How can a company adapt its employee strategy to withstand an uncertain economic climate?
Companies are presented with a formidable challenge. They can either heed caution and batten down the hatches or they can look beyond the immediate crisis and prepare for future growth.
Which approach are most adopting?
For now, most companies appear to be acting on the instinct that hard and sharp cuts are the right thing to do. A recent survey of 1,000 employers by the Chartered Institute of Personnel and Development confirms this view, finding that the majority of companies are intending to cut staff rather than hire them. This appears to be confirmed by recent job-cut announcements.
Why have they chosen this option?
Cost reduction is the traditional response to a recession, so it's not surprising that it is the single most common action taken by companies. In a survey by PA Consulting*, 82 per cent of respondents cut costs during the 2008 recession.
So it must be effective, right?
Well, when the performance of the companies in the survey was analysed, an interesting finding emerged. The companies that emerged strong and healthy (as measured by total shareholder return) appeared to have taken a carefully judged approach to cost reduction. They did not cut excessively; they tried to preserve staff and they avoided fire sales of businesses at the lowest point of the economic cycle. The survey results show a negative correlation between depth of staff cuts and on-going performance.
What does this mean for employers?
It means they should think twice about making staff cuts, especially if they reduce their capacity in areas where skills take time to build. Cuts that go too deep could significantly affect a business's performance down the road.
So what is bad cost-cutting?
A bad approach is marked by three characteristics. First, it is indiscriminate: if hard-to-acquire talent is lost, then a good business will suffer. Second, it damages longterm capacity or competitiveness. And finally, it restricts the company's ability to deliver high levels of customer service or product quality.
OK, what is the right approach?
Good cost reduction should focus on businesses, products or markets in which growth is either unlikely (for example, because the market is in long-term decline), or that are unlikely to create value (because the returns are below the cost of capital). Alternatively, it should target functions, activities or projects whose outputs are neither essential to the sustainability of the business nor highly valued by the customer (although as customer needs change, new opportunities for cutting costs might arise over time).
What can be learned from this?
Cost-cutting in moderation can be helpful to performance, but too much can be bad. If cost-cutting is a company's only strategy then it's time to think more creatively and look for other ways to gain competitive advantage.
What else can companies do?
The current economic climate presents plenty of new opportunities to build competitive advantage. A company that keeps its talent and engages its workforce will be more able to react positively to outmanoeuvre its rivals. These are the companies that will emerge with a sustainably higher market share at the end of the current crisis. The winning companies will be those that take steps now to derive advantage by building capability and acquiring talent, while looking for opportunities to develop new products and services.
* PA's Managing Uncertainty survey, www.paconsulting.com/managinguncertainty
Jonathon Hogg is head of the people and operations practice at PA Consulting Group.
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