Each and every organisation have its life and the life changes with the phase of product and service, man power and injecting new talents of developments, paving way to the new blood and development are important. In the present case you can give the benefits to existing staff as the number of persons may come down due to various reasons, yet, the authorities should be informed for the variations. Also, the reason for downsizing should be on record in case of permanent employees for the contract workers you actually going to reduce the size and period of contract where the contractor would reflect the same in the records. Find out ways for better progress rather than downsizing...
better prospect always give more progress...