Many local governments across the United States have been forced to downsize in response to the ongoing recession, reduced revenues, and skyrocketing health care and other employee benefit costs. To aggravate matters, some states have shifted money away from local governments to solve their own budgetary problems. Whatever the reasons, local government executives face more than a financial challenge in cutting budgets.

An even bigger dilemma for executives is the leadership challenge of crafting a new and vital future for the downsizing organization. The Leadership Challenge An organization faces a structural budget problem when ongoing projected expenditures outpace ongoing anticipated revenues over the middle to long term.

Simply reducing non-personnel-related costs will not be enough. Usually, local governments cannot wait for new economic development eff orts to produce additional revenues. Such efforts may also be insufficient. Hoping for the general economy to improve or for the federal or state government to bail us out tends to be “magical thinking.” Often, the only immediate structural solution, unfortunately, is cutting  services and staffing.

Organizations being downsized are confronted with two problems. Objectively, the organization has fewer resources (fewer people and less money for technology, training, and contract help) to deal with existing community expectations, as well as new demands placed on the local government.

Subjectively, the situation is even worse. The “surviving” employees—those who are not laid off —are often grieving and feel victimized, overwhelmed, unappreciated, and pessimistic about the future.

If the leader asks employees to do one new thing or try out another approach, they will scream. Consequently, the impact of diminished organizational capacity to deal with existing problems and
new issues is greater than the impact simply of reduced resources. This is the classic “productivity
paradox.” At precisely the point when a downsizing organization needs great boosts in employee productivity to overcome fewer resources, productivity takes a dramatic nose dive. The organization needs more than expert financial management. Cutting budgets and laying off employees, while painful, are relatively easy when compared with the larger and more time-consuming leadership challenge. What the organization sorely needs is large doses of thoughtful, visible, and strategic leadership in order to create a new future and the added capacity to fulfi ll its goals and aspirations.

The Strategic Approach
To overcome the productivity paradox and to achieve greater organizational capacity, the local
government executive must develop a multiphase strategic approach:

Understand the problem, and develop a preliminary plan of action.
The chief executive and the leadership team must analyze the organization’s structural problem,
come to some conclusions about the sources of the financial problems, and develop a general
course of action. This preliminary action plan may change over time as the executive team confronts
the realities of reshaping the organization, but leadership still needs a plan. In developing an
action plan, department directors must abandon their traditional “silo” mentality and derive, with
the guidance of the chief executive, a wider, unified perspective.

The leader and other executive team members must also personally prepare themselves because
creating a new future for the organization is a severe test requiring much fortitude and emotional
and physical energy. Consequently, executive team members must care for and nurture
each other as the team deals with organizational distress.

Prepare the environment for change.
Executive leaders need to ready the internal and external environment for downsizing and organizational
change. The leadership team must develop a long-range fi nancial forecast, prepare briefing papers based on its long-term financial analysis, and discuss the fiscal crisis with the governing board, employees, unions, boards and commissions, and all the external stakeholders (chamber of commerce, neighborhood groups, League of Women Voters, service groups, PTAs).

To adequately ready the environment, the local government manager should use all available media to “overcommunicate” to internal and external audiences because people will not want to believe the chief executive or will resist the negative implications (service cuts, layoffs, broken commitments) of the financial analysis.

. . . Creating a new future for the organization is a severe test for leaders, requiring much fortitude
and emotional and physical energy.

Build political support for change.
After preparing internal and external stakeholders, the leadership team must build political support for proposed budget reductions and downsizing. Obviously, to show that significant downsizing is critical, the leadership needs first to cut nonpersonnel costs and other discretionary spending, as well as use hiring freezes where possible. At the same time, it is necessary to engage the community in the process to minimize opposition, as well as to generate citizen solutions.

Resize and stabilize the organization.
Once the leadership team has prepared the environment as best it can and secured the political support or minimized the political opposition to make the changes, it needs to make the tough changes, including the service cuts, employee layoffs, and other budget reductions.

The long-range financial plan must show how the service cuts and layoff s will get the fi nances
of the local government into a stable situation, so the organization is sustainable over time. Leaders should make all the necessary cuts to minimize undue anxiety on the part of surviving
employees, who may fear that new rounds of layoff s may be necessary.

While some of the major reductions in services and staffi ng can be scheduled over a number of months or even a year, an organization should not unnecessarily drag out this diffi cult process. The “grieving” must begin, so that it will end sooner rather than later.

Engage employees in building a new future.
This is the hard part! The leadership challenge is engaging the hearts and minds of employees
in envisioning a reshaped yet vital, productive organization, enthusiastically taking on new challenges
and initiatives, and making new strategic investments in the future.

What are some strategies for creating this kind of new organizational capacity, even as the local
government is being downsized?

Here is a set of 12 interrelated strategies to reshape the local government and build employee spirit, passion, and commitment and, ultimately, organizational capacity:

1. Demonstrate that you care.
As the executive team downsizes and restructures the organization, the leadership must provide
support, show respect for employees, and demonstrate compassion and caring in tangible ways:

• “Overcommunicate” and tell the whole truth with employees
• Deliver bad news face to face
• Provide outplacement services and training
• Extend health insurance coverage, and provide severance packages where appropriate
• Provide individual and family counseling services
• Create “job banks”
• Ensure that employees who take on higher levels of responsibility are appropriately compensated and recognized

2. Create a new story for the organization.
After the chief executive has taken the needed action to downsize and some grieving has occurred,
it is time for the leader to help the organization focus on the future. As Marcus Buckingham states in a recent Fast Company article by Bill Breen, “The Clear Leader,” a leader’s job is to rally people toward a better future.

The organization cannot build new capacity to fulfi ll its new story unless it can accelerate through
subtraction. Through conversation and storytelling (not charts and PowerPoint presentations), the chief executive needs to solicit the hopes, dreams, and aspirations of employees about the future of the organization.

New thinking and, ultimately, new behaviors in organizations are shaped by speaking to people’s
feelings through narratives, not “facts.” Thus, our stories must be simple, positive, and easy to identify
with and must resonate emotionally. In telling stories, leaders must ultimately focus on joy, which
is always a stronger motivator than fear.

Once the story has been created, the leader and other executives must tell it over and over so it becomes the vision for the future.

3. Retain your talent.
To ensure that there is adequate talent to make the new organizational story come true, the chief executive
must keep both “stars” and up-and-coming talent. These generalists and critical specialists are the “free exiters” who have the skills and confi dence to leave the organization at will. To retain the free exiters, the leadership team needs first to identify its star, or high-potential, talent. Second, executive leadership needs to figure out what motivates these stars.

Entrepreneurial ventures . . . generate a sense of new possibilities, positive energy, and forward
momentum for a downsizing organization at precisely the point when they are most needed.

4. Reshape expectations of the organization.
With fewer resources, it is critical to define the core responsibilities of the local government and
reduce the always-growing expectations of the governing board and key external stakeholders, like the business community or neighborhood groups. The leadership team must continually reduce expectations and new demands, or at least insist that any new demand must mean elimination of an existing  obligation.

5. Subtract, subtract, subtract.
The organization cannot build new capacity to fulfi ll its new story unless it can “accelerate through subtraction.” The only way to keep up with and respond to an ever-changing environment (especially after downsizing) is to cut less important or outdated programs. It is critical to eliminate whole programs, thus freeing up staff resources. Given that every program tends to have a constituency, the temptation is to reduce the scope of the program but keep it alive. This may cut budget but not free up needed capacity for other endeavors. At the same time, the leadership team must engage employees to cut “ritualistic,”
non-value-added rules, procedures, and administrive of all kinds. The city or county manager may
hold a Bureaucracy-Busting or This Seems Stupid to Me! contest, with prizes for the best suggestions
to cut red tape.

The key is not only having some fun in tough times, but also creating some slack resources.

6. Free up management time.
Resourceful, astute downsizers look to fl atten organizational structures, consolidate administrative
positions wherever possible, and widen spans of control. To succeed in producing a vital new future
for a downsizing organization, however, these now-fewer managerial resources must be freed up to work on visible and high-touch leadership initiatives, streamlining, learning, coaching, other productivity improvements, and new strategic investments.

7. Make new strategic investments.
Even a downsizing organization needs to grow in certain areas, those in which there is a high potential payoff for the organization. To make strategic investments, it is critical to cut more than is minimally required or otherwise to create slack resources through streamlining, productivity improvements,
and/or revenue enhancements.

Entrepreneurial government is a key strategic investment. It is worth investing money, staffi ng,
time, and attention in selling services, expertise, facilities, and/or equipment to other public entities,
if the local government can generate net revenue to subsidize its own services or at least its overhead.

Cost centers like police, fire, ambulance transport, and information technology can all become profit centers.

8. Invest in learning to build capacity.
To devise a new organizational story (whatever it is) and to develop added capacity as resources
dwindle, an organization needs to invest in learning. While classroom training provides concepts,
perspectives, and context for new ways of behaving and doing business, on-the-job learning is the
most powerful way to acquire new skills, roles, and behaviors. As the downsizing organization is
reshaped, employee competencies must begin to match new roles and assignments.

Typical on-the-job learning occurs through:

• Interim, or acting positions.
• Job rotation.
• Special assignments.
• On-the-job coaching and mentoring.
• Team or project leadership.
• Ad hoc multidepartmental project teams.
• Other “action learning” assignments.

To promote a learning culture, executives must furnish opportunities for employees to “stretch,” incorporate learning goals into employees’ annual workplans and performance reviews, and reward
and recognize employees, as well as their managers, for learning achievements. Most important,
executives must promote an organizational and political environment in which risks are taken and
mistakes are seen and used as learning object lessons.

While executive leaders must provide the unadulterated truth in tough times, it is equally essential to embody optimism about the future of the organization and to encourage employees as they take on new roles, assignments, and challenges.

This is difficult. Senior managers must overcome their own negative emotions and their inclination
to become disengaged and “hunker down.” It is essential that leaders proactively manage the mood
in difficult times.

10. Model new attitudes and behaviors.
Employees will take their cues from their leaders. The most powerful way that adults (as well as children) learn is through modeling. Therefore, the leaders of the organization need to consciously model new behaviors (risk taking, entrepreneurial initiative, learning) and attitudes (optimism, faith in the future, openness to change, confidence). Modeling is the essence of leadership.

11. Align all organizational systems.
As the local government is downsized and restructured, all organizational systems must be consciously retooled and realigned over time to support the preferred future. Values, strategic planning, administrative processes for purchasing and contracting, hiring and promotion practices, learning and training, performance evaluation, rewards, and recognition systems all need to support the efforts to create additional capacity and organizational vitality.

12. Party with a purpose.
To maintain momentum, executives need to celebrate small, as well as large, achievements. Leaders must show their appreciation for the risks taken by the employees, their new learning, and their commitment to the organization. Some balloons, banners, “photos with the chief,” playful awards (for example, a Turtle Award for sticking one’s neck out, and of course food and drink can all make these celebratory events fun and help accentuate new attitudes, behaviors, and organizational momentum. We might call it “party with a purpose.”

Making the New Story Come True
To help fashion the vital new future for a downsized and restructured local government, executives
must understand that the psychological impacts of downsizing seriously exacerbate the actual reductions in resources. Employees typically feel victimized, pessimistic, overwhelmed, and resistant to any change or opportunities. An executive cannot manage an organization’s way to a new, more vital future.

Rather, an executive must spend a lot of “face time” with employees, exerting visible, confident, and optimistic leadership and then engaging employees in envisioning a new story and fulfilling it.  Employees need to see that someone is in charge, someone cares, and someone has a new story and a credible game plan. Then, of course, the leadership team must create organizational capacity through “subtraction” efforts, the management of expectations, employee learning initiatives, and other strategic investments.

Frank Benest is the Former City Manager of Palo Alto, California. Currently Frank is an Advisor to ICMA and
has been an active participant in the Alliance for Innovation for the last 20 years.