Ready for a Crash

By Dr. Sullivan

Jan. 28, 2008

Is the economic sky really falling? It’s hard to say with certainty, but you would have to have been living on a desert island to miss the very real signs of economic turmoil occurring in the world today. If you are a business-savvy HR leader, then, today might be a good day to begin shifting your HR strategy to better fit these unsettled times.

    Unfortunately, most HR departments find it difficult to be agile. There are many excuses that can be offered for that rigidity, and nearly all of them relate back to the fact that corporate HR strategies are overly focused on transactional HR and compliance. Business strategies are purposely designed to flex whenever the economic environment shifts from expansion to contraction. Most HR departments, on the other hand, don’t flex. They simply find a way to do everything they were doing before the contraction—just with less money (something that leads many executives to wonder whether the original budget wasn’t inflated to start with).

    Unfortunately, there are signs everywhere of an upcoming downturn, including fluctuating oil prices of about $95 a barrel, layoffs in the auto, banking and pharmaceutical industries, and lingering fallout from the bursting of the credit bubble. The collapse of the subprime lending industry is rapidly triggering a broader credit crisis, as illustrated by the massive financial problems and CEO resignations at Merrill Lynch, Citigroup and Bear Stearns. (If the CEO must be changed, shouldn’t the HR approach be changing also?) Regardless of your personal prediction of exactly when a downturn will come, it’s important that you have a plan.

    There are many elements of your HR strategy that should shift during a downturn. When economic conditions threaten growth plans, employees begin to shift their interest toward increased job security, resulting in less pressure on you to provide cost-of-living adjustments or to build outrageous compensation packages to attract and retain talent.

    Now that the economy is cooling, with unemployment in December increasing to 5 percent, the relative supply of labor available to firms is increasing. This provides smart HR managers with an opportunity to cherry-pick from this expanded candidate pool, while simultaneously beginning a process for identifying and then releasing their own poor-performing employees. It’s time to trade up, in other words.

    Another shift that should occur when preparing for a downturn is an increased emphasis on maintaining a contingent workforce. This provides you with the opportunity to more rapidly shrink or expand your workforce to meet your firm’s changing business needs. By expanding the amount of work that you outsource, as well as increasing the percentage of part-time and contract workers that you employ, HR gives managers the flexibility they need to quickly reduce their workforce by releasing contingent employees.

    Although HR professionals are almost universally resistant to even discussing the need for layoffs, an effective overall strategy needs a component that allows labor costs to be reduced quickly. This often begins with HR conducting an assessment of how much “fat” there is in the headcount. If appropriate, HR can conduct a mock layoff to identify the positions that have the highest probability of being cut. In addition to cutting costs, the HR strategy must also have a component designed to increase worker productivity and output.

    The best approach here is for HR to work with the CFO to identify a target “revenue per employee” number. This figure indicates the approximate value of the output produced by the average worker. HR can then work with individual managers to increase employee productivity through a number of approaches, including improved training, better metrics, programs for increasing innovation and an improved best-practice sharing process among departments.

    It’s almost impossible to successfully make the case that it’s perfectly acceptable for HR to drone along without a contingency plan for an economic downturn. If you want to be a business partner, then you have to act like a businessperson. That means rewriting your current HR strategy and including in it plans that cover each of the most likely “What if?” scenarios. Adding this agility component will clearly demonstrate to senior managers that HR, just like marketing, finance, product development and supply chain, has an effective plan of action for any upturn or downturn—whenever one might occur.

Workforce Management, January 14, 2007, p. 34Subscribe Now!

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