Don’t let knowledge walk away: Knowledge retention during employee downsizing

Defining employee downsizing

Freeman and Cameron (1993) defined organizational downsizing in its broadest sense as a set of management activities aiming to improve organizational efficiency, productivity and/or competitiveness. These downsizing activities involve reducing various organizational resources (i.e. assets, capital and human resources). Thus, downsizing is often only related to a reduction in organizational size (Freeman and Cameron, 1993), leading to confusion in the extant literature (Budros, 1999). This article focuses on employee downsizing and considers intentional personnel reduction strategies (e.g. transfers, outplacement, retirement incentives, buyout packages, layoffs and attrition) that impact an organization’s work processes. A number of scholars echo this perception and associate downsizing with a planned permanent workforce reduction (e.g. Budros, 1999; Chadwick et al., 2004; DeWitt, 1998). Cascio’s definition of downsizing as ‘planned eliminations’ therefore excludes individuals discharged for a reason and individual departures via normal retirement or resignation (Cascio, 1993: 96).

In the light of these conceptualizations, the term ‘layoff’ has often been used synonymously with the organizational downsizing concept. However, in contrast to layoff and other personnel reduction approaches, employee downsizing is a distinct concept due to its focus on the organizational instead of the individual level of analysis (Brockner, 1988). While employee downsizing represents the overarching, broader strategic concept of workforce reductions (Greenhalgh et al., 1988), layoff and the other approaches refer to the operational mechanism used to implement this strategy.

Moreover, the majority of researchers (Chadwick et al., 2004; Datta et al., 2010; DeWitt, 1998; Freeman and Cameron, 1993; Guthrie and Datta, 2008) stress that employee downsizing is driven by managers’ belief that this strategy will increase organizational efficiency and productivity. In this respect, employee downsizing is considered an intentional means of maintaining/increasing firm performance (Chadwick et al., 2004). Consequently, we define employee downsizing as an organization’s planned implementation of workforce reduction strategies in an attempt to increase organizational performance.

Consequences of employee downsizing

Despite employee downsizing’s widespread use as a strategic initiative, strategic human resource management (SHRM) research has no general consensus on the relationship between employee downsizing and organizational performance. In their recent literature review of this topic, Datta et al. (2010) examined 36 studies that had examined downsizing outcomes from the perspective of market returns, firm profitability, organizational efficiency and other outcomes (e.g. sales growth and R&D investments). While this review reveals that employee downsizing announcements are generally associated with immediate negative effects on the stock price, the long-term stock performance effects are rather mixed. The effects of workforce downsizing and firm profitability are much more contradictory (Datta et al., 2010). Researchers state that employee downsizing leads to sustainable performance improvement (e.g. Perry and Shivdasani, 2005), but also that it has sustained harmful effects on organizational profitability (e.g. Guthrie and Datta, 2008). Equivocal findings were also identified regarding employee downsizing and labour productivity, firm R&D activity and sales growth (Datta et al., 2010).

Prior research’s mixed results motivated some of the more recent studies to examine moderators that may influence the effectiveness of employee downsizing (e.g. Chadwick et al., 2004; Guthrie and Datta, 2008; Love and Kraatz, 2009). Chadwick et al. (2004) found that employee downsizing’s performance is closely related to the way it is implemented. Earlier, Cascio (1993) identified underestimating employee downsizing’s profound effects on work processes and structures as the main source of negative performance outcomes. This article subscribes to the idea that employee downsizing does not relate to whether or not it should be done, but rather how this strategy should be implemented. In this regard, we add to the emerging stream of research exploring critical contingencies’ moderating influences on employee downsizing.

Generally, employee downsizing is not a short-term solution to performance problems. Rather, it is a comprehensive and complex process causing dramatic changes to the existing informal organizational structure. These changes often require employees to take on new tasks within and outside the company (Cameron et al., 1991). In the aftermath of such downsizing efforts, the surviving employees frequently have to double their efforts to compensate for the reduced human resources.

Besides these quantitative problems, employee downsizing often leads to qualitative problems linked to implementation errors during the downsizing process. The SHRM perspective suggests that employee downsizing runs the risk of undermining sustainable competitive advantage. Sometimes referred to as ‘dumbsizing’ (e.g. Bedeian and Armenakis, 1998), employee downsizing efforts may result in the loss of key knowledge and individuals, leading to deteriorating quality, productivity and effectiveness. In particular, foresight and downsizing strategies’ non-prioritized implementation tactics run the risk of causing the loss of valuable institutional knowledge and memory if the wrong employees are laid off (Fisher and White, 2000; Guthrie and Datta, 2008).

The business press provides recent examples of valuable knowledge losses during employee downsizing. In this regard, Pfeffer (2010) mentions the US electronics retailer Circuit City, which downsized 3400 of its highest paid (and probably most effective) sales associates in an attempt to gain sustainable cost reductions. The remaining smaller, less skilled sales force provided competitors such as Best Buy with an opportunity to gain market share. Once in this spiral, Circuit City could not prevent the haemorrhage of clients and revenues. The company filed for bankruptcy in 2008 and finally ceased trading in 2009.

Charles Schwab Corp. provides us with a crisis-induced reaction in the aftermath of the dot-com crisis at the beginning of the new millennium. After two rounds of employee downsizing, the company offered a US$7500 bonus for any previously downsized employee rehired by the firm within 18 months of the layoffs (Morss, 2008). Astonishingly, this is not a unique phenomenon. Companies often lose people they did not want to lose and rehire them at additional costs. A survey by the American Management Association (AMA) revealed that about one-third of companies that lay people off subsequently rehire some of them as contractors because they still need their skills.

These examples draw attention to two critical aspects related to employee downsizing. First, employee downsizing comprises a certain amount of complexity that surpasses a pure quantitative reduction of employees and costs. Second, human and social capital are key sources of competitive advantage (e.g. Hitt et al., 2001) that may be negatively affected by employee downsizing activities. Burt (1997) characterizes human capital as an individual’s ability and knowledge, whereas social capital refers to the combined organizational knowledge obtained through social interactions. Employee downsizing’s potential risk will therefore differ depending on whether one takes a human or social capital perspective. If an organization is considered an aggregate of individuals, losing an employee through employee downsizing carries the risk that the information held in that employee’s memory as well as its value will be lost if this is not retained elsewhere within the organization (Fisher and White, 2000).

Conversely, if organizations are considered a collection of individuals with multiple interrelationships on a collective or organizational level, employee downsizing’s potential damage translates into the loss of future knowledge created through social interactions between individuals and other organization members (Fisher and White, 2000). The multiple collaborations that each individual has within and across organizational units are the fundamental basis of knowledge retention (Argote et al., 2003). Consequently, if such collaborations are damaged, employee downsizing’s potential negative effects are revealed. Massingham (2008) has recently highlighted and summarized these effects and categorized them into lost human, social, structural and relational capital.

However, organizational culture, processes and structure have also been found to be critical in combining and leveraging individual knowledge retention (Brown and Duguid, 1991). Unfortunately, prior research has provided us with few insights into how firms manage to successfully implement employee downsizing, retain key employees and simultaneously maintain a culture of trust and shared identity. Applying organizational learning theory, we build on prior conceptualizations and develop a comprehensive theoretical model that addresses these shortcomings.

Knowledge retention in organizations

Organizational learning enables firms to process information about their environment and make adaptations to achieve optimal fit and performance (Hedberg, 1981). By means of absorptive capacity, firms acquire and assimilate this new information and incorporate it into their knowledge base (Cohen and Levinthal, 1990; Easterby-Smith et al., 2008; Lane et al., 2006). This process depends on prior knowledge to understand and interpret the information acquired (Lichtenthaler and Lichtenthaler, 2009) and requires mechanisms to store the new knowledge in a sustainable way that facilitates retrieval at a future date. According to Walsh and Ungson (1991: 61), organizational memory refers to ‘stored information from an organization’s history that can be brought to bear on present decisions’. Retained knowledge is thus the result of decision stimuli (i.e. new information or problems encountered) and their responses (Anderson and Sun, 2010). It is embedded in various repositories that are either located on an individual, group, or an organizational level (Argote et al., 2003). Knowledge retention may therefore refer to an individual’s direct experience, observations and knowledge (e.g. Levitt and March, 1988), as well as to routines (e.g. Cohen and Bacdayan, 1994), organizational processes and practices (e.g. Girard, 2009) and/or culture (e.g. Walsh and Ungson, 1991).

Scholars have generally argued that retained knowledge enables a process of sorting, categorizing and organizational sense making which creates the potential to apply existing knowledge in new and strategic ways in the future (Madsen et al., 2003). Consequently, retained knowledge influences the interpretation of newly acquired information (Cohen and Levinthal, 1990), which may lead to organizational learning through permanent behavioural changes (Levitt and March, 1988). The two concepts are therefore inextricably intertwined (Olivera, 2000; Weick, 1979) and each is necessary to understand the other better (Anderson and Sun, 2010). Figure 1 displays these interrelationships.

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Figure 1.

The organizational memory concept

From an organizational perspective, groups of individuals retain knowledge through the process of knowledge sharing, thus exceeding any individual’s cognitive abilities (Walsh and Ungson, 1991). In organizations, knowledge sharing refers to the process by which units transfer and use retained knowledge developed by other units (Tsai, 2001). Although scholars have outlined that collective knowledge retention exceeds the level of individual knowledge retention, the antecedents and moderators of knowledge retention throughout the organization have not been sufficiently delineated (e.g. Huber, 1991).

Generally, research has recognized the potential of providing a better understanding of the broad variety of mechanisms that enable knowledge retention. A growing number of studies have therefore investigated the possibilities of improving organizational knowledge retention. Madsen et al. (2003), for instance, highlight how an increase in intra-organizational personnel inflows improves knowledge retention within the organization’s boundaries. Fiedler and Welpe (2010) highlight several structural organizational factors, such as standardization and organizational processes, that impact knowledge retention. Moreover, some scholars have particularly focused on analysing how employee outflows affect an organization’s retained knowledge. Droege and Hoobler (2003), for instance, investigate the conditions required for firms to capture retained individual knowledge and avoid knowledge losses due to employee turnover. Conversely, several studies (e.g. Bowersox, 2009; Fisher and White, 2000; Shah, 2000) have applied a social network perspective to emphasize the knowledge disruptions that employee downsizing causes. Massingham (2008) has recently presented a case study in which he differentiates between the risk of losing organizational knowledge through human (employees’ combined competence and experience), social (knowledge created through relationships and social networks), structural (organizational memory) and relational capital (knowledge acquired through an organization’s outside collaborations).

Overall, the extant literature provides rich insights into how to explain, measure and avoid the potential negative effects of knowledge loss in organizations. Nevertheless, how employee downsizing affects organizational knowledge retention throughout the organization has not yet been addressed. In fact, most of the relevant studies are very fragmented, mostly highlighting critical social and organizational network implications (Fisher and White, 2000; Massingham, 2008; Shah, 2000). However, employee downsizing not only runs the risk of destroying valuable organizational knowledge on the individual and social network levels, but may also profoundly disrupt established procedures, routines and the organizational culture. These more indirect effects can have severe long-term consequences.

There is considerable research (e.g. Brockner, 1990; Konovsky, 2000) indicating that preserving cultural values such as fairness and openness throughout the employee downsizing process has important consequences, such as better employee behaviour. Moreover, several authors (e.g. Casey, 2005) maintain that in order to understand the relationships between individual and organizational learning, a theory is needed that matches the complexity of the phenomenon being studied. These arguments spur our theoretical exploration of employee downsizing as a risk to knowledge retention on various organizational levels. Our approach differs from that in prior literature by offering a comprehensive view of all the direct and indirect effects of employee downsizing throughout all organizational levels. The following section presents our arguments in greater detail and develops testable propositions for our perspective’s key assumptions.

The effects of employee downsizing on knowledge retention

According to the knowledge-based theory of the firm (e.g. Grant, 1996), a key organizational task is accumulating and protecting valuable knowledge. This knowledge determines a firm’s capacity to efficiently convert its inputs into valuable, hard to imitate outputs. Thus, the firm’s critical knowledge, skills and capabilities—embedded in its human resources—contribute actively to its success (Nonaka, 1994). Some scholars argue that the firm’s boundaries should encompass these valuable competencies and core knowledge (Prahalad and Hamel, 1990), thereby keeping this knowledge internal. This will allow unique knowledge or capabilities to be developed and exploited.

As mentioned, inefficiencies and/or failure to implement employee downsizing strategies have negative consequences for an organization. One of these effects is the loss of vital organizational memory, as layoffs directly influence a firm’s stock of existing knowledge (Dougherty and Bowman, 1995). Consequently, research (e.g. Freeman and Cameron, 1993) has argued that effective employee downsizing efforts should be considered part of the firm’s long-term strategy to preserve its critical knowledge for sustainable competitive advantage. The word ‘critical’ knowledge is of particular importance for effective employee downsizing, as an elementary aspect of organizational learning is based on forgetting (Huber, 1991). Unlearning is often a necessary condition for change.

In this respect, knowledge retention can be viewed as both beneficial and detrimental to organizational functioning. Some researchers argue that retained knowledge harbours inefficiency, inflexibility and competence traps (Levitt and March, 1988). Considered a reinforcement of single-loop learning that maintains the status quo (Argyris and Schon, 1978), knowledge retention can prevent adaptation to new situations (Shin et al., 2001), thereby threatening the organization’s effective functioning. Conversely, researchers have recognized the vital role of knowledge retention. Knowledge retention can reduce transactional costs by limiting the amount of search and analysis needed for repeated or similar decision making (Walsh and Ungson, 1991). Retained knowledge has the potential to coordinate, integrate and legitimize organizational activities (Duncan and Weiss, 1979). Furthermore, it provides a basis for a shared context by allowing problem solving, adaptation and learning (Moorman and Miner, 1998).

The above arguments indicate that effective knowledge retention results from a combination of remembering and forgetting. In this respect, only the loss of critical knowledge due to employee downsizing has detrimental effects. Cameron (1994) supports this argument, as he considers it crucial to identify a firm’s future core competencies before undertaking employee downsizing. De Holan and Phillips (2004) describe an even more serious scenario by maintaining that the loss of critical knowledge equals the loss of an organization’s competitiveness and should therefore be avoided. Consequently, effective employee downsizing is closely related to the ability to retain a firm’s critical knowledge.

Weick’s (1995) four-level framework is a good starting point to analyse how critical knowledge can be retained throughout an organization. On the first level (individual or intrasubjective level), individuals store their knowledge of specific cause-and-effect relationships, creating an individual frame of reference. Interactions between individuals create the second, intersubjective, level: a universal reliable frame of reference creating shared meaning between individuals and groups. These intersubjective frames of reference create a ‘collective mind’ (Weick and Roberts, 1993). On the third, collective, level, these intersubjective frames are stored and preserved over time (i.e. in job categories, routines, ideologies, etc.), resulting in retained organizational knowledge. The final, extrasubjective, level retains knowledge on a macro level, such as in organizational culture and institutional artefacts (Weick, 1995).

Drawing on Weick’s (1995) perspective, knowledge retention can be considered as emerging from interpersonal and/or behavioural connections. Similarly, Walsh and Ungson (1991) consider organizations as networks of ‘intersubjectively shared meanings that are sustained through the development and use of common language and everyday social interactions’ (Walsh and Ungson, 1991: 60). These connections constitute a learning network based on a system of interaction effects within an organizational context. In this way, knowledge retention on the individual level ascends through social interactions to collectively retained knowledge on the organizational level.

Research implications

First, analysing the relationships between employee downsizing and knowledge retention requires an approach encompassing multiple levels of analysis. Prior theories and research focused on the individual, group or organizational levels of analysis. On the individual level, prior studies emphasized ways of reducing the impending risk of losing critical tacit knowledge through employee downsizing (e.g. Droege and Hoobler, 2003). However, these studies tend to neglect the indirect implications of individual knowledge losses for the overall organization’s function and performance. Conversely, studies focusing on the organizational level of analysis highlight that employee downsizing runs the risk of destroying employees’ commitment and their perception of trust (e.g. Hopkins and Weathington, 2006). Unfortunately, these studies do not examine how such organizational outcomes impact the use and development of an organization’s retained knowledge on the individual level. Drawing on our propositions, employee downsizing’s effects on knowledge retention are not solely manifested on a particular organizational level. Combining the intrasubjective, intersubjective, collective and extrasubjective levels provides a more fine-grained understanding of the interrelationships between employee downsizing and organizational memory. This research design echoes recent calls for multi-theoretic perspectives to analyse organizational downsizing on multiple organizational levels (Datta et al., 2010).

Second, the presented interrelationships between the different organizational levels demonstrate that employee downsizing is somewhat complex. Prior research (Guthrie and Datta, 2008) stated that the loss of critical human and social capital as well as the survivors’ lower levels of commitment and greater rigidity is the main reason for employee downsizing’s ineffectiveness. Underspecified models may therefore explain certain inconsistencies regarding employee downsizing in prior research findings. An organization that successfully preserves its critical social network structures on the intersubjective level does not, for example, necessarily avoid critical knowledge losses if it has failed to maintain its employees’ perception of justice. Consequently, employee downsizing’s negative and positive outcomes are due to a comprehensive approach on all the organizational levels. Neglecting this complexity raises questions regarding the outcomes’ validity and generalizability.

Third, the close interrelatedness between employee downsizing and knowledge retention emphasizes that financial performance measures fall short regarding determining employee downsizing’s overall effectiveness. The impact of knowledge losses after employee downsizing (Massingham, 2008) may not always be measurable as financial outcomes. Destroying access to individual or collective memory spurs inefficiencies (Cohen and Bacdayan, 1994) that may only become visible through decreasing levels of innovation (Dougherty and Bowman, 1995), creativity and collaboration (Amabile and Conti, 1999) as well as lower degrees of standardization (Tsoukas and Vladimirou, 2001). Consequently, when measuring employee downsizing’s overall effectiveness, the non-financial losses, which cannot be captured in financial figures, should also be taken into account. These measures could entail, for example, variations in individual and collective search behaviours (i.e. request for information and guidance), failure rates, the quality levels in established production/service processes, the amount of product or process innovations, voluntary employee turnover as well as changes in the firm reputation. If employee downsizing’s financial outcomes are enriched with non-financial outcomes, managers should take long-term competitive disadvantages, such as an erosion of skills, disrupted organizational networks and the survivors’ negative response behaviour, into account.

Fourth, retaining key employees and their knowledge during employee downsizing may also provide insights into how to retain employees in general. Prior research (e.g. Trevor and Nyberg, 2008) has confirmed the close relationship between employee downsizing and subsequent voluntary turnover. These involuntary turnovers have been found to consistently harm firm performance (Shaw et al., 2005). Avoiding knowledge losses during employee downsizings also provides potential insights into how to better retain knowledge in other organizational contexts, thus helping reduce the risk of knowledge losses due to involuntary turnovers.

Fifth, the insights into knowledge retention may also extend the process-based view of absorptive capacity (Easterby-Smith et al., 2008). The acquisition and assimilation of new knowledge depends strongly on individuals and organizational units’ existing knowledge (e.g. Cohen and Levinthal, 1990). As a result, multiple authors have called for a more integrative approach when analysing absorptive capacity (e.g. Anderson and Sun, 2010; Argote et al., 2003; Grant, 1996). The conservation of relevant knowledge on various organizational levels helps to create a context that enables collective knowledge processes and social integration mechanisms for absorptive capacity (Lichtenthaler and Lichtenthaler, 2009). Consequently, the presented framework for knowledge retention may provide new insights into how firms maintain and/or improve their absorptive capacity in the long term.

In a more general context, our propositions also provide insights into the debate on virtues and virtuousness (e.g. Arjoon, 2000; Caza et al., 2004). Virtuousness refers to standards that provide guidance for excellence in character and moral judgement during times of difficulty (Caza et al., 2004). Virtuous organizations contribute to employees’ ethical development by encouraging the pursuit of that which is beneficial for individuals and society (Fowers and Tjeltveit, 2003). In theoretical debates, scholars have stressed the importance of virtuousness as a ‘buffer’ against negative organizational consequences (Bright et al., 2006). These counterproductive consequences are the result of detrimental effects on shared values, trust, loyalty and the commonality of culture and values. In this respect, employees’ perceptions of justice during downsizings are crucial for determining how they perceive the level of virtuousness. Consequently, fostering procedural and distributive justice may not only be beneficial for knowledge retention on all organizational levels, it may also increase employees’ ability to absorb the perceived threat and trauma, thus leading to the preservation of social capital and collective efficacy during downsizings.

Managerial implications

The implementation of employee downsizing is often related to the question of who will actually be displaced. Managers sometimes answer this question by implementing across-the-board percentage cuts to maintain the perception of fairness and transparency. This behaviour lies at the root of one of the main criticisms of employee downsizing, namely that it is often short-sighted, badly managed and considered a ‘one-time, quick-fix solution’ (Cascio, 1993: 103). The theoretical model developed in this article clearly highlights that employee downsizing comprises more than just a pure quantitative reduction of the overall workforce. Implementing employee downsizing has to take the potential damage to a firm’s organizational memory into account. The article’s managerial implications (see below and Table 1) also provide indirect managerial insights into how to proactively reduce potential knowledge losses during future employee downsizing. Forward-looking companies that manage and distribute their organizational memory actively are those that can most successful retain knowledge.

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Table 1.

Reducing the risk of knowledge loss during employee downsizing

Organizational level	Risk for knowledge retention	Theoretical recommendation	Analytical approach	Practical recommendation employee downsizing
Intrasubjective level	Loss of tacit knowledge	Increase level of collaboration	Collaboration ties within organizational units	• Maintain connectivity between critical individuals with low levels of collaboration
Intersubjective level	Damage to informal network structure	Creation of dense networks (strong ties)	Network density and collaboration between organizational units	• Maintain high performing units • Ensure connectivity between critical networks with low levels of collaboration
Collective level	Loss of routines or standardized behaviour	Maintain leadership structure	Artifacts (i.e. rules, standard operating procedures); common behavioural pattern of employees	• Engage key leaders early in employee downsizing • Maintain employee rewards to increase psychological safety
Extrasubjective level	Undermine motivation to engage in knowledge retention and organizational learning	Procedural and distributive justice	Employees’ perceptions of justice and their knowledge of the reasons for the downsizing	• Rationale for employee downsizing • Communication and participation before, during, and after employee downsizing

A common approach to retaining knowledge is to capture and store departing employees’ information and knowledge through interviews and documentation. However, this approach often fails as (a) documentation does not guarantee the retrieval, correct interpretation and application of the knowledge; (b) not all tacit knowledge can be captured and stored in a database; and (c) these approaches ignore the context that embeds the individual’s knowledge in a social network of co-workers and external parties. Consequently, an initial managerial task is to be aware of informal collaborations within and across organizational units.

Social network analysts have provided us with a wide range of practical tools with which to quantitatively analyse and assess networks (e.g. Scott, 2000). A very straightforward approach to obtaining a list of people in a specific network is to simply ask all the group members to characterize their relationship with one another (Cross et al., 2002). Managers can assess the knowledge flows between group members by undertaking surveys and subsequently visualize these informative social networks by means of diagrams (Cross et al., 2002; Scott, 2000). Capturing collaborations and knowledge flows between individuals in diagrams allows executives to look beyond formal organizational charts and become aware of cross-functional or hierarchical boundaries (Cross et al., 2002; Parise et al., 2006).

The outcome of the social network analysis helps managers identify the individual employee’s critical internal and external relationships (Parise et al., 2006) and to prioritize selecting-out decisions (Fisher and White, 2000). In practice, managers often base selecting-out decisions on legal considerations and disregard a qualitative assessment of their employees (Fisher and White, 2000). On the basis of Burt’s (1992) theory of structural holes, the loss of individuals with very few links to other organizational employees could mean that the tacit knowledge embedded in these employees may be lost. An analysis of these employees’ overall contribution and function regarding the organization’s ‘strategic core’ (Datta et al., 2010) helps managers avoid non-prioritized selecting-out decisions. Additionally, managers can identify those individuals who form a unique link between otherwise unconnected networks in the organization. Maintaining these employees during employee downsizing prevents the destruction of critical network connections between organizational units. If such employees have to be made redundant, managers should repair their network connections to ensure that the organization’s overall network connectivity remains intact.

From a network perspective, managers should ask themselves how they reward and foster cooperation between organizational units. Cooperation was found to stimulate successful knowledge retention through multiple knowledge exchanges that create dense networks (Reagans and McEvily, 2003). Conversely, intense competition between units was found to limit a firm’s capability to effectively retain knowledge between networks (Argote, 1999). Networks consisting of such units are characterized by limited collaborations, inter-unit competition and a focus on performance outcome. If units perform similar tasks and demonstrate low social cohesion, managers should avoid layoffs in higher performing units, as they often outperform units with high internal cohesion and effectiveness. If units perform unique tasks and demonstrate low social cohesion, managers should aim to preserve those employees who provide critical links to units in other networks.

Similarly, implementing employee downsizing should go hand in hand with an adequate leadership structure. Routines can help solidify or stabilize existing arrangements, or promote change (Adler et al., 1999). While routines and their artefacts are often complex and difficult to identify, managers have to be aware of leaders’ critical role in promoting psychological safety, thus influencing employee behaviour. Maintaining and engaging key leaders early during employee downsizing offer a two-fold advantage. On the one hand, trusted leaders are maintained and motivated, which ensures managerial support throughout the organization. On the other hand, these leaders’ subordinate employees are given emotional stability which helps maintain desirable behaviours (DeRue et al., 2008). Conversely, managers need to identify those individuals and leaders who create barriers to effective organizational unlearning and forgetting (Cohen and Bacdayan, 1994). In this respect, employee downsizing provides managers with a good opportunity to destroy detrimental routines that prevent the creation of new knowledge by preserving and applying out-dated retained knowledge.

Finally, managers should be aware that the way in which they approach and implement employee downsizing affects organizations’ ability to use organizational memory. Creating a climate of fear, intimidation and hostility by incorrectly communicating the rationale for and scope of organizational downsizing will not only cause the usual side-effects (i.e. decreased levels of morale and employee involvement), but will also impede effective knowledge retention, which is required for productivity. Managers should therefore be fair during their layoff procedures, carefully following and constantly communicating the overall goals, thus avoiding contradiction and multiple rounds of organizational downsizing. Moreover, critical employees’ involvement in certain situations spurs commitment to and trust in the organization.

Limitations and future research

The developed model is a first step towards comprehensively explaining the interrelationships between employee downsizing and knowledge retention and the article’s limitations suggest the need for additional research. From a theoretical point of view, the article illustrates the interactive effects between employee downsizing and knowledge retention. This could result in managers avoiding involuntarily damaging a firm’s organizational learning processes. While the article’s main contribution focuses on providing a comprehensive research framework, the established propositions need to be empirically validated through qualitative case studies. Future research could, for example, map social network changes before and after employee downsizing (Fisher and White, 2000) in combination with qualitative interviews on its perceived justice (Cohen-Charash and Spector, 2001; Hendrix et al., 1998). Moreover, these studies should also include various types of firms (i.e. size, industry, internationality, etc.) as prior research has, for example, mentioned the moderating effects of firm slack (e.g. Greenhalgh et al., 1988) and firm governance (Perry and Shivdasani, 2005).

Furthermore, future studies could uncover how distinct types of employee downsizing affect the overall relationship with knowledge retention. Research has provided evidence that diverse methods of workforce reduction also generate different costs and effects regarding organizations and their employees (e.g. Greenhalgh et al., 1988). Distinguishing between specific employee downsizing tactics in future studies will have the potential benefit of uncovering, according to the framework’s varying organizational levels, the different effects of a firm’s ability to actually retain knowledge.

In addition, future research should analyse how different organizational structures impact the relationship between employee downsizing and knowledge retention on different organizational levels. Research has argued that social networks often mirror the formal structure in bureaucratic, tightly coupled organizations. Brass (1995), for instance, maintains that social networks overlap more with mechanistic structures than with an organic organization. In these cases, routines and culture dominate, whereas social networks and tacit knowledge become secondary (Fisher and White, 2000). This has different implications regarding employee downsizing’s impact on knowledge retention. Future research may uncover that organizational structure has a moderating role if the relationship between employee downsizing and knowledge retention is analysed on different organizational levels.

Finally, the proposed model should be applied to distinct environmental dynamism and competitiveness situations. According to DeWitt (1998), the nature of a firm’s competitive environment is a crucial element in selecting appropriate downsizing strategies. This argument implies that knowledge retention and employee downsizing’s overall importance may vary depending on the environmental context. Consequently, environmental complexity could be a valuable and promising antecedent in a further analysis of the interplay between employee downsizing and knowledge retention.