My team and I recently went through this process. (Thankfully, if you manage projects in a large corporation, you can sometimes relocate displaced team members to other parts of the organization. On my team, some of the people were able to be relocated.)
For those who remained on the project, here's what I did to maintain morale, learning a few valuable lessons along the way.
• Communicate to your team openly. The worst thing you can do is to withhold information. Make a plan. Reserve a portion of your normally scheduled team meetings to keep everyone up to date on the current situation and listen for any concerns.
• Explore, don't avoid, emotions. When a team member raises an issue or concern, don't wait for the chance to sit down one-on-one with him or her. Take the time right away to listen, understand and listen more.
• Plan a course of action. 1. Inventory your team members' skill sets. 2. Analyze team member strengths that could benefit other projects. 3. Establish a specific follow-up meeting to communicate any news.
• Focus on the future. After the restructuring, bring the team together and set the focus on the path ahead. Communicate the roles and responsibilities to mitigate any confusion between team members, which could lead to loss of morale. Without clear roles and responsibilities, it's like trying to drive uphill with the brakes on.
This "right-sizing" exercise has been a learning experience but I hope it will be a long while before I see another one ...
Also see the article, Motivating Team Members in an Insecure Job Market, from PMI Community Post.