An official from another company commented that the organization,
which focused on increasing efficiency and productivity in planning
its restructuring, had faced some criticism for not being more
aggressive in reducing its employee head count.  By focusing on ways
to increase efficiency and productivity, however, the official said
the organization was able to identify approximately 2,400 positions
that could be eliminated.  The official noted also that if an
organization simply reduces the number of its employees without
changing its work processes, staffing growth will recur eventually. 
Indeed, a 1993 survey by The Wyatt Company,\2 which summarized the
restructuring practices of 531 U.S.  companies, found that only 17
percent of the companies that downsized succeeded in cutting back
without later replacing more than 10 percent of the employees they
had dismissed. 

The states' planning approaches typically were based on budgetary
considerations and did not focus on the work done by the
organization.  For example, officials of one state explained that the
state downsized because a referendum limiting property taxes created
a need to cut state expenditures.  The states's downsizing objectives
were to eliminate about 4,000 employees (about 10 percent of the
total state government workforce) and to increase the
manager-to-staff ratio from 1:7 to 1:9.  According to the budget
director for the state at the time of the downsizing, the downsizing
resulted in eliminating 4,118 positions, but it was considered only
moderately successful because there was too much focus on reducing
total employment by a particular number.  This official felt that not
enough attention was given to exploring other, more creative
strategies for cutting expenditures.  Also, while the downsizing did
result in some savings, the official said the state ended up merely
doing less with less. 

In another state government, an official said a series of budget
deficits created a need to significantly cut costs.  Previous
attempts to cut costs by withholding state employee pay increases
were challenged and overturned in court, resulting in additional
budgetary problems.  To fund the retroactive salary increases
required by the court decision, the state decided to downsize its
workforce.  According to officials, the state decided to lay off
1,500 employees during a 2-month period in 1991 to produce the $23
million in cost savings required as a result of the court decision. 
In addition, about 1,150 employees separated through an early
retirement program.  Officials said that in total, between July 1991
and October 1993, about 2,600 state executive branch employees (about
9 percent of the state government workforce) left their jobs.  Other
employment reduction measures included (1) contracting for services
previously provided by state employees and (2) reducing the number of
state departments from 65 to 28.  Finally, to reduce the number of
levels of employment within state organizations, officials said
changes were made to the way in which jobs were defined, and
alternative career paths were created that allowed staff to advance
by moving horizontally rather than vertically. 

While this state's downsizing objectives were basically met in dollar
terms, state officials said that they began to realize a more
strategic approach to downsizing--changing work processes--was
needed.  These officials explained that morale and productivity
suffered during the layoffs and continued to be a problem, especially
because of the increased workloads imposed on the remaining staff. 
According to state officials, the objective of a subsequent
initiative was to build a more effective state government by
exploring innovative ways of delivering services for less cost while
taking advantage of the best in staff resources and new technology. 


--------------------
\2 Best Practices in Corporate Restructuring, The Wyatt Company,
1993. 


   MANY ORGANIZATIONS RECOGNIZED
   THE NEED FOR WORKFORCE PLANNING
---------------------------------------------------------- Chapter 2:2

Thirteen of the organizations in our review emphasized the importance
of workforce planning to identify positions to be eliminated in their
downsizing efforts.  This planning enabled them to pinpoint the
employees who were at risk of losing their jobs in the downsizings. 
In general, employees were targeted for separation on the basis of a
variety of criteria including skill levels, seniority, value-added
work, performance, and span of control (the number of employees
supervised by one individual).  Officials said that when insufficient
planning and targeting occurred, skills imbalances often resulted. 

Officials from one company said their restructuring efforts were
targeted to specific divisions, departments, or units, and added that
the approaches used varied from unit to unit.  When the restructuring
actions resulted in determinations that units or functions were
overstaffed, employees were identified for retention based on a
number of criteria including past performance, skills, and knowledge. 
In those instances where entire units or functions were determined to
be unnecessary, all positions were eliminated.  However, the
officials said they attempted to find other positions for the best
employees elsewhere in the organization. 

Similarly, another company evaluated each position in terms of its
cost and value added to the final product in determining whether
employees would be retained or separated.  A company official told us
that, while many excellent employees were determined to be excess and
separated through this process, the company believed work that added
value to the organization was the ultimate test of an employee's
worth and, therefore, should be the chief determinant of whether an
employee would be retained.  Despite the care taken to determine
which employees should leave, officials from this organization
acknowledged that there had been instances where essential functions
were eliminated and employees had to be rehired.  They attributed
these situations, however, to the fact that businesses normally go
through life cycles, both shedding and adding employees. 

Another company focused the restructuring efforts in its headquarters
office on examining supervisory spans of control.  According to a
company official, top management believed the company had too many
layers of supervision.  The official explained that the average
number of persons directly supervised by a manager was 4.2, and the
goal was to increase the average to 7.  The official said the company
concentrated on analyzing management positions where the manager
supervised three or fewer employees.  While this exercise fell short
of achieving top management's goal of increasing the average to 1:7,
it resulted in about 100 persons being demoted or reassigned and
about 17 managers being involuntarily separated.  Upon completion of
the restructuring effort, the average span of control was 1:6. 

Officials from another company admitted that they had not fully
appreciated the importance of workforce planning until they lost
staff with needed skills in a previous downsizing effort.  Officials
explained that in the earlier downsizing, the organization focused on
head-count reductions, did not plan for skills retention, and did not
recognize the importance of targeting separation incentives to
prevent the loss of employees with needed skills.  In its later
downsizing, however, officials said managers focused on work
elimination instead of on head-count reductions.  That is, the
organization reviewed work functions within units and identified
those functions that appeared redundant or unnecessary.  The company
planned, where possible, to redeploy or retrain employees identified
as excess as a result of the work elimination assessments.  It then
considered skills when deciding which staff should be retained and
which were excess.  If the excess employees did not have the skills
needed by other units, the employees were separated. 

Officials from another company said they too had come to recognize
the value of workforce planning in deciding how to downsize.  They
explained that an early downsizing effort had involved
across-the-board personnel cuts.  In later efforts, a group
commissioned to evaluate the company's competitive position found
that three major human resource problems existed:  (1) excess people,
(2) shortage of skills, and (3) poor distribution of talent.  They
said an approach involving across-the-board cuts would have addressed
the problem of excess people but would have worsened the other two
problems because it did not consider the organization's work flow and
possible structural inefficiencies.  To better respond to all three
problems, the company adopted a five-pronged approach to workforce
downsizing that considered (1) size, (2) skills mix, (3) skills
distribution, (4) costs, and (5) organizational capability and
culture. 

In an August 1994 report evaluating the NPR's accomplishments, the
Brookings Institution's Center for Public Management expressed
concern that insufficient planning has preceded the decision to
downsize the federal government.\3 The report maintained that
decisionmakers may have been too eager for quick savings and
characterized the government's approach as shrinking employment first
and then expecting management improvements to follow.  The report
cautioned that an emphasis on short-term savings created the risk of
increasing long-term costs, especially "...if downsizing in the
absence of a `reinvented' workplace led the wrong employees to
leave..." An example of where this situation may have occurred is the
Department of Education.  As described in our report, Buyouts at the
Department of Education (GAO/GGD-94-197R, Aug.  17, 1994), when the
1994 Restructuring Act was still being considered by Congress,
Department officials contemplated using the anticipated separation
incentives as a workforce planning tool.  By targeting the separation
incentives to particular groups of employees, the Department hoped to
streamline the organization, improve productivity, increase workforce
diversity, and restructure its workforce to better reflect new
legislative priorities.  However, when its "buyout" program was
established, the Department accepted applications only from its older
employees who were eligible for retirement.  Department officials
said any fiscal year 1995 buyouts will probably be targeted to
particular areas and limited to higher-graded employees. 


--------------------
\3 Kettl, Donald F.  Reinventing Government?  Appraising The National
Performance Review, Center for Public Management, The Brookings
Institution, Washington, D.C., August 1994. 


   FACTORS LIMITING RESTRUCTURING
   ACTIVITIES
---------------------------------------------------------- Chapter 2:3

Several organizations in our review pointed out that, in deciding
upon the need for and a plan for restructuring, an organization needs
to consider a number of factors that can affect how the plan is
carried out.  These factors include the organization's mission, its
budget, any limitations imposed by law or union contract, and the
views and values of its stakeholders.\4 Some of these factors may
place constraints on organizations' downsizing strategies.  This was
particularly true for the governmental organizations, which were
constrained by public sentiment, budget limitations, legislative
mandates to maintain certain programs, and personnel laws. 

Although only four private companies reported difficulties from legal
constraints on their downsizing plans, officials in two companies
said they would have carried out their downsizings differently were
it not for their interpretations of certain statutory requirements. 
Officials of one company said the company wanted to exclude employees
eligible for retirement from its voluntary separation incentive
program.  The company believed it was too costly to pay such
employees both separation incentives and retirement benefits.  For a
short time, the company offered cash buyouts ranging from $15,000 to
$72,000 to other employees it had targeted for separation.  However,
officials said the company became concerned that this approach might
be a violation of the Older Workers Benefit Protection Act of 1990
and terminated the separation incentive program.  In the other
company, officials said they would have liked to offer more generous
separation incentives to single mothers than it offered other
employees.  However, these officials said the company interpreted the
Employee Retirement Income Security Act of 1974 as requiring that all
at-risk employees be offered the same incentive package.\5

The statutory, regulatory, and other limitations affecting
downsizings in the governmental units were demonstrated by a state's
experiences.  Officials said the state's discretion in targeting
specific groups of employees for separation was limited because of
seniority "bumping" rights offered to state employees, whereby
displaced employees could supplant, or bump, nondisplaced employees
with less seniority.  According to state officials, the bumping
rights prolonged the separation process and caused uncertainty and
chaos for about 2 months following the layoff announcement.  These
officials said that, on the other hand, bumping helped preserve the
state's knowledge base because more experienced workers displaced
less experienced workers. 

Officials said this state's ability to target particular groups of
employees for separation was further limited by collective bargaining
agreements that required that union employees be separated based
primarily on seniority.  Officials said the state had slightly more
flexibility with nonunion employees, where it used a formula
considering performance evaluations along with seniority in making
separation decisions.  Union agreements also affected this state's
downsizing efforts in other ways.  An employee union challenged three
separate cases over the state's plan to retain part-time, temporary,
and student employees while laying off full-time employees.  The
union also maintained that the state was laying off too few
supervisory and management employees in comparison with lower-level
employees.  All three challenges were upheld in arbitration.  The
union later successfully lobbied the state legislature to adopt a
requirement for a 50-percent reduction in the layers of management. 

Officials from another state said they had to rely mainly on
attrition and, to a limited extent, involuntary separations to reduce
employment levels because of negative public perceptions about paying
separation incentives to encourage state employees to leave.  This
state's union agreement also had a large effect on determining which
employees would be involuntarily separated.  Employees in bargaining
units had to be separated based on seniority. 

In Canada, since December 1991, labor agreements with employee unions
provided protection similar to employment security for government
employees.  Thus, the Canadian government was required to minimize
the number of involuntary separations and was primarily limited to
voluntary separations and employee redeployments in downsizings that
occurred after the labor agreements were made.  Government officials
said the government is seeking changes to the labor agreements. 


--------------------
\4 A stakeholder is any group or individual who is affected by or who
can affect the future of the organization--customers, employees,
suppliers, owners, governments, financial institutions, and critics. 

\5 We did not research the laws cited by these companies in relation
to the individual situations.  Therefore, we take no position on the
companies' interpretations. 


APPROACHES USED TO REDUCE
WORKFORCE SIZE
============================================================ Chapter 3

Once an organization has determined that it will downsize, strategies
must be devised on how the workforce will be reduced.  The 25
organizations in our review used a variety of approaches to develop
and manage their downsizing programs.  Redeployment of affected
employees to other available positions was a commonly used strategy. 
In some cases, the organizations attempted to reach their reduction
goals through attrition and hiring freezes, but the majority used
monetary incentives to encourage employees to voluntarily resign or
retire.  Many of the organizations instituted employee dismissals
when other strategies did not result in accomplishing their
downsizing goals.  Three organizations elected to use only
involuntary dismissals without offering programs or incentives for
voluntary separations.\1


--------------------
\1 It should be noted that 18 organizations downsized a number of
times, and their downsizing approaches varied each time.  For
example, a company may have offered buyouts to anyone who separated
in one downsizing and offered buyouts only as incentives to retire
early in another downsizing. 


   REDEPLOYMENT TO OTHER JOBS WAS
   OFTEN USED TO REDUCE EMPLOYEE
   SEPARATIONS
---------------------------------------------------------- Chapter 3:1

Before initiating actions to separate "at-risk" employees, the
organizations often sought to redeploy them to fill needed positions
in other parts of the organizations.  For example, officials from one
state said redeployment was one of the state government's essential
tools in its restructuring efforts.  They told us that employee union
and state government officials had agreed that no involuntary
separations would occur without first considering efforts to redeploy
affected staff. 

Several organizations said they found that redeploying employees to
other positions in the organization was effective.  In this manner,
the number of employees who otherwise would have been separated was
reduced, and the organizations were able to retain more of their
employees instead of hiring new workers to fill needed positions. 
For example, at one company, redeployments significantly reduced the
number of employees who would otherwise have left the organization
during a restructuring.  Company officials estimated that 40 percent
of the employees in the company who were designated to be laid off
actually left the organization. 

The following examples illustrate how some organizations carried out
their redeployment efforts: 

  -- One company paid travel costs for employees who, on their own
     initiative, located prospective jobs at other company locations. 
     The company paid expenses plus regular pay for up to three trips
     of 2 days each for the employees to be interviewed at other
     locations.  If an employee was hired at a new location and a
     move was required, managers were authorized to pay relocation
     expenses up to $7,500. 

  -- The New Zealand government encouraged agencies to assist
     employees deemed surplus in the positions they held to relocate
     to other jobs in the government.  The government paid all the
     costs associated with relocating employees and their families. 
     In those instances where the new jobs were at lower salaries,
     the government paid allowances equal to the difference in salary
     for 2 years.  Employees could also receive an equalization
     allowance, payable in two lump sums, if they chose to take
     part-time positions.  If a geographic move was not required but
     the new job location resulted in additional public
     transportation costs for commuting, the government was to pay
     the extra expenses for up to 12 months.  Moreover, if the new
     job was in the same locality but the employee had to commute
     more than 30 minutes longer one way by public transport, the
     employee could move closer to the new job within 1 year and the
     government would pay all relocation expenses. 

  -- When necessary, New Zealand officials said their government
     provided training for government employees who chose to be
     redeployed to new jobs.  Other potential assistance for
     employees who relocated included loans for mortgage financing;
     reimbursement of realtor and legal fees; bridge loans (to
     finance a new home until credit had been approved); guaranteed
     sale of the existing home; and reimbursement, for 1 year, of any
     additional child care expenses incurred. 

  -- In Canada, hiring officials had to consider surplus employees
     for retraining or redeployment before new employees could be
     hired.  Any employee whose position was deemed to be surplus was
     to be guaranteed one reasonable offer of another public service
     position.  The officials said that the government was to pay for
     up to 2 years' retraining for its surplused employees to prepare
     them for other positions in the government. 

  -- One company found that retraining employees to work in other
     jobs also was cost-effective, particularly when employees'
     skills closely matched the needs of the new job.  Company
     officials noted that it was less expensive to train an employee
     to work in a new area than to bring in a new employee.  The
     redeployed employee already had institutional knowledge of the
     organization, and more time and energies must be expended on an
     employee brought in from the outside who knows little about the
     organization or its processes. 


   FEW ORGANIZATIONS RELIED SOLELY
   ON ATTRITION AND HIRING FREEZES
   TO REDUCE EMPLOYMENT LEVELS
---------------------------------------------------------- Chapter 3:2

An organization can reduce the size of its workforce simply by not
hiring replacements for employees who leave.  According to the
management officials we interviewed, few of the organizations in our
review used this approach.  Only seven organizations said they used
hiring freezes as part of their overall efforts to downsize. 
Officials in one company said that normal attrition, even with hiring
freezes, is often not sufficient to reduce employment levels in a
short time frame. 

Relying on attrition to reduce employment levels can also result in
skills imbalances in an organization's workforce.  One company in our
review froze hiring for 3 years.  In the first year after the freeze
ended, the company had to hire nearly 3,000 new employees to acquire
needed skills. 

Another company that generally hired only entry-level employees did
not freeze hiring but sought to control the process by centralizing
it.  The company wanted to limit the number of new employees entering
the organization.  Each hiring decision had to be approved at a high
level in the organization rather than allowing local managers to
decide who would be hired. 


   INCENTIVES TO ENCOURAGE
   VOLUNTARY SEPARATIONS WERE
   WIDELY USED
---------------------------------------------------------- Chapter 3:3

Of the 25 organizations in our review, at least 18 provided various
incentives to encourage employees to voluntarily leave.  Often these
incentives were offered in some combination.  Eighteen organizations
downsized a number of times (32 times in the case of one company),
and the features of their incentive programs varied with each
downsizing.  Examples of some of the incentives offered include the
following: 

Early Retirement.  Seventeen of the organizations offered early
retirement programs that allowed employees to retire before their
normal retirement age.  At least 10 of these organizations offered a
variety of incentives to encourage employees to take early
retirement.  Generally, the incentive programs gave employees credit
for a specified number of years of service and/or a specified number
of years added to their age toward retirement eligibility and
calculation of benefit amounts.  Early retirement age requirements
among the organizations ranged from 10 to 15 years younger than
regular retirement age requirements.  Early retirement service
requirements ranged from 10 to 15 years fewer than normal service
requirements. 

Three companies' programs allowed some employees to retire before the
normal retirement age with no reduction in annuity.  Nine
organizations imposed early retirement penalties.  For example, if
after factoring in service and age credits an employee still did not
qualify for regular retirement but was eligible for early retirement,
these organizations applied a 3- to 6-percent reduction or penalty in
the employee's retirement annuity for each year the employee was
below the organization's regular retirement age at the time of
separation.  We were unable to determine whether early retirement
penalties were imposed in the remaining organizations. 

Buyouts or Lump-Sum Payments.  Fourteen incentive programs provided
for employees to separate voluntarily and receive lump-sum payments. 
The amount of the payment was usually based on the organization's
severance pay formula--generally 1 or 2 weeks' pay for each year of
service with a maximum of a year's salary.  These lump-sum payments
were available to employees electing early retirement, regular
retirement, or resignation. 

Paid Insurance Benefits.  At least four incentive programs continued
the health, and/or life insurance benefits for specified periods for
employees who voluntarily separated.  Typically, retirement eligible
employees were given these benefits for life as part of the pension
plan.  Nonretirement-eligible employees who voluntarily separated
were generally granted these benefits for 4 to 18 months past the
separation date. 

Social Security Supplements for Early Retirees.  Three programs
supplemented early retirees' pensions until they were eligible for
social security.  These companies agreed to pay (or "bridge") amounts
equivalent to the retirees' social security benefits until they
became eligible for social security.  At that time, the supplemental
payments ceased. 

Paid Tuition.  In four downsizing programs, companies paid separating
employees' tuition for up to 2 years for college or training programs
to enhance their skills and help make them marketable for employment
elsewhere. 

New Business Start-Up Assistance.  One company sponsored workshops to
teach separating employees how to start their own businesses. 

The following examples illustrate how organizations actually combined
and used the various separation incentives. 

  -- To encourage employees to retire, a company offered lump-sum
     payments equal to 2 weeks' pay (up to a maximum of 1 year's pay)
     for every year of employment and 5 years of additional service
     credits in retirement benefit calculations for employees over
     the age of 50. 

  -- A company's regular retirement plan required a combination of
     age and years of service totaling 85 for eligibility.  For
     employees who agreed to retire early during the downsizing, full
     annuity benefits were available for age and service totaling 75
     years.  In addition, all retirees received 2 weeks' severance
     pay for every year of employment, up to a maximum of 1 year's
     salary; bridge payments until social security eligibility at age
     62; a $5,000 retraining allowance; and health and life insurance
     benefits for life.  The company also offered the severance pay,
     retraining allowance, and up to 4 months' insurance benefits to
     employees who resigned if they were not eligible for retirement. 

  -- In one of its incentive programs, another company offered a
     5-year service-and-age credit plan so that employees within 5
     years of the retirement age or service eligibility threshold
     could qualify for immediate retirement with full benefits. 

  -- Another company allowed employees to retire early but imposed a
     4-percent reduction in their retirement annuities for each year
     the employees were under the company's normal retirement age of
     62.  Under the company's early retirement option, employees
     could retire at age 55.  The company added 5 years to employees'
     ages and 3 years to their length of service in determining
     retirement eligibility and calculating benefit amounts. 

  -- Another company had six early retirement programs from 1986 to
     1993.  The minimum early retirement age varied from age 50 to 58
     in the various programs.  The company's regular retirement age
     was 65.  The company also offered to separating employees who
     were not eligible for early or regular retirement lump-sum
     payments of $15,000 to $72,000, depending on length of service. 

  -- Another company gave employees designated as at risk of losing
     their jobs 60 days to locate other positions in the company.  If
     they were unsuccessful in finding other jobs, the employees were
     offered up to 35 weeks of severance pay based on length of
     service in the company.  Employees who agreed to release the
     company from any future claims arising from the termination
     received a bonus of 20 percent of their severance payment, up to
     a maximum total severance payment of 42 weeks.  In addition,
     employees who had at least 5 years of service were provided
     company-paid medical insurance for 6 months after the
     separation. 

  -- The Australian government offered its Public Service Act
     employees (about 30 percent of all Australian public servants) a
     separation incentive of 2 weeks' pay for every year of service,
     up to a maximum of 48 weeks' pay.  Employees who retired
     immediately received an extra 4 weeks' pay.  Employees also had
     the option of receiving a refund of their contributions to the
     retirement fund, the interest that had accrued on these
     contributions, plus a payment equal to 2-1/2 times their
     contribution, plus interest.  This amount could either be taken
     as a lump-sum payment or rolled into another retirement fund. 


      SEPARATION INCENTIVES BECAME
      LESS GENEROUS OVER TIME IN
      SOME ORGANIZATIONS
-------------------------------------------------------- Chapter 3:3.1

Seven companies and one state, all of which had undergone multiple
downsizings over a number of years, said they tended to offer less
generous separation incentive packages in successive downsizings. 
For example, one company's incentive package in an early downsizing
consisted of 2 weeks' pay for every year of service, tuition
assistance, and assistance in starting a business.  Company officials
told us this package was too expensive, and the company subsequently
eliminated the tuition and business assistance components.  The
officials said any future downsizings may rely totally on involuntary
separations. 

Another company discontinued offering its social security bridge
payments for retirees who were not yet eligible for social security. 

Officials in another company said the separation incentive package it
used in 1993 was somewhat less lucrative than one it offered in 1991. 
The 1991 plan provided for voluntary early retirement with full
benefits, 2 weeks' pay for every year of service (up to a year's
pay), social security bridge payments up to age 62, a $5,000
retraining allowance, and health and life insurance benefits for
life.  The 1993 separation incentive package allowed only those
eligible for retirement who were also targeted for involuntary
separation to quality for the separation incentives.  Also, the
organization would only pay for health insurance costs up to 4 months
after an employee's separation date. 

One state government offered early retirement separation incentive
programs in 1986, 1988, and 1992.  In the 1986 and 1988 programs,
employees could elect to have the state pay all costs of their
health, dental, and life insurance coverage until age 65 or continue
to share the costs and receive a payment of 10 percent of their
annual wages, up to $5,000.  The 1992 program dropped the cash option
and life insurance payments and required all retirees to share health
and dental insurance costs. 


   INVOLUNTARY SEPARATIONS WERE
   THE FINAL DOWNSIZING TOOL
---------------------------------------------------------- Chapter 3:4

When redeployment and voluntary separation programs did not achieve
the employment reductions needed to meet efficiency, profitability,
span of control, or other restructuring goals, the organizations in
our review said they instituted, or planned to institute, involuntary
separation programs or reductions in force (RIF).  Various criteria,
including tenure and performance, were used to determine which
employees would be involuntarily separated.\2 The following examples
demonstrate how these criteria were applied during actual layoffs. 

  -- Officials of one company said managers of units targeted for
     downsizing ranked employees according to their performance
     appraisals and types of skills they possessed.  Lower ranking
     employees were scheduled for separation, and those employees
     received 60-day notice letters.  Officials said that during the
     60-day period, efforts were made to redeploy the employees to
     other units, but if those efforts were unsuccessful, the
     employees were involuntarily separated. 

  -- Another company concentrated on identifying employees the
     company wanted to retain in the restructured organization. 
     Company officials said the company used past performance
     appraisals, seniority, and potential for future promotion as the
     criteria for determining who would be kept.  Certain dimensions
     of the performance appraisals, such as customer service, which
     was considered an essential part of the company's mission, were
     weighted higher than other dimensions.  Scores were determined
     for each employee, and a list of employees was generated with
     evaluation scores in descending order.  A cut-off point was
     calculated based on the number of positions that would be
     available after the downsizing was completed.  Employees whose
     scores were above the cut-off point were retained and the others
     separated. 


--------------------
\2 In an earlier report, Federal Personnel:  Employment Policy
Challenges Created by an Aging Workforce (GAO/GGD-93-138, Sept.  23,
1993), we discussed the potential effects of organizational
downsizing on older employees.  Among the issues discussed in the
report was that older employees have often filed age discrimination
complaints about the manner in which employees were selected for
separation during downsizings.  It cited an example where employees
accused a company of intentionally selecting older workers for
layoffs and won an age discrimination ruling from the Equal
Employment Opportunity Commission. 


HUMAN RESOURCE MANAGEMENT
CONSIDERATIONS DURING DOWNSIZING
============================================================ Chapter 4

When organizations downsize, employees are apprehensive.  They are
concerned about (1) possible job loss, (2) uncertainties about career
advancement, (3) relations with new supervisors, (4) revised
performance expectations, and (5) other matters that may affect them
personally as their employers restructure or cut the number of people
they employ. 

The organizations we visited were generally attentive to the "people
issues" involved in downsizing by attempting to soften the
potentially harsh effects employees could suffer.  The organizations
generally communicated with their employees as part of their
downsizing strategies.  They also established programs to help
affected employees through counseling, outplacement assistance, and
retraining. 


   GOOD COMMUNICATION WITH
   EMPLOYEES AND THEIR
   REPRESENTATIVES WAS CONSIDERED
   VITAL
---------------------------------------------------------- Chapter 4:1

According to the literature we reviewed, significant changes in an
organization's structure and size can create a host of sentiments
among the organization's employees--both those at risk of losing
their jobs and those who are ultimately retained--including anxiety,
distrust, self-pity, frustration, bitterness, anger, depression, and
guilt.  The literature suggests that employees should be told in a
straightforward way what to expect to help lend credibility to the
reasons for the downsizing and the actions that are being taken. 

A 1991 survey by The Wyatt Company of 1,005 human resource executives
in large U.S.  companies found that communication efforts during
restructuring could be improved.\1 For example, 79 percent of the
respondents to Wyatt's survey said they most often used letters and
memorandums from senior executives as a means of communicating with
employees about the restructurings.  Yet only 29 percent of the
respondents said they found these communications to be effective. 
The study concluded that such impersonal approaches to communicating
with employees on a subject as traumatic as restructuring were easy
to use but did not address many employee concerns.  The report
suggested that face-to-face communication such as managerial
briefings and small group meetings was a more persuasive approach for
disseminating news of organizational restructuring to employees. 
Face-to-face communication also gave employees the opportunity to
provide input. 

Many of the organizations in our review emphasized the importance of
communicating with employees as part of their restructuring and
downsizing strategies.  Organization officials said that to be good,
communication should be delivered quickly and frequently.  The
organizations used various approaches, including (1) information
videos, (2) memorandums, (3) electronic messaging, (4) newsletters,
(5) telephone hotlines, (6) personal discussions, and (7) tailored
messages. 

Officials of one company said they had mistakenly believed that
employees hear only what senior management communicates, and that
communication done right the first time was all that was needed. 
However, they said they learned that rumors were more powerful than
official communications.  They found that, to get an accurate message
to employees and dispel rumors, information must be disseminated
constantly through multiple media. 

The general communication policy of another company encouraged
sharing all information that might stimulate employee reactions and
cooperation in the downsizing initiative.  Officials said the company
encouraged informal employee dialogue sessions, one-on-one
discussions, and breakfast gatherings to supplement its more formal
communications, such as memorandums, staff meetings, and audiovisual
briefings.  Information was also supplied on bulletin boards and in
the employee newspaper.  A special edition of the employee newspaper
was issued to announce the company's voluntary separation incentive
program. 

Officials in another company said a primary benefit of open
communication between management and employees was helping to avoid
distrust and morale problems.  These officials said they made every
effort not to appear as if they were withholding information from
employees.  For example, when the company decided to close specific
units, it provided affected managers with scripts to use as guidance
in informing their employees about the closures.  The scripts
described the reasons for the actions being taken and outlined
options available for the employees.  The officials said this
approach was an effective means of assuring that all employees heard
the same message.  The company also prepared videotape presentations
on specific matters associated with the downsizing such as the early
retirement program and used videoconferencing, electronic messaging,
and toll-free numbers to help answer employees' questions and convey
information. 

Officials from another company said it was important to communicate
continuously with employees before, during, and after downsizing. 
The company used its newsletter as a communication tool, including
special editions on specific downsizing issues.  Information sources
such as memorandums from the chairman and question-and-answer sheets
were also used.  For more personal communications, a member of the
employee relations staff was assigned to answer telephone inquiries
from employees who were calling about rumors they had heard, and the
organization's chairman hosted discussion groups and
videoconferences.  The chairman also led a 3-hour question-and-answer
session for all interested employees on the restructuring. 

Canadian government officials said they communicated in various ways
during the merger of Canada's Customs and Excise and Taxation
agencies into a single department, Revenue Canada.  The officials
explained that each agency had its own distinct corporate culture and
history.  During the merger, managers were responsible for informing
and involving staff in the restructuring decisions.  Canadian
government officials also said the deputy minister personally met
with many staff at the headquarters, regional, and field levels. 
Managers were responsible for keeping employees informed of
developments in an open and timely manner.  Many forms of
communication were used, including memorandums to employees, employee
meetings, newsletters, electronic mail updates, special bulletins,
and telephone hotlines.  Managers also regularly consulted with union
leaders. 

New Zealand officials provided documents that showed that the
government encouraged effective communications with its employees
during the reorganization and reform that began in the late 1980s. 
The government prepared communication guidelines for senior managers
to use during their restructuring.  The guidelines encouraged the
managers to speak directly to employees about the changes that were
taking place and to arrange for constant and consistent information
on the reorganization of their departments through a mix of
communication approaches such as (1) telephone hotlines, (2)
newsletters, (3) regular visits and progress reports from upper
management, (4) information and support networks, (5) staff meetings,
(6) discussion groups, and (7) face-to-face meetings with individual
employees.  Any information provided in writing was to be clear and
easy to understand and was to be communicated to the employees before
any public announcements were made.  The guidelines required that
employees be provided information on the following: 

  -- reasons for the restructuring,

  -- objectives of the restructuring,

  -- timetable for decisions and announcements,

  -- locations affected,

  -- numbers of staff affected,

  -- new jobs available,

  -- training available for staff whose skills would become surplus,

  -- options for displaced staff,

  -- relocation assistance, and

  -- support networks for both displaced staff and those who
     remained. 


--------------------
\1 Restructuring--Cure or Cosmetic Surgery, Results of Corporate
Change in the '80's with RX's for the '90s, The Wyatt Company, 1991. 


   MOST ORGANIZATIONS PROVIDED
   EMPLOYEE ASSISTANCE DURING
   DOWNSIZING
---------------------------------------------------------- Chapter 4:2

Twenty-three of the 25 organizations in our review devised programs
to assist employees who lost their jobs during downsizing.  Services
included employee and family counseling, job placement, relocation
assistance, and training.  Some of the organizations also recognized
a need to assist those employees who remained after the downsizings
were completed.  Literature we reviewed suggests that employees who
keep their jobs often have anxieties about whether they are next to
be terminated, may have doubts about the organization's loyalty to
its employees, and can feel guilty that they are still working while
many of their colleagues lost their jobs. 


      COUNSELING AND JOB PLACEMENT
      ASSISTANCE
-------------------------------------------------------- Chapter 4:2.1

Losing a job can be a traumatic experience.  Not only does job loss
disrupt an individual's personal life and plans, but displaced
employees may have real concerns about their abilities to locate
other work.  The organizations in our review offered a number of
programs to help employees in these circumstances. 

Some of the organizations provided stress counseling to assist both
displaced employees and survivors in dealing with the upheaval
associated with downsizing.  Two companies said they provided
counseling to employees' family members as well.  Officials in one
company that offered counseling said they originally had been under
the misconception that employees were accepting the changes brought
about by downsizing, whereas in reality, the employees were fearful
of showing their anxiety.  They said they also believed that
employees would react in a rational manner once the reasons for the
changes were explained.  However, they found that the employees
became very emotional when it came to losing their jobs. 

Another company provided extensive "prelayoff" workshops to its
employees who were being separated.  Officials said these workshops
were designed to help the employees face the reality of layoffs.  One
of the company's objectives in the workshops was for employees to
gain an understanding of the experiences they would encounter in a
downsizing. 

Company officials also said the company learned it was important to
address the needs of the survivors of the company's downsizing.  They
said management initially thought that survivors did not need any
assistance since they should be glad to have a job when, in reality,
they found survivors can be resentful of the changes in the
organization and of the support provided to those who left.  Because
of the increased workload demands on survivors and diminished
opportunities for advancement, the company developed a program to
address what it called "survivor syndrome." The program was designed
to help survivors focus on productivity, address their fears and
concerns, and dispel rumors. 

Similarly, officials at another company said its management
recognized that morale and productivity could be low during a period
of downsizing.  To help survivors deal with their emotions and
concerns, the company held a number of workshops to discuss with
employees the normal reactions to workplace changes and how to
constructively deal with them. 

Placement assistance for separated employees was offered by 21 of the
25 organizations.  It was felt such assistance aided the employees
who left, helped avoid lawsuits by displaced employees, reduced
unemployment costs, and enhanced the employers' reputation in the
community by showing that the organization cared about its employees. 

At least 10 organizations used outplacement firms rather than
providing placement services themselves.  These organizations
explained that they had insufficient staff with the necessary
backgrounds and expertise to provide placement assistance.  It was
also felt that displaced employees might be reluctant to use in-house
services out of concern that their privacy and confidentiality would
be compromised. 

One company formed an alliance with other area businesses to help
displaced employees in all the allied organizations find jobs. 
Alliance members notified each other when they were laying off
employees and described skills the employees possessed.  Any of the
organizations in the alliance that needed employees with these skills
could then interview the employees for available job openings. 

Another company established a nonprofit career resource center to
provide counseling and placement services to displaced employees. 
The center provided information on and support for reaching life and
career decisions and had crisis counselors available on-site.  The
center also provided job search coordinators to assist the displaced
employees in looking for jobs and made office equipment and
secretarial service available for preparing resumes and other related
correspondence. 

Another company contracted with a human resource consulting firm to
offer job placement support to salaried staff who accepted the
company's separation incentive package.  Company officials said a
variety of services were available, depending upon the employee's
level in the organization.  The services included providing (1)
office space, (2) secretarial support, (3) copying, (4) faxing, (5)
computers, (6) telephones for long-distance and local calls, (7)
library and resource materials, (8) seminars and career counseling,
(9) self-marketing techniques, (10) information on starting a
business, and (11) spousal counseling.  Further, officials said the
company had a specific program to assist hourly employees who worked
in plants that were closing.  Transition teams coordinated with local
governments and community organizations to help these employees find
other career opportunities.  Available assistance included job
placement services and guidance in helping the employees prevent or
deal with crises, develop career plans, assess job skills, learn new
skills, and pursue training and education options. 

One state developed a program designed to help its displaced
employees overcome the fears and insecurities that accompany job
loss.  It incorporated counseling, resume writing, and other
workshops in addition to job placement services.  A state official
said the program found jobs for nearly all of the approximately 1,000
displaced state employees it assisted.  However, a state employees'
union official complained that the program did not require state
agencies to hire displaced state employees in preference over new
outside hires.  The union official maintained that all state
government vacancies should be filled by displaced state workers. 

The Canadian government also assisted its employees affected by
restructuring.  For example, one department issued guidelines to help
in the employees' search for new employment in the Canadian public
service as well as in the private sector.  Each affected employee was
also assigned a mentor.  Within 2 days of notifying employees they
were being displaced, the department encouraged them to begin
one-on-one counseling, take resume writing and other workshops, and
obtain job search counseling. 

In anticipation of the significant required downsizing in the federal
government, in December 1993, the Office of Personnel Management
(OPM) instituted a new program to help displaced employees find jobs
in other federal agencies.  Known as the Interagency Placement
Program, it is to make placement assistance available to employees
for 2 years and to require registrants to update their status every 6
months to enable OPM to keep registrant information current.  OPM
intends the program to be a supplement to agency placement programs,
as agencies will continue to have the primary responsibility for
helping their displaced employees find other jobs.  The program
requires hiring agencies to give priority to RIFed employees when
filling positions with competitive appointments.  Proposed
legislation, the Federal Service Priority Placement Act of 1994,\2
introduced in both the House and Senate, would have broadened the
scope of OPM's program to a governmentwide mandate that would have
covered most other appointments.  On September 21, 1994, we testified
on the bill in a hearing before the House Subcommittee on Civil
Service, Committee on Post Office and Civil Service.\3 We said we
fully supported the legislation's goal and that in creating an
expanded priority placement program, a number of questions should be
answered.  These questions include

  -- What types of appointments should the program cover, and how
     might it affect agencies' other hiring goals? 

  -- How much flexibility should agencies be allowed in selecting
     candidates? 

  -- Are there additional approaches to enhancing the placement
     program that should be considered? 

We also said that OPM should resolve these questions in a study of
how best to place RIFed employees and to ensure that the placement
program serves the needs of both displaced workers and the government
as a whole.  OPM agreed. 


--------------------
\2 S.  2190, June 14, 1994, and H.R.  4719, July 12, 1994. 

\3 Federal Employment:  GAO's Observations on H.R.  4719, The Federal
Service Placement Act of 1994 (GAO/T-GGD-94-213, Sept.  21, 1994). 


      TRAINING FOR EMPLOYEES
      AFFECTED BY DOWNSIZING
-------------------------------------------------------- Chapter 4:2.2

Some of the organizations devoted considerable resources to training
employees to enhance their current skills or provide new and more
marketable skills.  Skills training was given to survivors of
downsizing as well as to separated employees.  Following are some
examples of how the organizations afforded training opportunities to
their employees in connection with restructuring and downsizing
activities. 

  -- One company used funds available under the Economic Dislocation
     and Worker Adjustment Assistance Act\4 for training and building
     the skills of its displaced employees.  Company officials said
     the government requires that private funds be used before
     federal funds can be committed, or that a combination of federal
     and private funds be used.  The company paid $2,500 toward each
     employee's training costs during the first 12 months after the
     employee's separation. 

  -- A company sponsored an on-site "university" that provided a wide
     range of training for all employees.  Company officials told us
     they found that keeping employee skills up-to-date not only
     helped the organization stay competitive, but was also helpful
     when employees were redeployed to other jobs in the
     restructuring.  They said the training programs also enabled
     displaced employees to better compete in the outside job market
     when layoffs were necessary. 

  -- A company reimbursed its displaced employees up to $5,000 each
     for vocational training or academic study satisfactorily
     completed within 24 months after separation.  The program was to
     help displaced employees enhance their occupational skills to
     enable them to continue in their current careers or to prepare
     for new career areas.  The reimbursement covered 100 percent of
     tuition costs; all application, registration, and graduation
     fees; a portion of thesis/dissertation fees; and up to $100 a
     class for textbooks. 

  -- The New Zealand government gave displaced employees who were not
     eligible for early retirement the opportunity to be trained for
     new jobs in the government.  The government also stressed that
     the training would make the employees more attractive to other
     potential employers because of the added skills they would gain. 
     The policy provided that training employees in other skills
     would make it easier to deploy them to meet organizational needs
     and give the employees a more positive attitude about the
     changes that were being made.  For surplus staff who agreed to
     be retrained for teaching positions in primary, secondary, or
     early childhood education, the government would provide up to 2
     years of salary; 6 months' leave with pay while awaiting
     selection for, or the beginning of, teacher training; and
     relocation expenses. 


--------------------
\4 P.L.  100-418, Title VI, 102 Stat.  1524 (1988). 


OBSERVATIONS
============================================================ Chapter 5

Any circumstance in which an employer reduces the size of its
workforce can be fraught with uncertainties and perils for both the
employer and its employees.  These potential uncertainties apply to
the federal government since the aggregate employment reductions
federal agencies are required to make in the coming years are
extremely large.  Moreover, the decision to downsize the government
was largely made without clear evidence that federal agencies had
more employees than they needed to accomplish the tasks required to
carry out the public's business.  Nevertheless, federal downsizing is
now a statutory requirement, and decisionmakers must see that the
workforce cuts are made as efficiently as possible while ensuring
that federal programs are administered effectively. 

While none of the organizations in our review had workforces that
came anywhere close to the federal government in size or
responsibilities, we believe the lessons they learned through their
downsizing experiences can be instructive for federal decisionmakers. 
Regardless of an employer's size or function, it would seem apparent
that sound planning and implementation of downsizing activities are
critical to their success. 

We believe an important lesson learned in this review was that
organizations need to carefully examine their functions and identify
needed structural changes and other revisions to traditional methods
of operation as a precursor to making decisions on where and to what
extent workforce cuts are appropriate.  By their own acknowledgment,
the organizations that did not practice sound strategic and workforce
planning often experienced skills imbalances when their downsizings
were completed because they had separated, or paid separation
incentives, to the wrong employees.  The observations of the
officials we talked with in this review are consistent with the
Brookings Center for Public Management report's caution that
insufficient attention to up-front planning in making federal
downsizing decisions could well lead to higher long-term costs. 

Many of the organizations in our review offered employees separation
incentives that were more generous than the federal government is
offering.  It remains to be seen whether the government's incentive
program will be sufficient to encourage the large number of employees
who must be separated to leave voluntarily.  Perhaps a more important
observation, however, was that in some organizations the generosity
of the incentive programs decreased in successive downsizings.  This
suggests to us that the government may wish to exercise care in
communications with its employees so they will not expect that
waiting longer to leave may mean their eventual incentive payments
will be greater. 

We found it meaningful that managers in most of the organizations in
our review said they found it necessary to assist their employees in
coping with the personal disruptions caused by the workforce
reductions, including the employees who were losing their jobs and
those who were not.  Many organizations emphasized frequent and
personal communications with employees as the downsizings developed,
showing a concern for the employees' information needs that federal
agencies undoubtedly should strive to emulate in the interest of
fairness to employees and to reduce the potential for disruptions
caused by uncertainty and misinformation.  Similarly, the extensive
efforts to counsel and help displaced employees find other jobs
suggests that most employers recognize an obligation to attend to
employee needs that the employers created through their decisions to
downsize.  These organizations' experiences are consistent with the
interest in improving the federal employee placement program shown by
OPM and the sponsors of the legislative proposals to strengthen the
program. 


MAJOR CONTRIBUTORS TO THIS REPORT
==================================================== Appendix Appendix


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------- Appendix Appendix:1

Robert E.  Shelton, Assistant Director, Federal Human Resource
 Management Issues
Nancy A.  Patterson, Assignment Manager
Janet Pietrovito, Evaluator-in-Charge
Jeffrey Dawson, Evaluator
Carol Henn, Evaluator
Marlene Zacharias, Evaluator Assistant


   DETROIT REGIONAL OFFICE
-------------------------------------------------- Appendix Appendix:2

Robert T.  Rogers, Assistant Director
Karen M.  Barry, Evaluator
Donna Bright Howard, Evaluator
John E.  Leahy, Evaluator
Laura L.  Miner-Kowalski, Evaluator
Barbara A.  Moroski-Browne, Evaluator
Cynthia A.  Neal, Evaluator
David K.  Porter, Evaluator
Lynda L.  Racey, Evaluator


   NEW YORK REGIONAL OFFICE
-------------------------------------------------- Appendix Appendix:3

Frank Minore, Evaluator
Helen Cregger, Evaluator

*** End of document. ***