Business moves in cycles. Given the overheating labor market, inflation, rising interest rates, supply-side challenges and geopolitical instability, only a brave person would bet against some level of economic contraction over the next 12-18 months. Recessions, defined as two consecutive quarters of reduction in gross domestic product (GDP), have the capacity to create substantial unintended costs and destroy long-term business value on an enormous scale.
Commonly, the actions organizations take to “survive” a recession carry a vast number of unintended repercussions that not only cause the organization to actually lose money, but also cause long-term damage to future growth. Learn from the past so that your responses to the slowdown puts you on the road to success, rather than stalling your progress entirely.
Common recession mistakes
In this post, I want to take a look at one of the most common mistakes that organizations make, understand what leads to this situation, and walk through ways in which it can be avoided. Organizations are particularly complex when it comes to reacting to challenges, and many smart and well-intentioned people can end up making decisions that are ultimately damaging to the business. The situations I have researched or experienced can rarely be blamed on a single bad actor or poor judgment, but rather the unanticipated consequences of seemingly logical decisions that occur due to the complicated behavioral responses of people, teams and organizations.
Anyone who has worked in the people-side of business will have multiple examples of the following story. During the 2007-08 recession, a business I knew had to lay off employees. This decision was based on cost. The finance team selected the impacted groups based on the needs of the budget. While the HR team executed the plan, they did not help shape it. Two months into the recession, the organization received a sizable order, the sort that brings a sense of relief to the CEO and CFO. But the organization had just finished laying off—and paying off—the group of people who knew how to run the machine that was required to make the order. They had the order, but they did not have the people required to deliver it.
Businesses don’t run without people
Somewhere in the decision-making process, the immediate need to cut costs overshadowed the understanding that machines cannot run themselves, and people are essential to the creation of value. The people who made decisions on where to cut costs did not consider the skills or knowledge that would also be lost, and how this would impact the business. The need to cut costs was real, but the breadth of insight required to do it well was not available to those making decisions.
Having just received a sizable severance payment, the team who could run the machine were rehired—at a significant pay premium. This was the only way the organization would be able to deliver the order and receive their much-needed revenue. The steps that were intended to bring a cost reduction, actually created the opposite effect. They led to a substantial one-off cost for severance, and increased ongoing labor costs due to higher salaries for the returnees. Rather than helping the business, the lay-offs did substantial harm in the long term.
As explained above, there was no clear mistake or specific intent to harm the business in the decision process. The finance team used what it knew to make sensitive decisions, believing that it would support the organization. So how does an organization avoid this type of unintended outcome?
Begin with people analytics
The first step is foundational and should be a practice of every HR group: Make sure that insights about people are curated and shared at least within HR and Finance, and preferably out to the organization’s executive leadership. The core measures of headcount, representation across different diversity categories, the compensation costs associated with these people, and the makeup of specific talent segments, like those roles that are critical to the operation of the business, are as foundational as items like revenue, budget and variance to budget. If Finance is aware that not all roles are the same as it relates to value creation, then there is a higher likelihood they will engage in the right conversations before making changes to the composition of the organization.
These foundational people analytics insights go beyond an HRIS system’s month end reporting. They involve combining people data into a technology that will build history, detect change, and allow for a detailed exploration of this data based on the ever changing shape of the business and its people. Increasingly, this includes the gig or contingent population, as well as the permanent population. This work does not need to deliver a world changing insight, but it does have to demonstrate a basic level of analytic competence and build the foundation of trust and interest. This foundation puts the people aspects of key cost control decisions on the radar of the decision makers.
This approach also lets you avoid having to run around and attempt to assemble the information needed to course correct poor cost cutting decisions, after they have already been made.
So how do you get ready to avoid losing crucial people as an unintended consequence of layoffs? You can start by answering the following questions and then investing money and time to ensure you can say yes to each one.
- Can everyone in HR leadership, finance leadership and the executive team access and interpret an accurate weekly trend for headcount?
- Can this headcount trend be explored based on different structures such as cost centers, locations, supervisors, job families, tenure, critical roles, and other key demographics?
- Can this headcount trend be matched by a trend of compensation costs, looking at this in summary (total rewards) and broken down into elements such as salary, bonus and benefits?
- Can this population of users quickly and easily understand the events which lead to natural changes in headcount through internal movement, turnover, retirements, internal and external hiring, etc?
This constant flow of information and knowledge about the population of people that animate the business is as important as the flow of information about money coming into, out of, and through the business. At its core, a business is two things: money and people. When your ability to explain the changes in people matches the organization’s ability to explain its change in financial position, then you are ready to make more effective business decisions.
About the author: Ian Cook
Ian is an advocate for the crucial role that people play in helping companies thrive. His career has focused on enabling people, teams and companies to perform at their best. For the last 15 years Ian has been helping leaders elevate their HR strategies and programs through the effective use of people analytics. At Visier, Ian led the development of our market leading solution and is now focused on the overall strategy for the people analytics business.
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