There are two key reasons why downsizing is bad for innovation. Neither is immediately obvious, explains Jeffrey Baumgartner in this must-read article.

Not a day goes by in which we don’t hear about some major organization laying off thousands of employees. One of our salespeople recently followed up on a prospective client who had contacted us with strong interest in our idea management product. When the salesperson called the client, he was told that the client company had just laid off 15,000 people and needed to adjust to the changes before going forward. We certainly couldn’t feel sorry for ourselves over the delayed sale in view of the far less pleasant prospects that faced those 15,000 people.

Downsizing is not nice. No one likes to have to dismiss large numbers of employees and victims of downsizing are generally even less happy about the situation. Unfortunately, in a recession many companies face an unpleasant choice: downsize or die. Understandably, management usually choose the former.

There are two key reasons why downsizing is bad for innovation. Neither is immediately obvious.

To make matters worse, downsizing is usually detrimental to innovation. Yet in a recession companies really need to innovate in order to survive.

Strategic linking

As you know, business innovation – and especially new product innovation – is almost never the result of one creative genius who sits in a laboratory inventing things. Rather, innovations are developed from the first germ of an idea, through to a developed concept and eventual product, service or process via collaboration.

Colleagues in an organization share ideas on how to solve problems. As good ideas are identified, they are built upon in conversations, team meetings, e-mail exchanges and by using collaborative tools. Creative people seek feedback on ideas from their more analytical colleagues. Marketing people might be asked to review product ideas. Research people build and test prototypes and so on.

According to research by Dougherty and Bowman¹, new product innovation relies on “strategic linking”. People need to link not only to other innovators, but to managers who can champion their ideas, sales people who can sell the resulting products and others. Keith Sawyer uses the term “collaborative web”² to describe the network of links. When collaborative webs break down owing to lay-offs, employees have to start all over in building up new links.

In their study of a dozen firms, Dougherty and Bowman found a direct correlation with the extent of a firm’s downsizing and the inability of people to solve strategic linking problems. The firms with the least downsizing solved 48% of strategic linking problems; the ones with the most solved only 23%.

They found that in most firms in which large numbers of employees were dismissed, management paid almost no attention to product innovation.

They found that in most firms in which large numbers of employees were dismissed, management paid almost no attention to product innovation. Their advice: “To overcome the negative consequences of downsizing on product innovation, managers should support innovation sponsors and champions, and retain “old timers” who constitute the network. They should also bolster the network by building more connections among departments, and between new and established businesses. Finally, they should incorporate innovation directly into their firm’s strategy. ”

I would add that management also needs to help employees build new collaborative webs. This can be done through internal networking activities; building the equivalent of marketplaces where employees can learn about other divisions and how to work with them; and bringing diverse people into meetings. Activities such as these bring people into contact with colleagues they might otherwise never meet and thus facilitates building new collaborative webs.

Unfortunately, these activities, while having substantial long term pay-off, are unlikely to be seen as productive in the short term. Employees themselves will be reluctant to do anything that might be perceived as non-productive and middle managers will be equally unenthusiastic about sponsoring such activities. Thus senior managers must make clear the long term benefits of networking to build new collaborative webs.

Indeed, as a senior manager, it is absolutely critical that you minimize disruption of the creative web, provide methods for rebuilding webs and stress the value of those webs as well as the importance of time spent on networking. Your company’s innovativeness depends on it!

Broken trust

Research on innovative companies often demonstrates that trust is a critical ingredient. If employees trust each other, trust their managers and trust their brand, they are more than willing to risk being creative and building ideas that can turn into innovations. They do not fear that they will be reprimanded if an idea does not pan out. They are not worried about managers stealing credit for their ideas and they know they will not be laughed at for making an outrageous suggestion.

Unfortunately, lay-offs have an unpleasant tendency to destroy trust. Employees are no longer sure if they have a future in their company. They begin to worry that time devoted to developing a creative idea might be perceived as time wasted. They worry that if they do not demonstrate productivity, they will be in the next batch of dismissed colleagues. They worry that more desperate colleagues might steal their ideas. And that all kills trust.

And once this trust dies, people spend less time trying to be more innovative. They keep ideas to themselves and avoid rocking the boat. And that is not good for innovation.

Again, it is up to management to stress the increased importance of innovation to the firm and encourage time spent on innovative projects. Indeed, management should explicitly state that time spent on innovative projects is considered productive time.

It is also important to bear in mind that if the focus of your company’s innovation strategy is going to change, this should also be communicated to employees. It is understandable that management may want to focus innovation on quick to market ideas rather than long term projects that might not pay off in five years. If so, employees need to understand this new focus so they can support it.

The best solution

Of course, the best thing you can do for the innovative future of your firm is not to downsize. But when you have no other option, then it is critical to keep innovation in mind when planning your downsizing.

By Jeffrey Baumgartner

About the author

Jeffrey Baumgartner is the author of the book, The Way of the Innovation Master; the author/editor of Report 103, a popular newsletter on creativity and innovation in business. He is currently developing and running workshops around the world on Anticonventional Thinking, a new approach to achieving goals through creativity.

Photo: Young laid off manager from