Right Sizing Vs. Down Sizing By Ryan Scholz At Isnare.com Ezine Articles

My wife and I have been exploring the idea of downsizing to a smaller home. With our children grown and gone, we only use about a third of our house on a regular basis. A few weeks ago we had a realtor show us some options, and during the course of our search, he made the comment that we should right size our next home, not just down size. The point he was making was that we had to really define what we needed and work from there, rather than just get rid of some of the stuff we currently had.

As businesses face difficult choices in today’s economic climate, I began to realize that this same principle applies to decisions about reducing the size of a business or organization. Too many times businesses make indiscriminate choices about cutting and slashing costs, without considering the long term implications. Downsizing is reactionary in nature. Numerous studies have proven that there is no correlation between downsizing and company profitability in the long run.

Conversely, right sizing is proactive. Right sizing literally starts with a blank sheet of paper and builds the organization and processes around the business reality of the current situation. It is a strategic activity aimed at ensuring the long term success of the business. In some ways, it is almost like starting over as a company.

Right sizing is not easy to do because of the emotional engagement that most leaders feel with their current organization. So it becomes much easier to say, “let’s cut 20% of our staff across the board”, rather than question the need for specific functions or departments. It is easy for senior leaders to become defensive and protect their turf during a right sizing exercise. For this reason, it is essential that someone from outside the organization be used to facilitate and lead the right sizing activity.

The objective of downsizing is usually survival whereas the objective of right sizing is success. The first step is right sizing is to make an accurate assessment of the market as it exists today. For example, the US auto market has shrunk about 45% over the past year from around 1.2 million units in February, 2008 to 0.7 million units in February, 2009. I am absolutely sure that there is a way for companies to make money selling 700,000 cars a month. The problem is that you can’t do with a structure and organization sized to sell 2 million cars per month. Simply downsizing the current structure won’t work.

Once the size of the market and the company’s realistic share of that market has been determined, then the next step is to determine the variable margin. The variable margin is simply the selling price less direct material and labor costs. If the variable margin is negative, then something has to change—either the selling price or direct costs. It is important at this point to make sure that the variable margin for each product offered is determined and to eliminate those products that have a negative margin. Too many businesses hang onto unprofitable products for too long. Part of right sizing is selling the right products at the right price.

The final step in right sizing is determining the right organization structure and processes to support the business . It involves critically assessing each function and determining if it needs to be done, and should it be done in-house or outsourced. Again a blank sheet of paper is the best way to do this. One question that senior leadership should ask itself—”if this was a startup business, what we would we do?”

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