The effects of downsizing on innovation.

Thesis

The effects of downsizing on innovation

Submission date: March 22

nd

2014

Student and student number: Steven van Veenendaal, 10282726

First supervisor: Dr. R.M. Singh

Qualification for: M.Sc. in Business Studies (Strategy track)

Table of contents

FOREWORD ... 3

MANAGEMENT SUMMARY ... 4

1. INTRODUCTION ... 5

1.1

D

OWNSIZING

... 6

1.2

I

NNOVATION

... 7

1.3

T

HE EFFECTS OF DOWNSIZING ON INNOVATION

... 8

1.4

I

NNOVATIVE RESOURCES

... 10

1.4.1 Physical capital ...10

1.4.2 Human capital ...15

1.4.3 Organizational capital ...20

2. RESEARCH METHOD ... 25

2.1

R

ESEARCH SETTING

... 25

2.2

D

ATA COLLECTION

... 26

2.3

D

ATA ANALYSIS

... 28

3. RESULTS ... 29

3.1

S

TATUS OF THE DOWNSIZING

... 29

3.2

P

HYSICAL CAPITAL

... 30

3.2.1 Location ...30

3.2.2 Technological factors ...34

3.2.3 Financial resources ...36

3.3

H

UMAN CAPITAL

... 39

3.3.1 Key players ...39

3.3.2 Managerial factors ...43

3.3.3 Slack time ...50

3.4

O

RGANIZATIONAL CAPITAL

... 54

3.4.1 Degree of formalization ...54

3.4.2 Interdependence between teams ...56

3.5

P

ERFORMANCE

... 59

3.5.1 Idea generation ...59

3.5.2 Idea execution ...60

4. CONCLUSION AND DISCUSSION ... 61

4.1

C

ONCLUSION

... 61

4.2

M

ANAGEMENT IMPLICATIONS

... 63

4.3

D

ISCUSSION

... 64

APPENDIX A: REFERENCES ... 66

APPENDIX B: CODING SCHEME ... 70

T

HEMES AND CATEGORIES

... 70

I

NTERVIEWEE TENURE AT

A

EGON

B

ANK

... 71

I

NTERVIEWEE INVOLVEMENT IN INNOVATIVE ACTIVITIES

... 71

C

URRENT STATE OF DOWNSIZING ACTIVITY

... 74

K

EY QUESTIONS

... 77

P

ERFORMANCE

... 133

Foreword

The idea for this thesis originated from my interest in innovation and personally enduring a

downsizing process. Innovation fascinates me as it drives us all forward. As time progresses

innovation seems to speed up, giving us opportunities now that we could not have imagined

ten years ago. In their strive to create better products and services or improve the processes

through which they are created, businesses drive innovation. This forerunning role makes

them interesting to study. Businesses create innovations, but innovation also transforms

businesses. Many companies we see today started out as a completely different company, but

over time innovations both small and large, changed them into what they are today.

Downsizing can also be a game changer for businesses and after watching one first hand I

became interested in the subject. While many consider it negative, I see a lot of positives in

downsizing as it creates new opportunities. By combining innovation with downsizing I was

able to study two themes of strategic management that speak to me the most.

I would like to thank Dr. Ranjita Singh for her help in guiding me in the right direction with

writing this thesis. Her guidance put me on the right track throughout the critical and maybe

most difficult first steps of the thesis. Drawing up my research topic I found many interesting

subjects that she helped mold into a delimited area of research. Her quick and clear responses

helped me get through all other difficulties one encounters throughout the process of writing a

thesis.

I would also like to thank Aegon Bank for providing me with the opportunity to pursue my

studies in the first place. Special thanks go out to my previous managers Kirsten Saers and

Tom van der Poel who created the possibility for me to attend the University of Amsterdam.

In addition I would like to thank all Aegon Bank employees that helped me by participating in

Management summary

The complexity of innovation makes it vulnerable to changes in the organization, which is the

very thing that downsizing causes. The obvious alteration is that the workforce decreases and

to cope with this organizations have to implement other changes as well. Some opt to change

the set-up and interdependence between departments while others modify their infrastructure

or their product- and customer base. It depends on the organization and its environment and

there is no clear-cut way to success. In the scientific literature various factors are described

that influence innovation, including: location, technological factors, financial resources, key

players, managerial factors, slack time, degree of formalization and interdependence between

teams. These are also likely to be influenced by the changes caused by downsizing but there is

a gap in the literature on this aspect. The effect of downsizing on these changes and

consequently on innovation has not been empirically researched. In this thesis I researched

this effect to answer the research question “What is the effect of downsizing on the innovative

strength of an organization?” To answer this question I conducted a case study at Aegon

Bank, an organization that has recently gone through a downsizing process. According to the

literature a decrease of financial resources should not impact innovation while the departure

of key players and changes to slack time, the degree of formalization and the interdependence

between teams should. I found that the effects of downsizing on financial resources, key

players and slack time did not have an appreciable impact on the innovative strength on the

organization. Changes to the degree of formalization did impact the innovative strength, with

highly formal job responsibilities and informal communication proving to benefit innovation.

Another factor to benefit innovation was the increased level of interdependence between

teams, coupled with a common goal. The most important factor though turned out to be the

managerial factor, as management decisions throughout the downsizing process determine the

level of success in retaining or improving innovation.

1. Introduction

In this thesis I will look into two aspects of the business world with which most companies at

some point in time have to deal: downsizing and innovation. The complexity of innovation

makes it vulnerable to changes in the organization, which is the very thing that downsizing

causes. The obvious alteration is that the workforce decreases and to cope with this

organizations have to implement other changes as well. There is no given set of guidelines to

which organizations should adhere in case of downsizing. It all depends on the organization

and its environment. Some opt to change the set-up and interdependence between departments

while others modify their infrastructure or their product- and customer base. However it is

clear that to deal with a substantial decrease of the organization’s workforce, changes have to

occur throughout the organization. All these changes can affect the organization’s ability to

innovate, making it interesting to research the effect of downsizing on innovation.

As I will further elaborate on in this introduction various authors have written about the

effects of downsizing on the innovative strength of organizations. Some have found evidence

of positive effects while others have found the opposite to be true. As the results of different

studies have been going in opposite directions it is important to study practical examples as

much as possible. These cases provide insights into what happened during times of

downsizing and how that affected the innovative ability of the organization. In this thesis I

study one such case to answer the question:

What is the effect of downsizing on the innovative strength of an organization?

The importance of practical examples lies in the fact that downsizing activities are never just

about cutting the workforce by a certain percent and continuing with business as usual. When

a substantial amount of the workforce is cut from an organization, other changes have to be

implemented as well to cope with this decrease of employees. These other changes depend on

the organization, its environment and how management decides to address them. It can bring

forth structural changes to the organization, by changing its infrastructure, products and

customer base and work processes. All of these changes can affect the factors that influence

innovation. To answer my research question I will determine which factors influence

innovation and research how the downsizing affected them and consequently how that

affected innovation.

1.1 Downsizing

The global economic crisis resulting from the financial crisis in the US still affects the global

economy in the early 2010’s and continues to put organizations in difficulty. As a result more

and more firms are forced to reorganize and downsize their personnel file. In The Netherlands

alone we have seen high-impact downsizing activities at numerous organizations, ranging

from financial service providers such as ING (ING, 2013, pp. 27-28) and Aegon (Aegon,

2013, p. 47) or IT service providers like CGI (former Logica, now CGI) (Logica, 2011) and

Sogeti (Sogeti, 2013, p. 8 & 12) to post delivery service provider PostNL (PostNL, 2013, p.

32).

With no firm end of the economic crisis in sight, it is not hard to envision additional

downsizing activities at other organizations. After the crisis it is likely that the number of

organizations who go through downsizing activities will drop, but the phenomenon will not

disappear altogether. Over time organizations grow and go through periods of success and

periods of downturn. During the latter period, organizations are forced to re-evaluate their

workforce. Inevitably some organizations will conclude they do not have the proper

workforce in place to survive the downturn.

Although the current economic crisis highlights the fact that downsizing can occur, it is by no

means the only driver for downsizing. As markets and industries change over time,

organizations are forced to change accordingly. O’Reilly, Tushman and Herrald (2009)

describe how IBM was long considered one of the premium hardware suppliers for

mainframe systems and personal computers. However as the technology progressed and at a

certain point became less high-tech, other firms could step in to the market and provide

hardware of similar quality at a lower price. IBM recognized this change and decided to

change its strategy from being a hardware provider to becoming a service provider, focusing

on translating business needs into IT solutions. During this transformation IBM had to adjust

its workforce, as it required different people for their new strategy. IBM is by no means the

only organization to undergo such changes. Telecommunications provider Nokia originally

started out as a paper manufacturer (Nokia, 2013) and one of its main competitors, Samsung,

originated as a trading company dealing in groceries and producing noodles (Kovach, 2013).

These shifts of focus in the strategy of organizations cause changes in the workforce, and will

sometimes lead to downsizing in order to rebuild the organization.

1.2 Innovation

Innovation is defined by Damanpour (1987) as the adoption or generation, implementation

and utilization of ideas to enhance performance and has always been what drove us forward

as a society (Marchetti, 1980). All technology we currently use originates from many

innovations. From a business perspective innovation is considered key to growth. Schumpeter

(1942) coined the term ‘creative destruction’ to describe how through innovation

organizations can create new products, markets and even entire industries by innovating

existing products and processes.

1.3 The effects of downsizing on innovation

The effects of downsizing on the innovative strength of an organization can go in multiple

directions. Although downsizing can perhaps be attractive in the short run because of an

expected increase in worker productivity, in the long run a decrease in innovative strength

might prove costly (Bommer & Jalajas, 1999). Some argue that organizational downsizing

will have a negative effect on innovative strength (Dougherty & Bowman, 1995; Amabile &

Conti, 1999; Mellahi & Wilkinson, 2008). Various arguments are put forth to explain this

downfall of innovation. Dougherty and Bowman (1995) argue that, the network of

relationships that innovators use to make vital strategic connections are broken due to people

being forced out of the firm. Even when people with the capacity to innovate remain at the

company, due to others leaving, they themselves cannot produce the same level of innovative

output that they used to. Mellahi and Wilkinson (2008) point out the uncertainty surrounding

job-security created by downsizing. Over a period of time people are unsure about who will

keep their job and who will lose it. As a result of this uncertainty, highly skilled personnel,

scientists and researchers are likely to leave the organization with a similar negative effect as

described in the first example as a result. These two examples show how the loss of certain

(key) people from the organization and the increased insecurity among the remaining people

can result in a downfall of innovative strength. Another trait that often coincides with

downsizing is the cutting of slack in processes (Love & Nohria, 2005). Although the actual

cutting itself may be considered a form of process innovation, there is a risk that it will result

in a decline of innovation. This risk materializes when there is no excessive amount of slack

to begin with. Nohria and Gulati (1996) formulated this by describing an inverse U-shaped

relationship between slack and innovation. Too little slack discourages employees to

experiment while too much slack takes away the discipline to pursue good projects. They

argue that there is an intermediate level of slack that provides the optimal amount for

innovation. If the initial amount of slack is at that intermediate level or even below it,

additional cuts in slack will result in insufficient room for creative experimentation. It is

creativity that sparks innovation and by taking creativity away, the organization thus also

takes away an important source of innovation (Amabile & Conti, 1999). This argument was

somewhat refuted by Mellahi & Wilkinson in 2008 though as they studied UK firms after

going through downsizing procedures and found the negative effect of the reduction of slack

on the innovative output was only temporary. Combined with the statement that cutting slack

is a part of process innovation, there seems to be reason to believe that organizational

downsizing does not have such a negative effect on innovative strength after all.

Other scholars argue in line with this conclusion and say that a shortage of available resources

creates a need to innovate and effectively forces organizations to innovate (Mone et al, 1998).

Because of this need, the innovative strength of an organization might not be affected at all or

even improve. This is a more ‘natural’ perspective, as evolution has taught us that in times of

shortage, change occurs and the strongest survive by means of doing things differently and

smarter. This principle applies to organizations as well. The firm itself has to survive in the

market and at times must innovate to deal with a changing environment. As such downsizing

itself is a key part of innovation. It is a rigorous alteration that is adopted in order to survive.

It changes the organization by shrinking it and provides a trigger for additional changes, to

cope with the new situation of fewer employees. Proceeding on this we can conclude that

although some argue that downsizing has a negative effect on innovation it actually is the

trigger of a sequence of innovations that are necessary to put the firm (back) in a competitive

position again. It thus seems as though downsizing can present opportunities for innovation,

but at the same time delivers a risk of innovative downfall.

1.4 Innovative resources

In 1991 Barney described three forms of firm resources required to achieve competitive

advantage: physical capital, human capital and organizational capital. Various authors have

proposed factors under these three forms of resources that can impact the innovational

strength of the organization. In this thesis I will study those factors that are likely to be

affected by downsizing to find out if they are indeed affected in this case and if that had an

effect on the innovative strength of the organization.

1.4.1 Physical capital

Under physical capital Barney (1991) named three factors: location, access to raw materials

and technological factors. While location, access to materials and technological factors are

not necessarily part of downsizing, they can become relevant as a side effect of

downsizing. In the scenario at Aegon Bank they were actually an integral part of the

reorganization, which included the downsizing. Although neither location nor

technological factors were specifically asked about during the interviews, they did form

part of the responses given by the interviewees as they had a profound impact. Access to

materials did not play a part, which is unsurprising given that Aegon Bank operates in

the financial service industry and does not require many specific materials. Other authors

have added additional factors specifically aimed at innovation. These factors include the age

of the organization (Koberg, Detienne & Heppard (2003) and Galende & Manuel de la

Fuente (2003)), size of the organization (Koberg, Detienne & Heppard (2003) and Subrama

& Nilakanta (1996)), and two money-oriented factors, the organization’s debt and its financial

resources, mentioned respectively by Galende & Manuel de la Fuente (2003) and Subrama

& Nilakanta (1996). All of the above factors can be grouped under the physical capital

denominator, as they are all structural properties of the organization. The availability of

financial resources is a factor within the physical capital spectrum that is likely to

change during downsizing and as such it will also be studied in this thesis. The

organization size is studied through two other factors: key players and slack time, as

these are the resultants of the reduction of organization size and provide more precise

insights into what aspects of the size reduction affected innovation. These two factors

are placed under the human capital denominator, which I elaborate on further on. As

the age of the organization and its debt are unaffected by organizational downsizing,

they are not studied more deeply in this thesis. They are important to note though as

they form a substantial part of the physical capital and should thus be clearly mentioned

as out of scope for this study.

Location

Deeds, Decarolis and Coombs (1997) describe the importance of the geographical

location of an organization with regard to innovation. The most important aspect of

location they mention is the possibility of information spillover from other

organizations in the region. They state that organizations often innovate through

“borrowing” ideas from others rather than inventing them themselves. By being closely

located to organizations in the same sector, this becomes easier to do. The downsizing

activity at Aegon Bank is accompanied by a move from the Nieuwegein office to the

Aegon Netherlands Headquarters building in The Hague. The original office was situated

in an industrial area with no other financial service providers in the direct proximity.

The nearest similar organizations are those in neighboring Utrecht, which is about ten

kilometers away. The Aegon Netherlands Headquarters on the other hand is located

near similar financial service providers such as ING and Nationale Nederlanden, with

offices literally across the street. The move then should have a positive impact on

innovation as it facilitates the opportunity for borrowing ideas described by Deeds,

Decarolis and Coombs (1997) in two ways: a) It brings employees in direct contact with

their Aegon Netherlands colleagues with who they will share a building and b) it brings

employees closer to other organizations in similar industries. This will allow for more

interaction and creates the opportunity to “borrow” ideas from colleagues and

competitors alike. However this effect is more likely to become visible in a longer run.

The research is conducted directly after the downsizing, which in turn was concluded

shortly after the move to The Hague. In this short span of time Aegon Bank is likely to be

focused mostly on itself, and unable to reap the benefits from being physically closer to

other people in similar industries. I therefore do not expect to find any impact on the

innovative strength of Aegon Bank due to the change of location at this point.

Proposition 1: The move of the organization from an industrial area to an area with

other financial institutes will not have a positive impact on innovation within the

timeframe of the reorganization.

Technological factors

The technological factors mentioned by Barney (1991) contain an organization’s plant

and equipment. This is aimed at industrial organizations and in the case of a financial

service provider can be translated into the organization’s office and its IT infrastructure,

as those are the two means that allow them to produce their service. To deal with the

downsizing of its workforce Aegon Bank decided to implement a new back- and

frontoffice IT system. From Barney’s perspective this would allude to a major change to

the organization’s equipment and thus provide ample opportunity for innovation. I

expect this system upgrade to have a positive impact on innovation in two ways. First

the implementation of the new systems can allow for innovations within the systems.

The new systems can provide new products and services to clients that the old systems

could not support. Secondly it can change the way Aegon Bank employees have to

interact with the system to service all processes. This could for example result in the

automation of processes that were done manually in the old systems. As the

implementation of these new systems runs parallel with the downsizing activities I

expect to see the positive impact on innovation during and immediately after the

downsizing activities.

Proposition 2: The implementation of new IT systems will have a positive impact on

innovation during the downsizing.

Financial resources

The debate on whether sufficient financial resources benefit innovation is not yet fully

crystallized. If an organization finds itself with a complete lack of financial resources for

innovation and must thus lend money to facilitate innovation, Savignac (2008) concludes that

innovation is hampered. A reduction of innovation of up to 20% percent can be addressed to

having to find external funding for innovation. Similarly, Katila and Shane (2005) state that

organizations with large financial resources are less reluctant to invest in innovation due to

their ability to absorb these investments more easily compared to organizations with more

limited financial resources. However there is also literature available that points in the other

direction. Galende del Canto and Suarez Gonzalez (1999) found that financial resources

hardly influence the organization’s innovative strength and a greater amount of firm equity

actually even has a negative effect on the probability for an organization to innovate. The

reason being that firms with substantial financial resources are less motivated to pursue

innovation for the sake of decreasing costs. Their possession of abundant financial resources

makes it less necessary to do so. Considering the situation in which Aegon Bank finds itself

prior to the reorganization it seems likely that the financial resources available for innovation

will develop in two ways. First a major amount will be made available to develop the new IT

systems mentioned earlier. Although this investment will not be entirely addressed to

innovation, there is a lot of room for innovation within the project to implement the new

systems. As financial resources are available for this implementation, at least part of it will be

attributed to innovation. Secondly though, the financial resources available for other

innovations will decrease. The downsizing activity is done to cut costs as Aegon Bank found

itself in serious financial difficulty. It seems likely that to aid in the cost cutting, apart from

the one-time investment in new IT systems, overall budgets for innovation will decrease.

However this does not necessarily have to have a negative impact on innovation. The Aegon

Bank management decided to focus its attention with regard to innovation on incremental

process improvements rather than large new product or service innovations. These

incremental innovations are far less costly to develop and implement and as such do not

require large financial sums but rather time from employees to review their work processes

and implement changes. Although time from employees ultimately derives from financial

resources, as larger resources would be able to sustain a larger workforce and clear more time

for these incremental innovations, I make a deliberate distinction between the two. The

available workforce will be addressed under ‘slack time’ while I consider financial resources

to be the actual available amount of money to invest in the development and implementation

of innovative ideas. As the focus with regard to innovation shifts towards incremental

innovations it is not necessary to lend money in order to innovate. This abates the risk that a

lack of financial resources will reduce the willingness to innovate (Savignac (2008), Katila

and Shane (2005)). Rather I expect the lack of financial resources to encourage the

and Suarez Gonzalez (1999), as it will serve as a means to create a sense of urgency among

workers to make the organization as efficient as possible.

Proposition 3: The reduction of financial resources will have a positive impact on

innovation.

1.4.2 Human capital

The three resource under the ‘Human capital’ denominator most likely affected by

downsizing are key players, managerial factors and slack time.

Key players

To innovate, an organization requires people with the capacity to do so. In this study these are

defined as key players. Two studies by Galende del Canto and Suarez Gonzalez (1999) and

Galende & Manuel de la Fuente (2003) argued that a high stock of skilled employees

positively influences innovation. Hadjmanolis (2000) added that it is not the level of stock of

resources that is critical for innovation, but rather the type and quality of resources. Lawson &

Samson (2001) have a different perspective as they showed that having key players is not

critical. They argue that effective resources management is required to help increase the

number of innovative initiatives and improve the probability of stimulating innovation.

Mobilizing those resources requires the support of key players though, namely those

individuals that at various stages of the innovation process act as gatekeepers, innovators or

sponsors. They finally argue that management should recognize and incorporate the different

visions employees might have to their own.

Aegon Bank can not simply choose to maintain its key players as it is not free to choose

which employees it wants to retain and which employees it wants to rid itself of in the

downsizing activity (Overheid, 2014). It first has to redesign the organization to describe all

available working positions after the downsizing. Upon completion the age bracket principle

(afspiegelingsbeginsel) is executed (UWV, 2012). The age bracket principle states that the

current workforce must be distributed over the new or remaining positions according to their

tenure with the organization, per age bracket. There are five age brackets: 15-25, 25-35,

35-45, 55 and over. The distribution over the age brackets must be done in such a way that the

age distribution remains as similar as possible to the original situation. Within the age

brackets, those with the longest tenure at the organization must be retained at the

organization. This only applies to positions that are considered interchangeable, which is

determined by a third party. For positions that change enough to not be considered

interchangeable Aegon Bank has to fire all employees of the original positions and allow for

all employees to apply for the new positions. It must speak to current employees first and if it

desires to hire new employees from outside the organization, it has to make clear why current

employees are unable to fulfill the new positions. Aegon Bank has the opportunity to single

out specific employees to be cleared from this principle under the condition that they are

deemed indispensable to the organization. In reality this is very difficult to prove and the

UWV is very strict in its rules to allow for this.

Given these laws and the number of people having to leave (40% of 200 original people

results in approximately 80 people) Aegon Bank runs a considerable risk of losing key

players. In the case of interchangeable jobs it has no say at all about which employees stay at

the organization and which have to leave. For the positions that are not deemed

interchangeable there is more flexibility as Aegon Bank can interview the current employees

and decide which to hire for the new positions. However this scenario also brings along the

risk that employees who are fired decide not to apply for the new positions. In either scenario,

Aegon Bank is likely to lose some of its key players. This loss is likely to have a negative

effect on innovation. Galende del Canto and Suarez Gonzalez (1999), Galende & Manuel de

la Fuente (2003) and Hadjmanolis (2000) all stressed the importance of key players for

innovation. Although they differed on the importance of the amount of people versus the

quality of those people, both categories are likely to be negatively impacted by the

downsizing. There is an opportunity for Aegon Bank to counter this threat by using the work

of Lawson & Samson (2001) who state that by effectively mobilizing the remaining

employees to pursue the desired new form of innovation, an organization, in this case Aegon

Bank, can still be successful with regard to innovation. This too seems unlikely though as

Lawson & Samson (2001) also stressed the necessity of key players within the process of

mobilizing the resources to pursue innovation.

Proposition 4: The departure of key players will have a negative impact on innovation.

Managerial factors

The importance of managerial actions is emphasized by Bommer & Jalajas (2002) who

describe the required environment for fruitful innovation. Management has to create an

environment that encourages calculated risk taking, welcomes ideas and suggestions from

employees, intrinsically motivates employees and makes sure that employees are not afraid to

put forth their ideas.

The Aegon Bank management indicated prior to the downsizing that the organization will be

focusing on a different type of innovation. Rather than focusing on large product and service

innovations like before, they now opt to pursue incremental process innovation. Implementing

such a change requires the management to promote the new type of innovation giving them

ample opportunity to create the environment described by Bommer & Jalajas (2002). The

difficulty lies in the fact that because of the downsizing the organization is going through a

period that will be difficult for employees. As Mellahi and Wilkinson (2008) pointed out,

when there is uncertainty surrounding job-security among employees, an organization runs

the risk that the employees are not interested in messages about innovation as they have more

pressing personal concerns. However throughout the entire downsizing process there should

be room for the management to put the new type of innovation on the agenda. Once the cut of

people has been made and the remaining employees regain their level of confidence with

regard to job-security there is room to discuss innovation again. From this perspective I

expect the role of the management to have a positive impact on innovation.

Proposition 5: Managerial factors will have a positive impact on innovation.

Slack time

There are various sources from which organizations can draw for innovation. Santamaria,

Nieto and Barge-Gil (2009) showed that apart from the ‘standard’ R&D department there are

other important internal sources of innovation such as the design department, the use of

advanced machinery and training. Actually they found that in low- and medium technology

industries only about 25% of all innovation stems from dedicated R&D teams, the rest comes

from other employees through the abovementioned practices and external sources such as

consultants and competitors. Aegon Bank does not have its own dedicated R&D department

and is thus forced to look for these other sources for innovation. The effects of external

sources are out of scope for this study. The main source for innovation to be studied then is

the regular workforce at Aegon Bank. The organization operates in a medium technology

industry and has people designing products and working with advanced machinery (in this

case software). In order for these regular employees to innovate, they need time (Lawson &

Samson, 2001). The time in which employees are free to look at the way they do their work is

often referred to as slack time, which is the gap between the time required to do one’s

operational tasks and the actual contractually agreed working hours (Nohria and Gulati,

1997). In 1987 Damanpour found that available slack time had a positive effect on

technological innovations, but not on process innovation. The time available created the

opportunity to think about technological innovations but at the same time took away the

pressure to improve processes. Lawson & Samson (2001) go one step further and argue that

innovators need sanctioned time to think. The time needs to be sanctioned as both managers

and employees are often caught up in short-term operational challenges resulting in

insufficient slack time to think about innovation.

Slack time is likely to be impacted heavily due to the downsizing activity. The workforce at

Aegon Bank will decrease by about 40%, leaving far less people to do a similar amount of

work. To cope with this the management decided to rationalize its product and customer base,

going from highly specialized products (with the associated labor intensive service) to a basic

set of products coupled with a highly standardized service. This should reduce the number of

clients and allow for employees to service more clients. In addition to this change the

management also decided to implement two new IT systems that are standard products

opposed to the original custom made systems. Although this takes away the flexibility to offer

clients specific services it also results in less IT development. These two measures should

make up for the departure of 40% of the workforce and thus keep slack time at a similar level

as prior to the downsizing. The time-span within which these changes are to be implemented

appears to be too short though. The downsizing will complete around the same time as the old

products are rationalized and the new IT system is in place. It seems likely though that there

will be some aftermath to both the rationalizing and IT implementation. New systems will not

immediately be up and running as stable as systems that have been in place for years. Also

people will need time to adjust to their new roles. This will result in a smaller organization

that has to service its customers and at the same time learn to work with new processes and

systems and probably spend time patching the new systems to make them as stable as the old

systems. It seems unlikely that the management will address this decrease of slack time by

allocating time specifically to innovation as the servicing of customer and patching the new

IT systems probably have a higher priority. In the short term I expect the level of slack time to

suffer from this. Once all employees learn about their new roles and processes and the new

systems are rid of their teething troubles the level of slack is likely to balance out again to

similar levels as prior to the downsizing. I expect this lack of slack time to have a negative

effect on innovation. As Nohria and Gulati (1997) pointed out there is an optimal amount of

slack time and in the short term Aegon Bank looks likely to dip to the part where there is

insufficient slack time available. Although this will take away the complacency Damanpour

(1987) warned about it is also unlikely that employees will have designated time for

innovation as Lawson & Samson (2001) proposed, leaving employees with too little time to

think about innovation.

Proposition 6: The downsizing will reduce the level of available slack time, which will have

a negative impact on innovation.

1.4.3 Organizational capital

Two aspects of organizational capital that affect innovation and are likely to be influenced by

downsizing are the degree of formalization and the interdependence between teams.

Degree of formalization

The degree of formalization within an organization is defined by Subramanian & Nilakanta

(1996) as the “existence of formal job descriptions, policies and procedures for an

organization’s personnel”. They found that high levels of formalization were positively

associated with continuous improvement. This is backed up by the study of Galende &

Manuel de la Fuente (2003) who found that great organizational resources make that

organizations become better at accumulating innovations, helping with innovation over a

longer period of time. They also added that good communicative capabilities have a positive

effect on innovation. Good might not mean too strict, as Hadjmanolis (2000) pointed out by

stating that informal communication helps in promoting and facilitating innovation due to

faster decision-making. However Lawson & Samson (2001) refute the advantages of highly

formal organizations and argue that the contrary is true. They say an organization would be

more successful with regard to innovation if they manage to break down barriers separating

functions, product groups and businesses. A more organic structure fosters a greater potential

for innovative ideas to spring according to their research.

The degree of formalization at Aegon Bank is likely to change in a few ways after the

downsizing. Prior to the downsizing throughout the course of several years, the organization

had developed into various formal and informal structures and guidelines. As part of the

downsizing activity all job descriptions, policies and procedures were redesigned to form the

new organization. This redesign puts a lot of emphasis on these guidelines and makes it likely

that they are followed more closely. Another part of the downsizing activity was the move

from the Nieuwegein office to the Aegon Netherlands Headquarters in The Hague. This

created an additional change to the work environment. In Nieuwegein all departments were

situated in one of two wings on a floor. In The Hague the entire organization is situated on a

single floor with no physical barriers between departments. This change will bring employees

in closer proximity to each other, which is likely to improve communication between

employees and departments (Whittaker, Frohlich, Daly-Jones, 1994). The reduction in the

number of people is also visible in the number of layers in the organization. There used to be

four levels (Management team, Operational Managers, Team leaders, Employees) in the

organization. By the removal of Team leaders the number of layers is brought down to three.

This reduction of layers should lead to faster decision-making (Hadjmanolis, 2000). I expect

these changes to positively impact innovation. The higher degree of formalization with regard

to job descriptions, policies and procedures should also positively impact innovation as

described by Subramanian & Nilakanta (1996) and Galende & Manuel de la Fuente (2003).

Lawson and Samson (2001) argue that higher formality has a negative impact on innovation,

stating that barriers between roles and departments should be broken down rather than put up.

Although the stricter description of responsibilities might create increased barriers between

departments, I expect the actual the removal of physical barriers between departments due to

the move to the new location will offset this increase.

Proposition 7: The downsizing will lead to both an increased formalization of job

descriptions, policies and procedures and to improved communication, which will both

positively impact innovation.

Interdependence between teams

A strong interdependence between teams has a positive effect on innovation. Galende &

Manuel de la Fuente (2003) point out that efficiency and synergies between Marketing and

R&D have a positive effect on innovation while Kolberg, Detienne & Heppard (2003) make it

broader by finding that strong intrafirm linkages in general, positively influence innovation.

The interdependence between teams is also related to the source of innovation. The source of

innovation (which department) is important to the success of innovation according to

Balachandra & Friar (1997). They put forth that with the marketing department as a source,

innovation tends to be incremental while innovation from the technical staff tends to be

radical. A strong interdependence between these departments is likely to lead to collaborative

innovation, as they need each other to be successful. This creates a hybrid source for

innovation of a joint marketing-technical team. As the literature above shows, a strong

interdependence between the various departments and teams within an organization has a

positive effect on innovation. The interdependence at Aegon Bank is likely to increase during

the downsizing activity but decrease afterwards. During the downsizing activity the

organization will have a few common goals to achieve. Two of these are likely to increase the

interdependence between departments. The implementation of the new IT systems will

require input from all ‘using’ departments such as marketing (setting up the products),

customer service and aftercare (using the systems to service clients) and finance (withdrawing

information from the systems for accounting and management information). During this

implementation these departments will have a strong interdependence with the IT department,

which is responsible for implementing and maintaining the system. Likewise the creation and

implementation of new processes in the organization will require a similar interdependence,

as all departments have to divide their tasks and responsibilities amongst each other to

develop effective and efficient processes. I expect these two activities to have a positive

impact on the interdependence between teams and consequently also for innovation. However

I also expect the impact to be temporarily. Once the new systems and processes are in place

the departments are likely to become less interdependent on each other. This is due to the fact

that the Aegon Bank management decided to implement much stronger role clarity and

departmental responsibilities, coupled with the completion of the common goal to implement

the new systems and processes. If the Aegon Bank management fails to implement a new

clear common goal, this will bring focus for individual departments but takes away from the

‘broader picture’, the shared goals of the departments. Without a shared goal, there is a risk

that departments will become competitive towards each other rather than cooperative (Wong,

Tjosvold & Liu, 2009). Based on the literature (Galende & Manuel de la Fuente (2003);

Kolberg, Detienne & Heppard (2003)) stating that strong interdependence positively

influences innovation, I expect this decrease to have a negative impact on innovation in the

long run. The long run effects on the downsizing are not part of my research though so I will

not be able to test this statement.

Proposition 8: The downsizing will lead to stronger interdependence between teams, which

2. Research method

2.1 Research setting

To research the question formulated in the introduction I conducted a case study at Aegon

Bank. The reason for choosing a case study as a means of research for this topic is the

richness of information it can provide. The success of innovation is difficult to express in

numbers, as are the effects of downsizing. The number of people leaving is one thing, but the

effects on people’s emotions is quite another. By performing a case study I was able to ask

people about their experiences throughout the downsizing process, focusing on specific

aspects (which I will extend on further on in this section) but also maintaining space for an

in-depth analysis of subjects that might not have been mentioned in the literature thus far.

The Aegon Bank division of Aegon recently underwent a downsizing activity in which the

employee stock was reduced by about 40%. This organization was chosen because of two

reasons. First of all the organization is a service provider in the financial industry. The

industry itself has been plagued by scandals the last few years and faces a strong challenge in

regaining consumer confidence. To do so it has to change its products and services, bringing a

high demand for innovation. As such Aegon Bank is a good example of an organization faced

with the demand for innovation in the service industry. Secondly, the organization underwent

a downsizing activity recently. At the time of research most interviewees agreed that the

downsizing had finished or was in the final stages of completion. This means that the

interviewees still had the situation during downsizing fresh in their memories and were able

to compare the situation to that before the downsizing. The disadvantage is that they could not

yet say anything other than expectations about the situation following the downsizing. I can

thus state nothing about the effects of downsizing on innovation in the long run. Finally, I

worked for the organization until the end of the downsizing and had good access to the

necessary people for interviews. This granted me access to the middle and top management

layers of the organization that, due to their busy schedules, might have been very difficult to

access at another organization.

2.2 Data collection

To conduct my research I interviewed fifteen people from the Aegon organization. Thirteen of

those work for Aegon Bank and two for other divisions of Aegon. The thirteen Aegon Bank

employees were selected to provide a good spread of the organization. Aegon Bank is built in

three layers: staff, operational managers for each department and a management team

consisting of three members. These three layers are all represented in the thirteen selected

Aegon Bank employees. I interviewed one member of the management team and in each of

the six departments the operational manager and an employee. The group of interviewees also

provides a balanced group with regard to their tenure at the organization. On average the

interviewees worked for Aegon for nearly nine years, with the shortest tenure being two years

and the longest twenty-five. Most of the interviewees said they had been highly (7) or

somewhat (6) involved with innovation in the past two years. One interviewee said he was

only a little involved with innovation and one indicated he was not really involved with

innovation. This selection was made to provide a good coverage of opinions on the state of

innovation and the effects of the downsizing on it. In each layer people might have different

perspectives on what happened and it is interesting to gather all these views to gain a

complete picture of the situation regarding innovation at Aegon Bank before, during and after

the downsizing.

There is a lot of information in the literature on both innovation and downsizing. Even the

combination of the two is researched. However the results from all these studies do tend to

vary. As we saw earlier in this thesis there are studies that conclude on positive effects of

downsizing on innovation while others conclude the exact opposite. Furthermore there seem

to be a lot of factors influencing the outcome of innovative activities in general and the effects

of downsizing in particular. It was not possible to ask about all factors within a reasonable

timeframe. This would create a risk that specific elements of the Aegon Bank case are missed

out if the interview was set-up to only ask about a selection of the factors mentioned by

previous researchers. Therefore the interview was set-up as a semi standardized interview

(Berg, 2009). I drafted an initial set of questions but allowed the interviewees to divert from

the standard questions when I deemed it to be interesting for the research. It also provided the

opportunity to pursue additional probing question when necessary. I did this to prevent

missing interesting insights the interviewees might have on the subject that were not part of

the set of questions.

The interview was split in four parts: introduction, transition, main and closing. The

introductory section is built on general questions regarding the interviewee’s tenure at the

organization. In the transitory stage interviewees were asked about their personal experiences

regarding the effect of the downsizing on their abilities to innovate. They were also asked

about the role of the management during this period. In the main part of the interview

questions focused on the factors that influence innovation and that are likely to be influenced

by the downsizing (as mentioned in the introduction: financial resources, key players,

managerial actions, slack time, degree of formalization, interdependence between teams).

Two factors under physical resources, location and technological factors were omitted from

the interview, as I had not perceived their impact to be important prior to the interviews.

During the interviews however they were mentioned several times by various interviewees.

Interviewees were asked if the downsizing altered these factors and if that alteration had an

impact on their (and the company’s) ability to innovate. In the closing section the

interviewees were asked if any of the changes that occurred actually impacted the number of

innovative ideas generated and executed.

2.3 Data analysis

All interviews were recorded and processed into transcripts. From these transcripts the main

analysis started. The first step was setting up the coding scheme to record the results. I split

the coding scheme in four parts: interviewees, with general info about the interviewee such as

job description, age and tenure at the company, situation at the organization, the status of the

downsizing, key, the main questions regarding the factors influencing innovation, and finally

performance, the performance of innovative activities before, during and after the

downsizing. I started with the influencing factors as the codes under which parts of the

transcripts could be placed. While analyzing, I added additional (sub)codes to contain other,

or more specific, pieces of information from the interviews. After coding, I analyzed the data

by reading through all codes related to one of the factors (location, technological factors,

financial resources, key players, managerial factors, slack time, degree of formalization

and interdependence between teams) and finding patterns that emerged from the

answers. After formulating these patterns in the results section the final step was to

compare the results with the statements argued in the literature.

3. Results

In this chapter I will present the results of my research. This chapter is split in five sections

starting with the status of the downsizing, to provide insight into what stage the downsizing

was at during the time of interviewing. Next I will discuss the three forms of capital that

affect innovation: physical capital with the factors location, technological factors and

financial resources; human capital, with the factors key players and managerial factors;

organizational capital with the factors degree of formalization and interdependence between

teams. For all factors I will discuss the results from the interviews and compare them with my

expectations based on the literature. The final part of the chapter consists of the overall effect

the downsizing had on the performance of innovation.

3.1 Status of the downsizing

Most of the interviewees regarded the downsizing to be completed. Although some mentioned

that they were still dealing with the ‘aftermath’. By this they meant that the cuts in the stock

of employees had been made and all redundant employees had left the company. However,

the organization was still encountering situations that sprung from the downsizing.

“The downsizing itself has been completed, but we are still in the building phase. You

can clearly see, for example at the Customer Service department that there is some

tension there. In advance we planned to do things with a certain amount of people, but

reality is always contumacious, so you see that tension flaring now.” (ans. 9 (2b))

This situation led some of the interviewees to conclude that the downsizing was nearing

completion while one of the interviewees considered this a vital part of the downsizing and as

such concluded it was still in the execution phase. This difference originates from the

definition interviewees have about downsizing. Some consider it to be finished when all

redundant employees have left the company, while others take the broader reorganization into

account and conclude that that has not been completed yet. In general though, I can conclude

that the downsizing is finished or nearly finished and as such the interviewees are valid to

discuss the results of the downsizing on the innovative strength of the organization. I should

add to this that they could only discuss the direct impact and not the consequences in the long

run, as those effects can only be considered some time after the completion of the downsizing.

3.2 Physical capital

3.2.1 Location

One of the decisions taken as part of the downsizing was to move the organization to the

Aegon Netherlands Headquarters in The Hague. Aegon Bank had been operating from

Nieuwegein for the last twenty years, but moved to The Hague during the reorganization. Not

only did the organization move, it split up as well. The organization was split in the building

team and the reduction team. The split was made based on who was redundant and who was

not, with the reduction team consisting of those who were redundant and the building team of

those who were not. The building team was charged with the development of the new system

and processes while the reduction team was responsible for running the existing systems,

servicing the clients and migrating the data from the existing system to the new one. This

decision had various consequences, for both teams. In the first place colleagues who had been

working together for (many) years suddenly found themselves in different buildings and in

different cities. The split up into two teams meant that people did not have the opportunity to

catch up with each other anymore. Not being able to discuss things informally anymore had a

negative effect on innovation.

“You notice that the distance creates a gap. People who normally talked to each other

at the coffee machine to help each other could no longer do so. That does impact your

innovative strength.” (ans. 2 (3h)

Secondly, many of the people who were transferred to The Hague lived in the Nieuwegein

area and were suddenly faced with a far longer commute than they were accustomed to. The

additional commute for those moving to The Hague appeared to be a negative influencer at

first.

“Suddenly you have to commute to work and you don’t have a choice. So it impacts

your personal life and your mood. I have to travel to work two hours, have additional

costs and don’t get anything in return.” (ans. 3 (3f)

However at the same time the organization become much more lenient with regard to the

‘New working’ concept, allowing people to work from home. This countered part of the

negative influence of the additional commute.

“The move has not hindered my ability to innovate. In Nieuwegein I was at the office

five days a week, now I am at the office tree days and I work from home two days a

week. At first you think you will see people far less giving you fewer opportunities to

discuss and improve things. But I am not too strict about those home days and if it is

necessary I am here five days a week. Most people do so and if you adjust your

schedules to each other’s it works just fine.” (ans. 5 (3f))

The building layout in The Hague also vastly differs from that in Nieuwegein. The

Nieuwegein building consisted of eleven floors with each floor being occupied by one or two

departments while the building in The Hague provided a single open office floor for the entire

organization. The new office lay-out had a positive effect on interaction between people

which in turn had a positive impact on innovation.

“Everybody finds their own spot, but you are mixed up a lot more than we were in that

fishbowl in Nieuwegein. You had physical barriers there that prevented you from

socializing with your colleagues. Now you see, the first time it’s just ‘Hey you IT guy,

you are sitting at my block, what kind of coffee do you want?’ But in time that will

progress into knowing what your colleagues are doing and making it easier to ask for

help and find new solutions together.” (13 (3g).

However the building team did find themselves in the Aegon Netherlands Headquarters while

the reduction team was left in a now half-empty building with hardly any ties to Aegon

anymore. The split was not only a physical division, but also a mental one. The reduction

team consisted only of people who were redundant and they were ‘left behind’ in the old

office building. Each of these alterations affected innovation in one way or another. The

reduction team was somewhat cut-off from the rest of the organization as they stayed behind

in Nieuwegein. This did create a strong sense of ‘team’, which also had a positive effect on

innovation.

“You become a team that does more than just work together, like have a drink or

dinner together. When you know someone in another way than just work it helps

innovation because you become more eager to help someone and implement

improvements.” (ans. 2 (3g))

Interviewee totals

Impact of the change of location on innovation.

Positive

Negative

Neutral/No opinion

Overall the move to The Hague had a positive effect on innovation. There were two negative

aspects, namely the split between co-workers in The Hague and in Nieuwegein and an

additional commute for employees that live near the Nieuwegein office. The first of these

only had a temporary effect as the remaining employees in Nieuwegein were declared

redundant and all left the organization by the time the downsizing ended. From then on all

employees were once again situated in the same office providing similar opportunities to

informally discuss things and help each other with innovations. The additional commute was

partly mitigated by being lenient with regard to working at home. This boosted employee

motivation but also created extra distance between employees. Most interviewees who

mentioned the subject indicated that they had found ways to make this situation work though

and did not encounter a negative influence with regard to innovation. The different layout of

the new building was the main positive effect of the move to The Hague. The single floor on

which the entire organization now resides brings people from different departments in closer

contact with one another, which is considered to have a positive effect on innovation by some

of the interviewees. The main advantage of a good location pointed out in the literature by

Deeds, Decarolis and Coombs (1997) is the possibility of knowledge spillover from other

organizations in similar industries within close proximity. This possibility definitely

exists for Aegon Bank as the new office is placed inside the Aegon Netherlands

Headquarters, bringing the Aegon Bank employees in much closer contact with their

colleagues from different branches of the company. However none of the interviewees

mentioned that this had occurred.

These results provide partial evidence for proposition 1 (The move of the organization

from an industrial area to an area with other financial institutes will not have a positive

impact on innovation within the timeframe of the reorganization), but do not provide

overall support for it. As expected in the proposition, the spillover effects were not (yet)

visible at Aegon Bank. However the change of location did provide an unexpected

positive influence as the new office layout improved communication and collaboration

between employees and departments.

3.2.2 Technological factors

The technological factors at Aegon Bank changed with the INBK project. This was the

project that would replace the two old back-office systems with two new ones. The project

was massive in size (nearly all employees were at some point involved in the project) and

critical to the success of the reorganization and Aegon Bank as a whole. The implementation

of the new systems would bring about a large reduction of IT maintenance costs, which was a

necessity for the organization to survive. A couple of interviewees stated that the project

forced innovation to come to a standstill for two years. As all time, energy and resources were

diverted to the project, there was simply no room for any other innovation. Most of the

interviewees though concluded that the project was innovative in itself.

“The reorganization decision itself contained a lot of innovation. We were not going

to make it with the two old banking systems and we need to create something new so

that we can provide better service to our customers according to the way we envision

it in our strategic path.” (ans. 13 (3b))

In fact the INBK forced a redesign of both the IT infrastructure and most processes.

Switching to an entirely new system created the opportunity to redesign both the system and

its processes from scratch.

“It’s good that you can start from scratch for once, because that brought innovation.”

(ans. 3 (3e))

As the INBK project was the only major project during the reorganization, nearly every

employee was at some point involved (although some more than others). This provided a

major boost to collaboration within the organization.

“The collaboration between Customer Service and other departments like Marketing,

Product Management and Expiration really grew. I feel those ties have been improved

partly due to the project and the new system.” (ans. 1 (3h1))

Interviewee totals

Impact of the implementation of new technology on innovation

Positive

Negative

Neutral/No opinion

7

2

8

* Some interviewees replied with both a positive and negative impact, hence the total number of responses here

exceeds 15.

These results provide evidence for proposition 2 (The implementation of new IT systems will

have a positive impact on innovation during the downsizing) as the implementation of the

new IT systems allowed for employees to innovate both on a technological and process level.

Barney stated in 1991 that the plant and equipment could provide a positive impact on

innovation. Although Aegon Bank has an office rather than a plant and software instead of

equipment, the implementation of the new systems brought about new opportunities to

innovate. On both the technical and process level employees were able to implement

innovations due to the new systems. The downside of the INBK project was that it attracted

so much attention that it left too little room for any other innovation to materialize. However

this cannot be ascribed to the technological factor but rather to the emphasis put on the