Cost-benefit analysis of organizational interventions: The case of downsizing

This article advocates a new approach to assessing the desirability of down sizing. The model treats downsizing programs the same as any other projecte d investment by a firm. The steps involved in reaching a decision include: (a) Estimation of cash outflows at the initial stage of the process regarde d in this paper as the investment in the downsizing project; (b) Assessment of the net inflow from downsizing; (c) Estimation, on the basis of(a) and (b), the real, post-tax rate of return on the downsizing plan and compariso n with the real, post-tax cost of capital to the firm; (d) Ranking and comp aring the downsizing project to all other potential investments. The final decision of whether to accept or reject a downsizing plan will then depend on the relative desirability of the project (when all other non-quantitativ e considerations are also evaluated) to other investment alternatives, taki ng into consideration the limited resources of the firm for capital spendin g.