DOWNSIZING

Category: Report
Jurisdiction:
Management Issues: Rightsizing/Downsizing
Policy Area:
State:
City:

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On Governance, Leadership, Learning, and the Future
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DOWNSIZING

by

Alexis A. Halley
Executive Director, Washington D.C. Office
The Meridian International Institute


for the

Information Cooperative Project
Alliance for Redesigning Government
National Academy of Public Administration


Final Copy: April 5, 1995


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Copyright 1995 by Alexis A. Halley. All rights reserved.


CONTENTS
OVERVIEW:


Introduction 3

1.0 What is Downsizing?3
1.1 Definitions 3
1.2 Information Cooperative Topics
Related to Downsizing 5

2.0 Why is Downsizing Important? 6

3.0 Fundamental Choices in Implementing Downsizing 7
3.1 The Incremental Approach 7
3.2 The Strategic Approach 8

4.0 Tools of Downsizing 9
4.1 Tools for Diagnosing the Downsizing Problem 9
4.2 Tools for Workforce Reductions 10
4.3 Tools to Reduce Other Aspects of Size 12
4.4 Related Tools 13

5.0 Results and Lessons 13
5.1 Highlights of Emerging Results 14
5.2 Highlights of Emerging Lessons 15

6.0 Next Generation Issues 17

References Cited in the Overview 19


OVERVIEW


INTRODUCTION

This overview focuses both on downsizing in the narrow sense (workforce reduction)
and on related, generally broader or more fundamental strategies such as rightsizing and
rethinking. The document defines key terms, discusses why downsizing is important,
highlights implementation approaches, tools, and results and lessons, and suggests next
generation issues. It includes a selected, annotated bibliography; examples of experts and
resources in downsizing; and illustrative examples of the various approaches (e.g,
downsizing, rightsizing, rethinking). Because most lessons of experience" suggest that
workforce reductions are rarely effective undertaken in isolation (i.e., downsizing for the
sake of downsizing is increasingly regarded as a highly ineffective strategy), the overview
attempts to weave together themes pertinent to downsizing, to rightsizing, and to some
extent to rethinking.



1.0 WHAT IS DOWNSIZING?


1.1 DEFINITIONS

Language is a real problem in downsizing. Downsizing is associated, and often confused,
with numerous terms. Gradually, however, we are developing a set of definitions that
makes sense of key differences:


1) ADMINISTRATIVE REFORM. Reorganization, restructuring, and virtually all of the
definitions below are a subset of an area of study and practice known as administrative
reform. Administrative reform is the induced systemic improvement of public sector
operational performance, and came of age in the 1980s (Caiden, 1991). It is international
in scope.

2) REORGANIZATION / RESTRUCTURING. Changes in organizational structure are
usually called reorganizations. Reorganization is a process that changes the distribution of
responsibility, and the prevailing lines of authority. It has technical, political, economic,
and social aspects. Reorganization concepts apply at many different levels (e.g., branch,
division, agency, bureau, section, unit). The scope of the reorganization is defined by the
level that is the target(s) of the effort. Restructuring involves moving, adding, or
eliminating organizational boxes or units represented by an organizational chart.
Restructuring can also be defined as rebuilding the strength of an organization by changing
its asset structure and its resource allocation patterns (see Hoskisson & Hitt, 1994).
Reorganizations do not include normal, expectable, routine changes or minor changes to
which the organization can readily adapt itself.

3) DOWNSIZING / WORKFORCE REDUCTION. According to Steven Applebaum and
his colleagues (1987), "downsizing" was coined to define the scaling down of car sizes by

automobile manufacturers. The term was first applied to the process of cutting back
employees when business and government began making major reductions to their
employee bases in response to recessionary pressures in the 1980s. Downsizing is a type
of reorganization or restructuring. Downsizing or workforce reduction is a strategy to
streamline, tighten, and shrink the organizational structure with respect to the number of
personnel the organization employs. As downsizing has become more prevalent, the term
has lost its original precision (i.e., workforce reduction). Today, the term downsizing is
used both to refer to a narrow effort to reduce the workforce and also to broad efforts to
improve work systems or redesign the total organization.

4) REENGINEERING. Reengineering changes the way work processes are carried out, to
better serve the customer, client, or citizen. Reengineering is a strategy to redefine, and
perhaps reduce, the business processes of an organization. Workforce reduction may be
part of reengineering. Today, information technology is usually central to the
reengineering of business processes. Synonyms: process management, process redesign

5) RIGHTSIZING. Organization structure, however, is more than the boxes on a chart;
more than the number of employees, positions, or jobs; and more than business processes
(e.g., it includes formal and informal patterns of interaction that link all organizational
elements toward mission accomplishment). Rightsizing can involve reducing the
workforce (downsizing) as well as eliminating functions, reducing expenses, and
redesigning systems and policies (e.g., to reduce costs or reduce organizational size). It
can also require upsizing (increasing the workforce) in certain areas. Rightsizing
eliminates unnecessary work and improves and prioritizes the most important work. It is a
multifaceted attempt to reshape the total organization. Some adherents also give
rightsizing a strong humanistic orientation. Synonyms: lean organization, revitalization,
renewal, reinvention, total organizational performance, organizational design

6) RETHINKING. Rethinking is both broader and more fundamental than rightsizing.
Rethinking strategically identifies and refocuses the core mission. Rethinking asks, for
example: Why do we exist at all? What is our mission? Is it still the right mission? Is it
still worth doing? Rethinking also asks: Assuming we should still exist, how should we
go about our mission? What are our performance capacities? What redesign is relevant to
the core mission? Rethinking is necessary and appropriate in periods of the greatest
change. Antonym: repair

7) DECLINE. Organizational decline refers to an involuntary, unplanned loss of resources.
Decline does not necessarily produce a reduction in personnel. Organizations can
downsize without declining; they can decline without downsizing. Downsizing may be
implemented when an organization is growing or declining.

8) LAYOFFS. Layoffs are the termination of employees with or without advance notice and
for reasons other than performance. Layoffs are one of many tools used to implement a
downsizing strategy to reduce the size of the workforce. Downsizing can be done with or
without layoffs. Downsizing includes an array of other tools to reduce the workforce.

9) DELAYERING. Layering is the number and size of management levels. Delayering
involves removing, through reorganization, one or more of the layers of management
between the head (or chief executive) of an organization and the front or operational lines.

10) DEREGULATION. Deregulation refers to clearing away rules, regulations, paperwork
requirements, or approval processes that affect the performance of public servants or the
performance of industries, sectors, programs, overseen by public servants.



1.2 INFORMATION COOPERATIVE TOPICS RELATED TO DOWNSIZING

Downsizing is related to numerous topics that are in the Information Cooperative database.

Downsizing strategies, focused on size of the workforce, can be implemented using the principles
and framework of Total Quality Management and Performance Management, Outcome-Oriented
or Results-Oriented Management.

When downsizing is coupled with rightsizing, for more of a total organization or total system
focus, Business Process Reengineering and Information Technology tools are important. When
downsizing strategies are part of a broader jurisdictional effort to reduce the size of government
beyond workforce reductions, then Privatization and Relationship Realignment strategies are
relevant.

When downsizing strategies are embedded in efforts to reinvent democracy" or examine the
more fundamental questions surrounding the purpose and role of government in a jurisdiction, and
/or when citizen support is essential for the long term success of the downsizing / rightsizing, then
tools such as Visioning, Strategic Planning, Electronic Town Meetings, and Citizen Engagement
are important complements (e.g., to define the purposes and targets of change).


2.0 WHY IS DOWNSIZING IMPORTANT?

**IT IS LIKELY TO CONTINUE AND BECOME MORE SIGNIFICANT

Downsizing is becoming as popular in the public sector as it has been in the private sector. Most
experts believe that downsizing will continue through the 1990s and beyond. Though economic,
fiscal, and political pressures are an immediate prompt for downsizing actions, the fact is that in
today's rapidly changing business and government environments, size, coupled with industrial age
hierarchies, can be a disadvantage. Few foresee an end to restructurings, downsizings,
rightsizings, and the gut wrenching changes they bring. Continuous restructuring and
fundamental redesign are more likely to be the wave of the future.


**WE DON'T KNOW ENOUGH ABOUT HOW TO DO IT WELL.

Traditional business and government organizations are changing faster than most of us can
absorb. We have a very rich literature and body of experience on organizational design and high
performance under conditions of growth. But surprisingly little of that literature deals with high

performance in lean organizations, or the ongoing process of getting to leaner organizations. This
lack of knowledge is compounded by conflicting goals. Whether downsizing or rightsizing,
organizations usually seek multiple, often contradictory goals: reduce costs, reduce the
workforce, increase efficiency, improve service delivery, increase productivity, increase
entrepreneurship, decrease overhead, achieve same or better results, increase cost consciousness
and accountability, and increase managerial flexibility.


**IT MATTERS FOR DEMOCRACY.

How we "size" our public sector organizations and our public service matters for democracy. The
"right size" is very difficult to determine once and for all, and is a question that raises fundamental
political issues.

Note: Is democracy related in any way to size? Robert Dahl and Edward Tufte (1973) tell us
that smaller units are often said to facilitate democracy better than larger units. At the same time,
there are complaints that smaller units are incapable of handling their problems and this leads to
demands for larger units. Martin Landau (1969) discusses the importance of redundancy and
overlap in the American political system. Yet how much and what kind of redundancy and
duplication are necessary to check and balance institutions without engendering excessive size,
waste, and inefficiency?


**IT AFFECTS THE LIVES OF INDIVIDUALS--OFTEN PROFOUNDLY.

Last but surely not least, downsizing affects, often profoundly, the lives and productivity of
individuals, whether they survive the downsizing or leave the organization.



3.0 FUNDAMENTAL CHOICES IN IMPLEMENTING DOWNSIZING


The effective executive is likely to be a person who delights in the chance to
choose the best path according to his own lights. For the Public Executive, the
feel" of administration is the exhilaration of choice." (Harlan Cleveland, 1972)


There is no one best or simple way to undertake structural change aimed toward cutback,
retrenchment, downsizing, rightsizing, rethinking, or any of the numerous terms in use today. No
matter how the downsizing mandate surfaces, the administrator faces numerous choices. Some
choices are CONCEPTUAL (e.g., What model of organization will guide the structural change?
What model of governance and public management will guide the structural change?) The most
important choice is the OVERALL ORIENTATION TOWARD CHANGE: Whether to be
incremental and reactive, or whether to take a more strategic, proactive approach.


3.1 THE INCREMENTAL APPROACH

According to Peter Drucker and Scott Fosler, both public and private decision makers often adopt
a reactive attitude to the forces of change. When they do so, their responses usually follow a
predictable, incremental sequence.

The first stage is typically denial that anything is wrong, denial that change is on the horizon.
Public servants hear the terms "administrative reform" or "reinvention" or "workforce reduction"
and believe this too shall pass."

The second stage is patching--an experiment here, a law or rule changed there, an agency
reorganized somewhere. But deep or pervasive systemic change is still elusive.

The third stage is crisis as the forces of change that have been denied to this point come to the
fore. Deep, cost-driven cuts radical downsizings occur at this stage along with other
crisis-driven, typically short-term responses or what Drucker calls amputation without
diagnosis." These types of downsizings yield mixed, if not dangerous, results: smaller versions of
what didn't work before; loss of institutional memory; performance interruptions; and an anxious
and mistrustful group of survivors.

The fourth stage is rightsizing. Organizations in this stage ask questions about both structure and
process. They engage in downsizing and in business process reengineering. They look at
the long term, at total performance, and at what they can do to create or add value. But they
still tend to assume that the existing organization needs only to be repaired or that the system is
simply somehow flawed, and that if only the system is fixed, the solution will be obvious.
Organizational members may suspect that the situation is still unsound, but lack the mental maps,
tools, and language to express alternatives.

Organizations often downsize reactively, with little consideration of the long term costs and
implications for future effectiveness (e.g., Kozlowski, et. al., 1993).


3.2 THE STRATEGIC APPROACH

Organizations often have a choice: They can take the above incremental approach or they can
take a more strategic, proactive approach that interrupts the reactive sequence. While the
incremental approach to downsizing is less painful in the short run, in the longer term the
strategic approach is likely to produce more effective results more quickly. Strategic downsizing
is more complex, involving the use of multiple decision criteria in the selection and configuration
of downsizing strategies (Kozlowski, et al, 1993).

The strategic approach is fundamentally a process of rethinking, which is a search for new
mental maps and new tools. Rethinking asks: Why do we exist in the first place? What results
should we produce given the resources available? Cutting expenses becomes a means to broader
ends. In the public sector, those broader ends might include effects on the democratic process
itself.

The following are suggested principles for adopting a strategic approach aimed at seizing
downsizing as an opportunity for fundamental rethinking:

1) Use a systematic framework and methodology, rather than an unstructured approach
to the downsizing / rightsizing.

2) Determine whether downsizing is driving the process or whether a broader or more
fundamental set of goals is appropriate (e.g., changing mission, changing work
processes, changing and reducing workforce).

3) Review the conditions precipitating the downsizing as well as the range of tools (see
below) possible to achieve it.

4) Develop a change-management plan with a clear vision--especially of the ideal future

organizational identity--and specific steps to conduct and oversee the transition.

5) Develop a plan to maintain and improve organizational performance during and after the
downsizing.

6) Consider how to involve employees, union officials, citizens, and customers throughout
the downsizing planning process.

7) Have a clear understanding of the administrative and legal ripple effects" inherent in the
use of downsizing tools.

8) Generate alternative scenarios based on a range of different assumptions about key,
unpredictable variables including costs.

9) Develop a plan to implement whatever strategies are chosen.

10) Identify the people who will be affected. Will they need retraining or outplacement
assistance? What core competencies must be retained? What are the needs of new
employees?

11) Create placement opportunities and allow reasonable time for employees to find jobs
elsewhere.

12) Follow-up and engage in ongoing rebuilding.



4.0 TOOLS OF DOWNSIZING

Many tools are used in downsizing (narrow and broad efforts). Examples of four sets are outlined
below. The evidence on the effectiveness of any of these tools, used singly or in combination, is
mixed.


4.1 TOOLS FOR DIAGNOSING THE DOWNSIZING PROBLEM

A first set of tools has to do with frameworks for thinking through the problem prompting a
downsizing or rightsizing and the accompanying approach. Some examples are:

1) RETHINKING THE FUNDAMENTALS OF GOVERNMENT.

To rethink the fundamentals of government, Scott Fosler believes the following questions should be asked: What is the public purpose? Of all the governmental responsibilities, which level of government should assume them? What organizational designs and performance capacities best enable the effective and efficient achievement of missions? If this program or activity were not in place today, would there be justification to start it? What change strategy is appropriate and effective? (Fosler, 1995)

2) DECISION TREES TO ANALYZE PROGRAMS.

More limited in scope than Fosler's framework, Vice President Gore's National Performance Review (NPR) has issued various decision trees for analyzing agency programs and ultimately reducing the size of the federal government. One of those trees starts with the question Is this program or function critical to the agency's mission based on customer input?" If it is critical, questions are asked about where that function is best performed and how costs can be cut or performance improved (e.g., devolved to other governments, franchised, privatized). If the program or function is not critical, then the choice is either to terminate it or to privatize it.

3) ANALYSIS OF THE NATURE OF FISCAL STRESS.

Ruth Ann Bramson (1992) offers a framework to assist local governments whose constrained budgets are forcing them to rethink and redefine what they do. One aspect of that framework is to link downsizing and rightsizing strategies to the nature of the fiscal stress situation.

* A FISCAL CRUNCH (low fiscal stress and short duration) is a temporary, moderate
problem which can be addressed through short-term budget balancing mechanisms
(e.g., reduce overtime, freeze hiring and expenditures, defer maintainence, stall
payments).

* A FISCAL CRISIS (high severity but short duration) calls for all the tactics employed in
minor stress situations as well as layoffs, terminations of programs, and cancellation of
equipment replacement.

* A FISCAL SQUEEZE (low severity but long duration) involves an opportunity to
anticipate budget cuts and plan appropriate action (e.g., changing in operations and
management as well as changes in the size and mission of the government and its
agencies).

* Finally, a FISCAL CRUSH (deep cuts over a long period of time) requires the greatest
change in organization and services (e.g., redefine mission, shed functions, contract out
extensively, use temporary employees and volunteers).

4) STRATEGIC PLANNING / STRATEGIC MANAGEMENT.

When the ultimate goal is organizational renewal and effectiveness, strategic planning and
management should set the context and oversight of the downsizing process. The strategic
management process is the full set of commitments, decisions, and actions required for an
organization to achieve high performance or overall optimum effectiveness (e.g., Hitt,
Ireland, & Hoskisson, 1995). In strategic restructuring, choices may be made among downsizing,
geographic contraction, process and business reengineering, product rationalization, and
downscoping (reducing diversification to focus on core businesses).


4.2 TOOLS FOR WORKFORCE REDUCTIONS

When the focus is limited to workforce reductions, then tools and techniques available to
achieve a reduction in the workforce include:

1) Workforce reductions can be made across the board with all units sharing the reductions
equally, or targeted to particular units, or executed in varying proportions throughout the
organization.

2) TOOLS OTHER THAN LAYOFFS TO REDUCE PERSONNEL COSTS: To reduce
the size of the workforce, agencies can:

* Reduce overtime,

* Freeze hiring,

* Reduce by attrition (leave vacancies unfilled),

* Conduct cross training,

* Negotiate wage and benefit concessions from employees,

* Implement furloughs (mandatory, unpaid leaves), and

* Reduce position ceilings which limit the number of full time permanent staff allowed
in each agency.

3) INCENTIVES AND SERVICES TO PROMPT EMPLOYEES TO VOLUNTARILY
SEPARATE: Agencies can provide a variety of incentives and services to prompt employees
to voluntarily separate and to ease the stress of change. These include:

* Early retirement,

* Increased separation pay,

* Financial assistance,

* Career transition or outplacement assistance,

* Education, training, and retraining assistance, and

* Emotional counseling.

4) REDUCING LAYERS: The number of organizational layers can be reduced and whole

layers of management or operations can be eliminated.


4.3 TOOLS TO REDUCE OTHER ASPECTS OF SIZE

When the focus is more a mix of reducing the workforce and reducing programs and other
cuts, then the following are examples of additional tools that have been used in the past:

1) LOAD-SHEDDING THROUGH PRIVATIZATION, LOAN GUARANTEES,
DEREGULATION, AND DECENTRALIZATION: These tools involve transformations in the
organizational framework that provides government services:

* Privatization introduces choice, competition, and potential load-shedding by contracting out
or transferring government services to the private sector.

* Government can guarantee loans provided by the private sector rather than make direct
loans to beneficiaries.

* Deregulation (suspending rules, changing laws, terminating or limiting regulatory agencies,
increasing the discretion to those regulated) can be a means to reduce the number of people
required to administer regulations.

* Decentralization shifts the responsibility from one level of government to another.

2) PROGRAM REDUCTIONS: Still other tools to reduce government include:

* Discontinuing programs and services,

* Limiting eligibility or reducing the number of people who qualify to receive program and
service benefits,

* Reducing the benefit amount and level of service, and

* Charging consumers for services.

3) LOAD SHEDDING THROUGH CHANGES IN ORGANIZATIONAL TYPES: Even when
programs are retained in the public sector, another tool of retrenchment or reduction is to ciphon
them off into smaller, presumably more accountable and efficient mission-oriented organizations
granted greater flexibility in administrative procedures in exchange for accountability for results.
This has been seen in the formation of Special Operating Agencies in Canada, administrations de
mission in France and Belgium, executive agencies in the United Kingdom, and Projektgruppen in
West Germany.

4) PERFORMANCE AUDITS: Performance auditors can play a helpful role in the downsizing
process. Performance audits can identify downsizing options that focus on efficiency and quality
and use performance measurement and benchmarking (comparison) as audit techniques.

5) CONSOLIDATIONS / MERGERS / COLOCATIONS: To give order to the number of
annexations and incorporations in a jurisdiction, or to change the size of the jurisdiction, efforts
are sometimes made to consolidate service districts or jurisdictions (e.g., combine city and county
governments). Categorical grants can be consolidated into block grants. Programs can be
consolidated by co-location and by changing how they are differentiated and integrated in various
organizational structures.


4.4 RELATED TOOLS

When the focus is more on changing the way work processes are designed and implemented, tools
of "business process reengineering" are being used (with mixed results). (These tools are
identified in the Information Cooperative Cluster on Business Process Reengineering.)

Downsizing has also been linked to the tools of "Total Quality Management (TQM)," where
there are debates as to whether TQM promotes or prevents downsizing. (TQM tools are
identified in another Information Cooperative Cluster.)

Many recent management concepts (e.g., TQM, business process reengineering, downsizing),
focus on intra-corporate or intra-organization restructuring. These concepts are also appropriate
to examine with respect to strategic alliances, public-private partnerships, and other types of
inter-institutional relationships. (The Information Cooperative has clusters on "Public-Private
Partnerships," and "Restructuring Relationships" that contain relevant resources.)



5.0 RESULTS AND LESSONS


Efforts are being made to cumulate the lessons of experience from efforts to downsize, rightsize,
and rethink public organizations, the public sector, and private organizations. Following is a
compendium of results and lessons that reflects the varying points of view.


5.1 HIGHLIGHTS OF EMERGING RESULTS

Results of downsizing efforts are mixed. One emerging theme is that there are conflicting views
about whether any particular effort is successful or unsuccessful. For example:

* MOST ARE NOT SUCCESSFUL. Today, many large, mature companies find themselves
in the throes of change. In ambitious, sometimes bold efforts to gain control of their future,
these companies have implemented one or more of the currently popular change programs
such as total quality management, process reengineering, and even complete reinvention.
Unfortunately, many of these efforts are not very successful. (Miles and Snow, 1994;
Drucker, 1995)

* SOME ARE SUCCESSFUL. In just the first year, the National Performance Review has
confounded its critics. It has also launched a broad reform movement in the right direction.
It has at least been asking the right questions. Its critical problem is that it is not now a
self-sustaining revolution. (Kettl, 1994)

There is an emerging, limited and cautious body of experience documenting some generally
positive illustrations of actual efforts to use the tools of downsizing (see Appendix B, C). There
is also an emerging body of work attempting to conduct the more difficult task of rethinking (see
Appendix B, C). In general, experience to date provides some important, specific cautions:

1) Some research shows that fewer than half of the downsized companies achieve a reduction
in overall expenditures, and less than one quarter show increased productivity. Moreover, many
organizations and individual employees experience unexpected and undesirable outcomes.

2) Numerous studies show that following a downsizing, surviving employees become
risk-averse, distrust management, and show productivity and morale drops. Indeed, a nearly
unanimous pattern among survivors" of downsizings, sometimes called lay-off survivor
sickness" is initial anger and pain, followed by fear and cynicism, declines in efficiency, and
erosions of productivity. These effects are much more pronounced when the downsizing is

short-term, deep, across the board, and handled with limited communication and employee
and stakeholder participation. Recent work at the Center for Creative Leadership (Bunker,
1995) seeks to make this more precise by distinguishing four ways people respond to major
organizational changes such as downsizing (e.g., they either feel entrenched, overwhelmed,
jockey for position and do not learn well, or are ready to be stretched, to mature, and to assume
new responsibilities.

3) Pioneers of popular tools and approaches (e.g., Michael Hammer and James Champy)
have become very concerned about the effects those tools have had on careers and organizations,
as well as the resistance the tools have encountered. Like Miles and Snow, and Drucker, they
think that the so-called redesigns, brilliant though they may appear, don't get results because of
managerial thought and ideology. Champy, in a recent Wall Street Journal article (Lancaster,
1995) said, Some companies are just downsizing and calling it reengineering. ... We're brutalizing
the workforce right now during this transitional period. If we're going to get what we need, the
brutalization has to stop. I think it will when we dramatically downsize and learn to do much
more with much less. Then we can settle into the new social contract with our people and be
more stable."



5.2 HIGHLIGHTS OF EMERGING LESSONS

Other, still very preliminary, lessons are now being drawn from our experience with downsizing:

1) The way in which downsizing occurs is more important in accounting for effectiveness
than is the size of the work force reduction or the cost savings that accrue. (Cameron, Freeman,
& Mishra, 1991)

2) Some people believe strongly that issues faced by downsizing organizations in the public
sector are different from those faced by downsizing organizations in the private sector. For
example, public organizations are generally not rewarded for downsizing efforts. In addition,
their downsizing is often legislation-driven and is measured more by full-time-equivalent
reductions in workforce than by cost savings. In government, for examp

...........................

Contact Info: Alexis A. Halley
Executive Director
Washington D.C. Office
The Meridian International Institute

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Source: Alexis A. Halley; Executive Director, Washington D.C. Office; The Meridian International Institute